Financial Instruments

A financial instrument is any contract that results in a financial asset for one entity and a
financial liability or equity instrument for another. These instruments are critical in the
financial system, enabling the transfer of capital, risk, and financial resources.

2. Financial Assets

A financial asset is any asset that is:

1. Cash.
2. An equity instrument of another entity.
3. A contractual right:
o To receive cash or another financial asset.
o To exchange financial assets or liabilities under favorable conditions.
4. A contract settled in the entity's own equity instruments.

Examples of Financial Assets

• Cash: The most liquid form of financial asset.

• Trade Receivables: Amounts due from customers for goods or services delivered.
• Investments: In equity instruments (e.g., shares of other companies) or debt
instruments (e.g., bonds).
• Loans Given: Amounts lent to others.
• Derivatives: Options, forwards, and swaps that may result in financial gains.

Classification and Measurement (IFRS 9)

Financial assets are classified into the following categories based on:

• Business model for managing the asset.

• Contractual cash flow characteristics.

1. Amortized Cost:
o Used when the asset is held to collect contractual cash flows (principal and
interest).
o Measured using the effective interest method.
o Examples: Loans and receivables, held-to-maturity bonds.
2. Fair Value Through Other Comprehensive Income (FVOCI):
o Used when the asset is held both to collect cash flows and for sale.
o Unrealized gains/losses are recorded in other comprehensive income (OCI).
o Examples: Certain debt instruments and equity investments.
3. Fair Value Through Profit or Loss (FVTPL):
o Used for assets held for trading or where cash flows do not represent solely
principal and interest.
o Gains/losses are recognized in profit or loss.
o Examples: Trading securities, derivatives.
Impairment of Financial Assets

• Expected Credit Loss (ECL) Model:

o Entities must estimate credit losses expected over the asset's life.
o Applies to assets measured at amortized cost or FVOCI.

3. Financial Liabilities

A financial liability is any liability that is:

1. A contractual obligation:
o To deliver cash or another financial asset.
o To exchange financial assets or liabilities under unfavorable conditions.
2. A contract settled in the entity's own equity instruments.

Examples of Financial Liabilities

• Trade Payables: Obligations to pay suppliers for goods or services.

• Borrowings: Bank loans, bonds issued, or other forms of debt.
• Derivative Liabilities: Derivatives with a negative value (e.g., put options written).
• Lease Liabilities: Obligations under lease agreements.

Classification and Measurement (IFRS 9)

Financial liabilities are categorized as:

1. Amortized Cost:
o Most liabilities are measured at amortized cost using the effective interest
method.
o Examples: Trade payables, loans payable.
2. Fair Value Through Profit or Loss (FVTPL):
o Includes derivatives and liabilities held for trading.
o Changes in fair value are recognized in profit or loss.
o Examples: Certain financial guarantees, options written.

4. Key Concepts and Methods

Initial Recognition

• Financial instruments are initially recognized at fair value.

• For assets/liabilities not at FVTPL, transaction costs are included in the initial
measurement.

Subsequent Measurement

• Financial Assets: Based on classification (Amortized Cost, FVOCI, FVTPL).

 • Financial Liabilities: Typically measured at amortized cost unless classified at
FVTPL.

Derecognition

• Financial Assets: When the contractual rights to cash flows expire or are transferred.
• Financial Liabilities: When the obligation is discharged, canceled, or expires.

5. Differences Between Financial Assets and Liabilities

Aspect Financial Assets Financial Liabilities

Resource controlled to generate Obligation requiring future
Definition
future inflows. outflows.
Cash, receivables, investments, Borrowings, payables,
Examples
loans. derivatives.
Measurement Amortized cost, FVOCI, FVTPL. Amortized cost, FVTPL.
Recognition of Income or OCI depending on Expenses or OCI depending on
Gains/Losses classification. classification.

6. Importance in Financial Reporting

• Helps in understanding an entity's financial position and performance.

• Ensures transparency and comparability of financial information.
• Facilitates informed decision-making by investors, creditors, and other stakeholders.

Compound Financial Instruments

A compound financial instrument is a financial instrument that has components of both

equity and liability. In other words, it combines features of both a financial liability and an
equity instrument, which must be accounted for separately under the applicable accounting
standards, such as IAS 32 – Financial Instruments: Presentation.

Key Features of Compound Instruments

1. Hybrid Nature:
o Includes both a liability component (e.g., an obligation to pay cash) and an
equity component (e.g., an option to convert into shares).
2. Examples:
o Convertible bonds: Bonds that can be converted into equity shares of the
issuer at a future date.
 o
Debt with detachable warrants: Debt instruments accompanied by warrants
that give the holder the right to purchase shares.
3. Objective:
o Issuers use compound instruments to raise capital while offering flexible terms
to investors.

Accounting Treatment of Compound Instruments (IAS 32)

1. Initial Recognition:
o A compound financial instrument is split into its liability and equity
components at the time of issuance.
o The allocation is based on the relative fair value of each component.
2. Steps for Accounting:
o Step 1: Measure the liability component first.
▪ Calculate the present value of the cash flows (interest and principal
payments) using a market interest rate for similar instruments without a
conversion feature.
o Step 2: Allocate the residual amount to the equity component.
▪ The equity component represents the holder's right to convert the
instrument into shares.
3. Subsequent Measurement:
o Liability Component: Measured at amortized cost using the effective
interest method.
o Equity Component: No remeasurement after initial recognition.
4. Derecognition:
o The liability component is derecognized when the obligation is discharged,
canceled, or expired.
o The equity component remains in equity unless there is a buyback or another
equity transaction.

Example: Accounting for a Convertible Bond

Facts:

• A company issues a convertible bond with a face value of $1,000,000.

• The bond pays an annual coupon of 5% for 5 years.
• Market interest rate for similar non-convertible debt is 8%.
• The bondholder has the option to convert the bond into equity shares at the end of 5
years.

Steps:

1. Calculate the Liability Component:

o Use the market rate to discount the future cash flows (interest and principal).
o Present Value of Interest: 50,000×PVAF8%,550,000 \times
2. Allocate the Residual to Equity:
 o Subtract the liability component from the total bond proceeds.
o Residual = Total Bond Proceeds – Present Value of Liability Component.
3. Journal Entries:
o On Issuance:
▪ Dr. Cash
▪ Cr. Liability Component (e.g., Bonds Payable)
▪ Cr. Equity Component
o For Subsequent Interest Payments:
▪ Dr. Interest Expense
▪ Cr. Cash
▪ Cr. Bonds Payable

Presentation in Financial Statements

1. Liability Component:
o Presented as part of non-current or current liabilities (depending on maturity).
2. Equity Component:
o Presented in equity as "Other Reserves" or "Convertible Bond Reserve."

IFRS 9

Q1

DanKay Ltd bought a ten-year bond on 1 August 2016 at a cost of GH¢45 million. The
bond carries an interest coupon of GH¢5 million paid annually in arrears, and its
effective yield to maturity was 12% at the date of purchase. Dankay Ltd is holding the
bond as a speculative investment, expecting its value to increase, and hopes to sell the
bond at a profit in the short to medium term. On 31 July 2017, its reporting date, the
fair value of the bond had declined to GH¢43 million. The interest payment was
received as scheduled.

Required:

Advise DanKay Ltd on the treatment of the above in the financial statements for the
year ended 31 July 2017 in accordance with IFRS 9: Financial Instruments.

SOLUTION
 • As the bond is not to be held to maturity it fails the “Business Model”
test set out by IFRS 9 Financial Instruments.

• This means the amortised cost method cannot be used, and the fair value
method must be used instead.

• This results in a fair value loss of GH¢2 million, and a carrying value of
GH¢43 million.

• The interest received of GH¢5 million is recognised as a gain in profit or

loss. This results in a net gain of GH¢3 million to profit or loss.

Q2

Chereponi Ltd (Chereponi) is a listed manufacturing company. Chereponi

granted a loan of GH¢25 million to a homeless charity for the building of a
community centre. The loan was granted on 1 January 2018 and is repayable on
maturity in four years’ time. Interest, which is subsidised, is to be charged one
year in arrears at 4%, but Chereponi assesses that a normal rate for such a loan
would have been 8%. Chereponi recorded a financial asset at GH¢25 million and
reduced this by the interest received each year.

Required:
In accordance with IFRS 9: Financial Instruments, recommend with justification the
required accounting treatment for the issue of the loan to the homeless charity in the
financial statements of Chereponi for the year ended 31 December 2018.

SOLUTION

Charity Bond (IFRS 9)

The fair value of the bond is determined by calculating the present value of all
future cash receipts using the prevailing market interest rate for a similar financial
instrument. This will result in a lower figure than the amount advance. The
difference is recognised in profit or loss.

Cash flows Discount factor PV

GH¢m 8%
GH¢m
2017 1 0.93 0.93
2018 1 0.86 0.86
2019 1 0.79 0.79
2020 26 0.74 19.24
 21.82
The fair value of the loan is calculated by scheduling the cash flows due to take
place over the life of the loan and discounting them to present value at the
unsubsidised rate of interest of 8%. The making of the loan should have been
accounted for as:
GH¢m GH¢m
Dr Financial assets 21.8
Dr Profit or loss 3.2
Cr Cash 25

The asset is then held at amortised cost.

1 January 2017 Interest rate Cash received 31 December 2017
GH¢m (8%) GH¢m GH¢m
21.8 1.7 (1) 22.5

Correcting entries:
GH¢m GH¢m
Dr SPLOCI 3.2
Cr Financial asset 3.2
Dr Financial asset 1.7
Cr SPLOCI 1.7

Q3

On 1 January 2018, Kaduna issued 10,000 bond instruments with a face value of
GH¢100 at a market price of GH¢95. Bond brokers charged fees totalling GH¢18,000
in relation to the bond issue. The bonds carry a coupon rate of 5% and are redeemable
in 3 years at face value. Kaduna wishes to account for the bonds using IFRS 9: Financial
Instruments amortised cost method. However, there was some confusion about how
the bonds should be accounted for. Currently, the cash received from the bond issue
of GH¢950,000 has been recognised as a non-current liability. The broker fees of
GH¢18,000 were deducted from the noncurrent liability carrying amount, the coupon
payment of GH¢50,000 has been expensed in arriving at profit before tax and the
effective rate of interest is 7.62%.

Required: Justify the necessary accounting treatment of the above transaction relating
to Kaduna Ltd for the year ended 31 December 2018.

SOLUTION

Under IFRS 9’s - amortised cost model, the financial liabilities should initially
be recognised at the fair value of the cash received. Any directly
 attributable costs to the bond issue should be offset against the carrying
amount of the liability.

Therefore, at initial recognition the bonds should be measured at:

GH¢
Fair value of consideration received 950,000
Less: transaction costs (18,000)
Carrying amount 932,000

The initial recognition and measurement of the financial liabilities has

been carried out correctly in Kaduna’s financial statements.

The journal entires are

Dr Cash 950,0000
Cr Financial Liability 932,000
Cr Broker Fees Payable (Transaction costs) 18,000

However, IFRS 9’s amortised cost method requires the bonds to be

amortised over the bond term using the effective interest rate.

The instrument cash flows are:

GH¢
CF0 932,000
CF1 (50,000)
CF2 (50,000)
CF3 (1,050,000)
The effective interest rate which discounts back the future cash flows
to the instrument’s present value is 7.62% (rounded to 2 decimal
places).

The debt amortisation schedule for the debt, using the effective interest rate,
is shown below:
Year Opening Coupon Finance cost Difference: to Closing
capital Payment charged @ 7.62% capital sum capital
balance balance

Kaduna has failed to amortise the bond using the effective interest rate,
instead expensing the coupon payment in the profit or loss. Therefore,
the following correcting journal entry is required:

Dr Interest expense (P&L) GH¢21,018

 Cr Non-current liability (SOFP) GH¢21,018

Q5

Alfa Limited issued a GH¢5,000,000 18% convertible loan note at par on 1 July 2015
with interest payable annually in arrears. Three years later, on 30 June 2018, the loan
note becomes convertible into equity shares on the basis of GH¢100 of loan note for
50 equity shares or it may be redeemed at par in cash at the option of the loan note
holder. The Financial Accountant of Alfa Limited has observed that the use of a
convertible loan note was preferable to a non-convertible loan note as the latter would
have required an interest rate of 24% in order to make it attractive to investors.

The present value of GH¢1 receivable at the end of the year, based on discount
rates of 18% and 24% can be taken as:
Year 18% 24%
1 0.847 0.806
2 0.718 0.650
3 0.609 0.524
Required:

Show the accounting treatments for the convertible loan note in Alfa Limited’s:
i) income statement for the years ended 30 June 2016, 2017 and 2018; and (3
marks) ii) the statement of financial position as at 30 June 2016, 2017 and 2018. (4
marks) (Note: Assume that the share option is taken at the end of June 30, 2018.)

ANS

This question relates to a compound financial instrument (convertible debt). The

treatment is in accordance with IFRS 9 Financial instruments.

(i) Financial statement extract

Income Statements for the year ended 30 June

2016 2017 2018
GH¢ GH¢ GH¢
Finance costs (see working) 1,056,480 1,094,035.2 1,140,603.65

Statement of Financial Position as at 30 June 2016

Non-current liabilities
18% convertible loan note (4,402,000 + 1,056,480 – 900,000) 4,558,480

Equity (Option to convert) [5,000,000 – 4,402,000] 598,000

Statement of Financial Position as at 30 June 2017

Non-current liabilities
18% convertible loan note (4,558,480 + 1,094,035.2 – 900,000) 4,752,515.2

Equity (Option to convert) [5,000,000 – 4,402,000] 598,000

Statement of Financial Position as at 30 June 2018 (Assuming the share option is

taken)
Non-current liabilities
18% convertible loan note -

Equity (Option to convert) [5,000,000 – 4,402,000] 598,000

Equity 5,000,000
Workings
Determination of debt and equity components of compound financial instrument
Item Cash flows Discount Present
factor @ value
24%
GH¢’000 GH¢’000
Year 1 interest 18% x 5,000 = 900 0.806 725.4
Year 2 interest 18% x 5,000 = 900 0.650 585
Year 3 interest 18% x 5,000 = 900 0.524 471.6
Year 3 Principal 5,000 0.524 2,620
Total value of debt component (carrying 4,402
value)
Proceeds of the issue 5,000
Equity component (Residual) 598

Note: The finance cost in the income statement for 2013, for instance, is computed as
GH¢4,402,000 x 24% = GH¢1,056,480. Meanwhile, the interest to be paid is
GH¢5,000,000 x 18% = GH¢900,000. This requires an accrual of GH¢156,480 (that is,
GH¢1,056,480 – 900,000). This accrual should be added to the carrying value of the
debt to arrive at the amortised cost at the end of year 2013.

Loan amortised cost schedule

 Year Liability @ Finance Interest paid @ Liability @
start charge @ 24% 18% / Principal end
paid or share
option taken
1 4,402,000 1,056,480 (900,000) 4,558,480
2 4,558,480 1,094,035.2 (900,000) 4,752,515.2
3 4,752,515.2 1,140,603.65 (900,000) 4,993,118.85
4 4,993,118.85* - (5,000,000) -

* Difference due to rounding off

Q6
On 31 December 2022, Hamza Ltd purchased GH¢10 million 5% bonds in Jins Ltd
at par value. The bonds are repayable on 31 December 2025 and the effective rate
of interest is 8%. Hamza Ltd’s business model is to collect the contractual cash
flows over the life of the asset. At 31 December 2022, the bonds were considered
to be low risk and as a result, the 12-month expected credit losses are expected to
be GH¢10,000. On 31 December 2023, Jins Ltd paid the coupon interest, however,
at that date the risks associated with the bonds were deemed to have increased
significantly.

The present value of the cash shortfall for the year ended 31 December 2024
were estimated to be GH¢462,963 and the probability of default is 3%. On 31
December 2023, it is also anticipated that no further coupon payments would
be received during the year ended 31 December 2025 and only a portion of
the nominal value of the bonds would be repaid. The present value of the
bonds was assessed to be GH¢6,858,710 with a 5% likelihood of default in the
year ended 31 December 2025.
Required:
With reference to IFRSs, calculate and discuss the financial reporting treatment of the
bonds in the financial statements of Hamza Ltd as of 31 December 2022 and for the
year ended 31 December 2023, including any impairment losses.

SOLUTION

i) IAS 32 defines an equity instrument as any contract which evidences a

residual interest in the assets of an entity after deducting all of its liabilities.
An equity instrument has no contractual obligation to deliver cash or another
financial asset, or to exchange financial assets or financial liabilities under
potentially unfavourable conditions. If settled by the issuer’s own equity
instruments, an equity instrument has no contractual obligation to deliver a
variable number or is settled only by exchanging a fixed amount of cash or
another financial asset for a fixed number of its own equity instruments.
Preference shares which are required to be converted into a fixed number of
ordinary shares on a fixed date should be classified as equity (this is known
as the ‘fixed for fixed’ requirement to which the finance director refers).

However, a critical feature in differentiating a financial liability from an

equity instrument is the existence of a contractual obligation of the issuer
either to deliver cash or another financial asset to the holder, or to exchange
financial assets or financial liabilities with the holder, under conditions
which are potentially unfavourable to the issuer. In this case, Sanda Ltd has
issued convertible redeemable preference shares – which makes little
commercial sense from the company’s perspective, as they offer the holder
the benefit of conversion into ordinary shares if share prices rise, and the
security of redemption (at the choice of the holder) if share prices fall.

IAS 32 notes that the substance of a financial instrument, rather than its legal
form, governs its classification in the entity’s statement of financial position.
A preference share which provides for mandatory redemption for a fixed or
determinable amount at a fixed or determinable future date or gives the
holder the right to require the issuer to redeem the instrument at a particular
date for a fixed or determinable amount is a financial liability. Since the
preference shares offer the holder the choice of conversion into ordinary
shares as well as redemption in two years’ time, the terms of the financial
instrument should be evaluated to determine whether it contains both a
liability and an equity component. Such components are classified
separately as compound financial instruments, recognising separately the
components of a financial instrument which creates both a financial liability
of the entity (a contractual arrangement to deliver cash or another financial
asset) and an equity instrument (a call option granting the holder the right,
for a specified period of time, to convert it into a fixed number of ordinary
shares of the entity).

Per IFRS 9 Financial Instruments, when the initial carrying amount of a

compound financial instrument is allocated to its equity and liability
components, the equity component is assigned the residual amount after
deducting from the fair value of the instrument as a whole the amount
separately determined for the liability component. Sanda ltd would measure
the fair value of the consideration in respect of the liability component based
on the fair value of a similar liability without any associated equity
conversion option. The equity component is assigned the residual amount.
Gearing would decrease if the draft financial statements had included the
preference shares within equity: the correction would increase non-current
debt (the present value of the future obligations) and decrease equity.
Question 19 (IFRS 9 – Financial
instruments) (a)
Asamankese Ltd (Asamankese) purchased a 6% GH¢50 million bond on 1 August
2018 at a 10% discount to par value. Expenses of purchase were GH¢500,000. The
bond is due for redemption on 31 July 2028 at par. The effective annual interest rate
to maturity is 7.3%. Asamankese intends to hold the bond until its maturity date.

Required:
In accordance with IFRS 9: Financial Instruments, how much should be recognised in
Asamankese financial statements in respect of the above transaction for the year
ended 31 July 2019 (to two decimal places)

Question 1

On 1 October 2013 Bolgatanga Ltd issued GH¢10 million 6% convertible loan stock on
the following terms:
The issue price was at par.
The loan stock is convertible into the company’s equity shares at the option of the
stockholders four years after the date of its issue (30 September 2017) on the basis of
20 shares for each GH¢100 of loan stock. Alternatively, it will be redeemed at par.
Lagos Services had advised that if Bolgatanga Ltd had issued similar loan stock
without the conversion rights, then it would have had to pay an interest (coupon) rate
of 10% on the loan stock. This is because the terms of conversion to equity shares are
favourable.
Lagos Services further advised that because it is almost certain that the loan stock
holders will exercise their right to convert to equity shares, the loan stock has the
substance of equity and can be included as such on the statement of financial position.
This has the added advantage of improving/reducing the company’s gearing
(debt/equity) in comparison to what would be the case with the issue of ‘straight’ loan
stock.

The present value of GH¢1 receivable at the end of each year, based on discount rates
of 6% and 10% can be taken as:
6% 10%
Year 1 0.94 0.91
Year 2 0.89 0.83
Year 3 0.84 0.75
 Year 4 0.79 0.68

Required:
In relation to the 6% convertible loan stock, calculate the finance cost to be shown in
the statement of profit or loss and the extracts from the statement of financial position
for the year to 30 September 2014; and comment on Lagos Services’ advice.

Question 2

On 1 January 2017, Tamale Investors Group (TIG) issued 10% GH¢200 million bonds
on the domestic debt market. The bonds were sold at a premium of 20% of their
nominal value. Transaction costs of GH¢10 million were incurred. The coupon is
payable annually in arrears. The bond must be redeemed on 1 January 2020 (after 3
years) at a discount of GH¢1.33 million approximately. The effective rate of interest is
5% per annum.
On 1 March 2017, TIG applied the bond proceeds to subscribe for 12% equity interest
in Abiola Technologies (AT) for GH¢128 million (including associated transaction cost
of GH¢5 million). Two months after this subscription, AT paid dividends worth
GH¢25 million to its equity shareholders. All these dividends were paid out of AT’s
retained earnings balance at 31 December 2016. TIG made an irreversible decision to
account for the investment at fair value through other comprehensive income. Market
capitalisation of AT as at 31 December 2017 was GH¢2,500 million.

Required:
In line with IFRS 9 Financial Instruments, explain how the above would be accounted
for in the financial statements of TIG for the year ended 31 December 2017.

Question 3

Naniama Ltd issued 3,000 convertible bonds at par. The bonds are
redeemable in 4 years’ time at their par value of GH¢100 per bond. The
bonds pay interest annually in arrears at an interest rate (based on
nominal value) of 5%. Each bond can be converted at the maturity date
into 5 GH¢1.00 shares. The prevailing market interest rate for four year
bonds that have no right of conversion is 8%.
 The present value at 8% of GH¢1 receivable at end of:

Year 1 0.926
Year 2 0.857
Year 3 0.794
Year 4 0.735

Required:
Show the initial accounting treatment of the bond in accordance
with International Financial Reporting Standards (IFRS).

Answer

Naniama Ltd

GHC
Non-current liabilities
Financial liability component of convertible bond (W1) 270,180
Equity
Equity component of convertible bond (300,000 – (Wi) 270, 180) 9,820

Working
GHC
Fair value of equivalent non-convertible debt
Present value of principal payable at end of 4 years
(3,000 x GHC100 = GHC300,000 x 0.735) = 220500

Present value of interest annuity payable annually in arrears for 4 years

Year 1 (5% x 300,000) = 15,000 x 0.926 13,890

Year 2 15,000 x 0.857 12,855
Year 3 15,000 x 0.794 11,910
Year 4 315,000 x 0.735 11,025
49,680 49,680

270,180

Nov 21

QUESTION 4
a) Manu Ltd (Manu) is a private company that prepares financial
statements in compliance with International Financial Reporting
Standards (IFRSs). Financial statements for the year ended 31 December
2020 are being prepared, and the following transactions occurred.

i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the

stock exchange for speculative reasons (making profit) at a price of
GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31
December 2020, the shares were now trading at GH¢1.32 per share on
the stock exchange, and Manu received a dividend of GH¢15,000 on the
shares.
(3 marks) ii) Manu issued GH¢360,000 of redeemable 2% Preference
shares at a discount of 14% on 1 January 2020. Issue costs were
GH¢5,265. The shares will be redeemed on 31 December 2022 at par.
Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)
Required:
In accordance with IFRS 9: Financial Instruments, explain how to
account for the above transactions in the statement of profit or loss and
statement of financial position for the year ended 31 December 2020.

Ans

i)
•The shares were purchased for speculative reasons; hence they should
be classified as equity investment (equity financial asset) at fair value
through profit or loss.
•They should be initially measured at their fair value GH¢120,000
(GH¢1.20 x100,000 shares). The transaction cost of GH¢1,250 should be
expensed to the statement of profit or loss.
•At 31 December they should be remeasured at their fair value of
GH¢132,000 in the statement of financial position, and fair value
movement (gain) of 12,000 (GH¢132,000-GH¢120,000) reported in the
statement of profit or loss.
•Dividend received of GH¢15,000 should be reported in the statement
of profit or loss as investment income.
Classification 0.5mark
Initial measurement 1mark
Subsequent measurement 1mark
Treatment of dividends
0.5 marks ii)
•The bond is a financial liability at amortised cost, and there is no
intention to trade in the liability.
•It should be initially measured at its fair of GH¢304,335 (W1)
 •At 31 December 2020, it should be remeasured at amortised cost of
GH¢321,482
(W2)
•Effective interest of GH¢ 24,347 (W2) should be reported in the
statement of profit or loss.

W1 initial fair value

GH¢

Nominal value 360,000

Discount 14% (50,400)

Issue costs (5,265)

Net proceeds 304,335

Question 5

Kombra Ltd (Kombra) is a market leader in the printing and publishing industry.
To benefit from a potential future decline in interest rates, Kombra invests in
bonds and issues callable bonds. It occasionally trades these bonds by
immediately flipping them for a profit. Others are held for the long term.

Kombra purchased two bonds on 1 January 2023. Details of the two particular
bonds are as follows:
Sikapa bond Cocoa bond
Nominal value of bond GH¢47.25 million GH¢31.5 million
Coupon rate 4% 5%
Purchase price of bond GH¢40.425 million GH¢29.4 million
Effective yield to maturity 6.75% 7.8%

The Sikapa bond was bought with the intention of keeping it for a long time
and withdrawing the interest and principal as they fall due.

The Cocoa bond was bought at a deep discount, and the aim is to wait until
the market value increases, and then sell it at a profit. The Cocoa bond had a
fair value of GH¢28.875 million as of December 31, 2023.

In both situations, the coupon, which is due on December 31 each year, has
been paid as agreed.
 Required:
In the case of each bond above, show the financial reporting treatment
required by IFRS 9: Financial Instruments for the year ended 31 December
2023. Show all workings clearly.
(9 marks)

Ans

a) Sikapa
As the bond was purchased with a view to holding it for the long term, the
business model test is met. As the bond’s cash flows consist solely of interest
and principal payments, the cash flow test is met. Hence, this bond should be
accounted for using the amortised cost method. The bond is recorded at its
cost, plus any costs to purchase (not relevant here).
GH¢ million GH¢ million
Dr Financial assets 40.425
Cr Cash 40.425

Subsequently, the effective yield to maturity should be used to amortise the

bond over the year. This is applied to the opening balance to determine the
finance cost
(6.75% * 40.425m = 2.7286 million or GH¢2.7 million)
GH¢ million GH¢ million
Dr Financial assets 2.7
Cr Profit or loss (finance income) 2.7

Finally, the interest payment was paid at 31 December 2023 as promised. This
should be 4% of the par value GH¢47.25 million, or GH¢1.89 million. This is
treated as a reduction to the financial asset.
GH¢ million GH¢ million
Dr Cash 1.89
Cr Financial assets 1.89

Cocoa Bond
As this bond was purchased with a view to sell it at a profit, the business
model test fails. Hence, amortised cost cannot be used to measure the bond. It
must be remeasured to fair value at the reporting date.
The bond is recorded at cost, but any costs of purchase would be expensed in
this scenario.
GH¢ million GH¢ million
Dr Financial asset 29.4
Cr Cash 29.4
 At 31 December 2023, the scheduled interest is paid, at 5% of par value
GH¢31.5
million, or GH¢1.575 million. This is taken to finance income.
GH¢ million GH¢ million
Dr Cash 1.575
Cr Finance Income 1.575

Finally, at the reporting date, the bond is remeasured to fair value,

GH¢28.875 million. This shows a loss of GH¢0.525 million which should be
taken to profit or loss.
GH¢ million GH¢ million
Dr Profit or loss (finance costs) 0.525
Cr Financial Assets 0.525
(Marks are evenly

Question 6

Asamankese Ltd (Asamankese) purchased a 6% GH¢50 million bond on 1 August

2018 at a 10% discount to par value. Expenses of purchase were GH¢500,000. The
bond is due for redemption on 31 July 2028 at par. The effective annual interest rate
to maturity is 7.3%. Asamankese intends to hold the bond until its maturity date.

Required:
In accordance with IFRS 9: Financial Instruments, how much should be
recognised in Asamankese financial statements in respect of the above
transaction for the year ended 31
July 2019 (to two decimal places)?

Ans
The initial carrying value of the bond will be as follows:
GH¢m
Purchase price (90% of GH¢50) 45
Add: Purchase costs 0.5
Total asset cost recognized 45.5

Finance income will be recognized @ 7.3% of the opening carrying value 3.32

Financial assets measured at amortized costs

Asset @ start Finance Interest Asset @ end
Income (7.3%) Received (6%)
 GH¢ GH¢ GH¢ GH¢
2018/2019 45.5 3.322 (3) 45.8

Profit or Loss (Extract) for the year ended 31/7/2019

GH¢
Finance Income
3.322
Statement of Financial Position as at 31/7/2019 extract
GH¢
Financial assets 45.8

This bond meets the criteria for classifying it as Amortized Cost. These are
• the cash flows to be derived from the instrument are solely interest and
principal, and
• the entity intends to hold the instrument to draw the contractual cash flows.
Hence the amortized cost method is appropriate. Fair value is irrelevant.

Initial recognition of bond at amortised cost: 2 marks

Treatment of finance income in P&L: 1 mark
Amortsied cost schedule: 1 mark
Question 7

Bawaleshie Ltd controls the following financial assets at its reporting date of 31
January 2017:
i) An investment in the equity shares of Obojo Ltd was purchased during April
2016 for GH¢2.6 million. The fair value of this investment at 31 January 2017
was GH¢2.8 million. Bawaleshie Ltd decided at the date of purchase to
recognize any fair value gains and losses through other comprehensive
income. (2 marks)

ii) An investment in a bond issued by Shiashie Ltd on 1 February 2016. This bond
cost GH¢10 million (equal to its par value) and entitles Bawaleshie Ltd to 8%
interest per annum on the anniversary of the bond’s issue. The principal is to
be returned on 31 January 2021. It is the intention of Bawaleshie Ltd to retain
the bond in order to collect the contracted cash flows on the due dates.
(3 marks)
Required:
 Recommend how the above financial assets should be accounted for at 31
January 2017 in accordance with the requirements of IFRS 9 Financial
Instruments.

Ans
(i) The investment is revalued to fair value at the reporting date. A gain of
GH¢200,000 results. This is recognised in other comprehensive income, as
the entity made an election to do so at the date of purchase.

31 Jan 2017 Dr Financial assets GH¢200,000

Cr Other comprehensive income / reserves
GH¢200,000 (Fair value gain on investment in shares of another entity)

(ii) As the cash flows due to Bawaleshie under the terms of the bond consist
solely of interest and principal, the amortised cost method should be
applied. Interest earned during the year ended 31 January 2017 is
GH¢800,000 (8% of GH¢10m). As this is not payable until the anniversary of
the bond’s issue (1 February 2017), an accrual must be made for this amount.
The fair value of the bond at 31 January 2017 is therefore irrelevant.
31 Jan 2017 Dr Interest receivable (current asset) GH¢800,000
Cr Profit or loss
GH¢800,000
(Interest accrued to Bawaleshie Ltd on bond investment)

Question 8

Sukura Ltd is preparing its financial statements for the year ended 31 December
2018. Sukura Ltd entered into a contractual arrangement on 1 September 2018 with
another company, Mammobi Ltd, setting up an unquoted entity, Awoshi
Electronics. However, in this arrangement Sukura Ltd only has a 15%
shareholding and does not have any influence in the day to day financial and
operating policies. Sukura Ltd has recorded the investment in Awoshi Electronics
at its cost on 1 September 2018, being the carrying amount of the equipment and
cash transferred at that date. No subsequent changes were made to the carrying
amount.

Required:
Advise the directors on the accounting treatment of the above in Sukura
Ltd's financial statements for the year ended 31 December 2018.

ANS
• The investment in Awoshi Electronics is a financial asset as it is an investment
in shares. Such investments must initially be recorded at fair value under IFRS 9:
Financial Instruments.
• Consequently, the fair value is the fair value of the equipment plus the cash
transferred. As a result, a profit or loss on recognition of the equipment may arise.
• At the year end, as this is an investment in equity instruments, it must be held
at fair value. Sukura can choose whether to hold the investment at fair value
through profit or loss or fair value through other comprehensive income. The
decision is irrevocable.
• As the investment is an unquoted one, fair value cannot be determined by
reference to market data, so a business valuation needs to be performed.
(4 points for 4 marks)