- 10 Marks
CR – Mar 2023 – L3 – Q2a – Financial instruments: Recognition and measurement Corporate reporting
Discuss financial reporting treatment of Hamza Ltd bonds as at 31 December 2022 and 2023.
Question
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 interest rate is 8%. Hamza Ltd’s business model is to collect contractual cash flows over the life of the asset. At 31 December 2022, the bonds were considered low risk, and the 12-month expected credit losses were estimated at GH¢10,000. On 31 December 2023, Jins Ltd paid the coupon interest, but the risks associated with the bonds increased significantly.
The present value of the cash shortfall for the year ended 31 December 2024 was estimated at GH¢462,963, with a 3% probability of default. At the end of 2023, it was 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.
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