Use IFRS 9 to determine how to subsequently measure the following financial assets. Three choices of measurement basis are amortized cost, fair value through other comprehensive income, and fair value through profit or loss. Provide justification for your choice. Long-term loans that are held for collecting contractual cash flows till their maturities, but may be subsequently sold if the loans’ credit risk substantially increases. Investments in bonds that are held for collecting contractual cash flows, and may be subsequently sold to re-invest the cash in financial assets with a higher return. Subprime (high risk) mortgage loans that were originated by a mortgage-broker firm that always sell these loans to banks right after their origination. Forward contracts that an EU bank purchased to hedge the exposure to changes in fair value of US$-denominated loans. Investment in bonds that are convertible into common stock of the bond issuer. Investment in bonds that pay a variable market interest rate that is capped, and may be sold if interest rate starts to go up. Investment in bonds that pay a variable interest rate that is linked to the issuer’s net income which is not completely related to credit risk. The bank may sell this investment if the issuer’s net income drops significantly. Investment in yen-denominated 10-year bonds with payments of principal and interest that are linked to an inflation index of yen. The principal is protected but the inflation link is not leveraged. The bondholder has no plan to sell this bond investment. Portfolio of equity and debt securities held by an insurer to fund insurance contract liabilities using the proceeds from the contractual cash flows on these securities and engaging in significant buying and selling on a daily basis to rebalance its portfolio and to meet cash flow needs as they arise. Long-term investment in Google stock in a retirement fund for Google’s employees (not for trading).

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Use IFRS 9 to determine how to subsequently measure the following financial assets. Three choices of measurement basis are amortized cost, fair value through other comprehensive income, and fair value through profit or loss. Provide justification for your choice.

Long-term loans that are held for collecting contractual cash flows till their maturities, but may be subsequently sold if the loans’ credit risk substantially increases.
Investments in bonds that are held for collecting contractual cash flows, and may be subsequently sold to re-invest the cash in financial assets with a higher return.
Subprime (high risk) mortgage loans that were originated by a mortgage-broker firm that always sell these loans to banks right after their origination.
Forward contracts that an EU bank purchased to hedge the exposure to changes in fair value of US$-denominated loans.
Investment in bonds that are convertible into common stock of the bond issuer.
Investment in bonds that pay a variable market interest rate that is capped, and may be sold if interest rate starts to go up.
Investment in bonds that pay a variable interest rate that is linked to the issuer’s net income which is not completely related to credit risk. The bank may sell this investment if the issuer’s net income drops significantly.
Investment in yen-denominated 10-year bonds with payments of principal and interest that are linked to an inflation index of yen. The principal is protected but the inflation link is not leveraged. The bondholder has no plan to sell this bond investment.
Portfolio of equity and debt securities held by an insurer to fund insurance contract liabilities using the proceeds from the contractual cash flows on these securities and engaging in significant buying and selling on a daily basis to rebalance its portfolio and to meet cash flow needs as they arise.
Long-term investment in Google stock in a retirement fund for Google’s employees (not for trading).

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