FAC4861 - SIM TEST 2 - 2019 - S.pdf - 1 Part a \u2022 At initial recognition a financial asset is measured at fair value plus transaction costs(except when

FAC4861 - SIM TEST 2 - 2019 - S.pdf - 1 Part a • At...

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1 FAC4861 - SIM TEST 2 - 2019 - S.docx © Edge Business School Part a) At initial recognition a financial asset is measured at fair value plus transaction costs (except when classified at fair value through profit and loss) (1) After initial recognition a financial asset is measured at amortised cost if: o The entity’s business model is to collect contractual cash flows. EDGE has a business model to collect contractual cash flows. (1) o Where the contractual cash flows are solely payments of principle and interest . On this point: (1) Interest is consideration for time value of money and credit risk on the principle amount. (1) The fact the instrument is perpetual does not mean that the payments are not principle and interest. In effect a perpetual instrument has continuous extension options. As long as the payment of interest is mandatory in perpetuity, the holder would receive consideration for the time value of money and credit risk. CF Ltd does have to make interest payments. (1) (1) The fact that the instrument is callable does not preclude the payments from being principle and interest. CF Ltd will pay back the principle and all accrued interest if the bond
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