QUESTION 1 Illustration 1: Trade receivables A Limited makes sale of goods to customers on credit of 45 days. The customers are entitled to earn a cash discount @ 2% per annum if payment is made before 45 days and an interest @ 10% per annum is charged for any payments made after 45 days. Company does not have a policy of selling its debtors and holds them to collect contractual cash flows. Evaluate the financial instrument.
Solution:
The financial instrument in this case is trade receivables.
To evaluate the financial instrument, we need to consider the classification, measurement, and disclosure requirements under IAS 32 and IFRS 9.
Classification:
As per the given information, the company does not have a policy of selling its debtors and holds them to collect contractual cash flows. Therefore, the trade receivables would be classified as "held to collect contractual cash flows" under IFRS 9.
Measurement:
The trade receivables would initially be measured at fair value, which is the transaction price. Subsequently, they would be measured at amortized cost using the effective interest method, which would take into account the cash discount and interest charges.
For example, if a customer pays within 45 days, they would receive a cash discount of 2% per annum, which would be calculated as follows:
Cash discount = Trade receivable x Discount rate x (Days early payment made / 365)
= Trade receivable x 2% x (45 / 365)
If the customer pays after 45 days, they would be charged an interest rate of 10% per annum, which would be calculated as follows:
Interest charge = Trade receivable x Interest rate x (Days late payment made / 365)
= Trade receivable x 10% x (Days late payment made / 365)
The amortized cost of the trade receivables would be calculated as the initial measurement plus any accrued interest income (for early payments) or interest expense (for late payments).
Disclosure:
The company would need to provide disclosures related to the classification, measurement, and impairment of the trade receivables in its financial statements. This would include information about the aging of the receivables, any significant concentration of credit risk, and any impairment losses recognized.
Overall, the trade receivables would be evaluated as a financial instrument held to collect contractual cash flows and measured at amortized cost using the effective interest method, taking into account the cash discount and interest charges. The company would need to provide appropriate disclosures in its financial statements.
