QUESTION 4 Illustration 4: Creditors for sale of goods A Limited (the ‘Company’) makes purchase of steel for its consumption in normal course of business. The purchase terms provide for payment of goods at 30 days credit and interest payable @ 12% per annum for any delays beyond the credit period. Analyze the nature of this financial instrument.
Solution:
The financial instrument in this case is creditors for the purchase of goods.
To analyze the nature of this 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 has purchased steel for its consumption in the normal course of business and is required to pay for the goods at 30 days credit. Therefore, the creditors for the purchase of goods would be classified as "financial liabilities measured at amortized cost" under IFRS 9.
Measurement:
The creditors for the purchase of goods 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 interest charge of 12% per annum for any delays beyond the credit period.
For example, if the company makes the payment within the credit period of 30 days, no interest charge would be applicable. However, if the company delays the payment beyond 30 days, it would be charged an interest rate of 12% per annum on the outstanding amount, which would be calculated as follows:
Interest charge = Outstanding amount x Interest rate x (Days late payment made / 365)
= Outstanding amount x 12% x (Days late payment made / 365)
The amortized cost of the creditors for the purchase of goods would be calculated as the initial measurement plus any accrued interest expense for delayed payments.
Disclosure:
The company would need to provide disclosures related to the classification, measurement, and impairment of the creditors for the purchase of goods in its financial statements. This would include information about the aging of the creditors, any significant concentration of credit risk, and any impairment losses recognized.
Overall, the creditors for the purchase of goods would be analyzed as a financial liability measured at amortized cost, taking into account the interest charge for delayed payments. The company would need to provide appropriate disclosures in its financial statements.
