Mikail Shishkhanov is the owner of Binbank, co-owner of several pension funds, ...
IFRS: training, methodology and implementation practice for companies and professionals
A joint project of the IPA of Russia and the journal “Corporate Financial Reporting. International Standards".
Discounting in calculations for IFRS purposes
K. e. n. Deputy Director of the International Audit and Consulting Department of DELOVOI PROFILE JSC.
Effective interest rate for discounting
The discounted value is determined by the formula:
FV n = PV (1 + r) n ,
where FVn - future value in n years (Future Value);
PV - modern, present or current value (Present Value);
r - annual interest rate (effective rate);
n - discount period.
From here present value:
PV = FV / (1 + r) n .
The most interesting and controversial point in this formula is the effective rate. It should be noted that there is no single approach to calculating the effective interest rate for discounting. Experts use various methods to calculate it.
Cumulative Method
This method is an adjustment (increase) of the risk-free rate for the risks inherent in the country, market, company, etc. For this method, the company needs to establish the influence of individual factors on the value of the risk premium, that is, develop a scale of risk premiums.
d = R + I + r + m + n,
where d is the effective interest rate;
R - risk-free rate of return (%);
I - country risk;
r - industry risk;
m - the risk of unreliability of the project participants;
n is the risk of non-receipt of the income provided for by the project.
The risk-free rate is the rate of return that can be earned on a financial instrument that has zero credit risk. The most reliable investment instrument in the world is 30-year US government bonds. If we compare a similar instrument in the same currency, for the same period, on the same conditions in Russia, the rates will differ by country risk. If we take bonds with similar terms, denominated in rubles, and compare with previous securities, we get the effect currency risk.
Organizational weighted average cost of capital (WACC) model
The weighted average cost of capital is calculated as the sum of the return on equity and borrowed capital, weighted by their specific share in the capital structure.
Calculated using the following formula:
WACC = Ks × Ws + Kd × Wd × (1 – T),
where Ks - cost of own capital;
Ws - share of own capital (%) (according to the balance sheet);
Kd - the cost of borrowed capital;
Wd - the share of borrowed capital (%) (according to the balance sheet);
T - income tax rate (%).
Capital Asset Pricing Model (CAPM)
With an efficient capital market, it is assumed that only market (systemic) risks will affect the future performance of a stock. In other words, the overall market sentiment will determine the future performance of a stock.
Rs = R + b × (Rm - R) + x + y + f,
where Rs is the real discount rate;
R - risk-free rate of return (%);
Rm - average market return (%);
b - coefficient beta, which measures the level of risks, making adjustments and amendments;
x - premium for risks associated with insufficient solvency (%);
y - premium for the risks of a closed company related to the unavailability of information about the financial condition and management decisions (%);
f - country risk premium (%).
You can also refer to open source information. In particular, you can use the Banking Statistics Bulletin of the Central Bank of the Russian Federation, which provides monthly information on the level of interest rates broken down by legal entities and individuals, by currency and by terms of loan obligations.
Discounting in IFRS
The use of discounting is required by a number of international financial reporting standards.
- According to IAS 18 Revenue, discounting must be applied if payment for goods occurs much later than their delivery, that is, in fact, this is a commodity credit. Finance costs will need to be excluded from revenue on recognition and recognized over the installment period (similar to IFRS 15 Revenue from Contracts with Customers).
- IAS 17 Leases states that leased assets are accounted for at the lower of the discounted value of the minimum lease payments or the fair value of the property received.
- IAS 36 Impairment of Assets requires an impairment test to be performed when there is evidence of impairment. The recoverable amount of an asset is determined, which is calculated as the higher of the fair value and value in use of the asset. The value in use of an asset is calculated as the present value of the future cash flows associated with that asset, most often discounted at the weighted average cost of capital.
- IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that if long-term provisions are made, the liability must be discounted.
Example 1
A well was purchased for 20,000 thousand rubles. The service life of a similar well is 20 years. According to the legislation, when decommissioning a well, it is necessary to carry out restoration work (land reclamation). The estimated cost of these works will be 3,000 thousand rubles. The effective rate is 9%.
Under IAS 16, the cost of decommissioning work must be included in the cost of property, plant and equipment. In this case, the estimated liability should be reduced to the current value:
3,000,000 / (1 + 0.09) 20 \u003d 535,293 rubles.
Thus, the initial cost of the fixed asset will be 20,535,293 rubles. and reserve. Amount RUB 535,293 is a discount. Each reporting period, the provision will increase by the amount of finance costs recognized, calculated using the effective rate.
- Under IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, if payment for an asset is made on a deferred basis, it is required to exclude finance costs from the cost of the asset on recognition and recognize expenses during the installment period.
Example 2
Stocks were purchased under the contract in the amount of 15,000 rubles. deferred payment for 12 months. The market interest rate is 8%. When reflected in the accounting, the reserves and the liability are recognized in the amount of the discounted future flow: 15,000 / (1 + 0.08) 1 = 13,888 rubles.
The amount is 1112 rubles. - a deferral fee, which will be recognized as a finance cost during the year and will reduce the cost of inventories.
- Discounting is also required by IAS 39 Financial Instruments: Recognition and Measurement. Financial instruments are accounted for and measured in accordance with this standard until 31 December 2017. Starting January 1, 2018, the new standard IFRS 9 Financial Instruments will come into effect, early application of which is permitted.
New IFRS 9 Financial Instruments
The introduction of the new standard IFRS 9 Financial Instruments introduced some changes to the calculation and recognition of impairment compared to IAS 39 Financial Instruments: Recognition and Measurement.Financial instruments are initially recognized at fair value at the trade date less/plus transaction costs, regardless of which model the financial instrument is subsequently accounted for.
A financial asset is recognized at an amount equal to the actual amount of cash or other consideration paid, payable, or rights of claim arising, plus costs directly attributable to the transaction.
Financial liabilities are initially recognized at an amount corresponding to the amount of cash or other consideration received, less directly attributable costs to the transaction.
The fair value of assets and liabilities at the time of recognition may differ from the amount of funds received and consideration received, for example, if there is a temporary deferred payment. In such a case, it is necessary to discount future flows using the market rate to eliminate the deferral fee.
A significant difference between IFRS 9 and IAS 39 is that at the time of recognition, the company must not only reflect the fair value, but also assess the expected possible risks and create a provision upon initial recognition of financial assets in accounting:
- assets at amortized cost;
- assets carried at fair value through other comprehensive income;
- lease receivables;
- a number of other financial instruments.
For trade receivables and lease receivables, expected credit exposures are measured and recognized over the entire period of ownership of the instrument.
At each reporting date, it is necessary to assess how the expected credit risks change, and in case of a significant increase, it is necessary to create a provision for the entire amount of expected losses during the holding period. A significant increase in risk occurs, for example, in the event of a delay in payment or adverse events for the borrower.
The borrower's condition may improve, and he will begin to make payments in accordance with the contract. Then, having assessed the reduction of risks, you can return to the assessment of future risks for 12 months.
Since there is no real impairment in the above cases, accrual of finance income should continue based on the asset's carrying amount and the effective interest rate.
When there is evidence of impairment at the reporting date (such as more than 90 days overdue), it is necessary to estimate the amount that is realistically obtainable under the contract and discount it using the original effective interest rate. The difference between the carrying amount and the new discounted cash flow amount is credit losses, they need to create a reserve. If there are clear indications of impairment, interest will only accrue on the amount that can be collected from the customer, so the effective rate should be multiplied by the difference between the carrying amount and the allowance.
Consider the difference in discounting with an example.
Example 3
On December 15, 2016, the company issued a loan in the amount of 200,000 rubles. for a period of three years.
The return period is 12/15/2019. The rate under the contract is 11% per annum. Interest is paid annually on December 31st. Interest is calculated monthly. The effective market rate is 14.12%.
According to the developed rules for this type of loans (without obvious signs of the risk of non-payment), the probability of a default is estimated at 1%.
It is known that as of December 31, 2017, the borrower was in arrears for 45 days; for such loans, the probability of default is estimated at 4.0%.
On December 30, 2018, it became known that the borrower had financial difficulties and payments would not be made in full. According to calculations, the company will be able to receive only 191,036 rubles.
Comparative information on the reflection of financial assets in accordance with IAS 39 and IFRS 9 (in rubles):
postings According to IAS 39 According to IFRS 9 The moment of recognition 12/15/2016 Dt "Financial asset" (FA)
(statement of financial position, FPR)
CT "Cash" (OFP)
Dt "Profit and Loss"
(income statement, OFR)
CT "Financial asset" (OFP)200 000 200 000
14 35714 357
200 000 200 000
14 35714 357
Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)-
-1856
1856Reporting period 31.12.2016 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)2
2Dt "FA" (OFP) 1149
11491149
1149Reporting period 31.12.2017 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)5745
5745Dt "FA" (OFP)
CT "Financial income" (OFR)26 239
26 23926 239
26 239Reporting period 31.12.2018 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)30 000
30 00014 093
14 093Dt "FA" (OFP)
CT "Financial income" (OFR)26 837
26 83723 774
23 774Reporting period 31.12.2019 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)-
-8304
8304Dt "FA" (OFP)
CT "Financial income" (OFR)26 131
26 13129 195
29 195The movement of debt can also be presented in the form of a table.
According to IAS 39:
Period Interest accrued for the year Debt with interest Payouts Carrying value of FA as at 31 December 2016 185 643 1149 186 792 −964 185 828 2017 185 828 26 239 212 06 −22 000 190 067 2018 190 067 26 837 216 904 −22 000 30 000 194 904 2019 194 904 26 131 221 036 −191 036 30 000 0 According to IFRS 9:
Period Debt at the beginning or date of recognition Debt after discounting expected flows, taking into account credit losses Reserve upon receipt of FI Interest accrued for the year Debt with interest Payouts Provision for impairment at the end Carrying value of FA as at 31 December excluding provision 2016 185 643 1856 1149 186 792 −964 1858 185 828 2017 185 828 26 239 212 067 −22 000 7603 190 067 2018 190 067 168 371 23 774 192 145 −22 000 21 696 191 841 2019 191 841 191 036 29 195 221 03 −191 036 30 000 0
Solution
1. Settlements at the time of recognition of a financial asset on December 15, 2016
1.1. We determine the fair value of FA as of December 15, 2016, since interest is paid unevenly and the nominal rate differs from the effective one:
Payment date The amount of payments under the contract Discount formula Present (current) value of cash flows 31.12.2016 964 = 964 / (1 + 0,1412) ^ (16 / 365) 959 31.12.2017 22 000 = 22 000 / (1 + 0,1412) ^ (381 / 365) 19 167 31.12.2018 22 000 = 22 000 / (1 + 0,1412) ^ (746 / 365) 16 795 31.12.2019 221 036 = 221 036 / (1 + 0,1412) ^ (1095 / 365) 148 723 Total 266 000 185 643
1.2. Adjusting the carrying amount to fair value:200,000 − 185,643 = 14,357 rubles
We recognize the difference in costs.1.3. We charge a reserve for assessed financial risks for 12 months:
185,643 × 1% = 1856 rubles.
2. Calculations at the end of the reporting period 12/31/2016
2.1. We estimate the future credit risk as of 12/31/2016. There was no significant increase in credit risk. We create a reserve for 12 months based on the new amount of debt. Debt Amount:185,643 + (185,643 × 14.12% × 16 / 365) - 964 = 185,828 rubles.
Reserve as of December 31, 2016: RUB 185,828 × 1% = 1858 rubles.
Change in the reserve in OFR: 1858 rubles. − 1856 rub. = 2 rub.2.2. We accrue and recognize financial income at the effective rate of the carrying amount:
185,643 × 14.12% × 16 / 365 = 1149 rubles.
3. Calculations at the end of the reporting period 12/31/2017
3.1. We estimate the future credit risk as of 12/31/2017. There has been a significant increase in credit risk. We create a reserve based on the entire period of asset ownership based on the new amount of debt:185,828 + (185,828 × 14.12% × 1) - 22,000 = 190,067 rubles.
RUB 190,067 × 4.0% = 7603 rubles.
Change in the reserve in OFR:7603 rub. − 1858 rub. = 5745 rubles.
3.2. Finance income is accrued and recognized at the effective rate of the carrying amount:185,828 × 14.12% × 1 = 26,239 rubles.
4. Calculations at the end of the reporting period 12/31/2018
4.1. There are signs of impairment of the financial asset as of 12/31/2018.As of December 31, 2018, we estimate the value of future cash flows, discounted at the original effective rate, taking into account the new cash flow:
4.2. Expected credit losses are:190,067 − 168,371 = 21,696 rubles
Taking into account the amount of the provision already accrued in the OFR, we recognize impairment in accordance with IFRS 9:21 696 - 7603 = 14 093 rubles.
Reserve under IAS 39: RUB 30,000 in OFR.4.3. Finance income is accrued and recognized at the effective rate for 2018:
5. Settlements at the time of disposal of the financial asset on 12/16/2019
- from the book value IAS 39: 190,067 × 14.12% × 1 = 26,837 rubles.
- of the book value less credit losses on IFRS9:(190,067 - 21,696) × 14.12% × 1 = 23,774 rubles.
5.1. At the time of repayment of the loan on December 15, 2018, the amount of the recognized provision will be RUB 30,000.The OFR reflects the additional accrual of credit losses up to 30,000 rubles:
30,000 − 21,696 = 8304 rubles
5.2. The amount of interest income is calculated as the balancing amount required to close the contract, taking into account the actual payment and the reserve. In our case, this is 29,195 rubles.
Thus, in addition to the issue of the method for calculating the effective discount rate, the introduction of IFRS 9 Financial Instruments introduced additional cases in which discounting is used and determined a new procedure for calculating credit losses.
In contrast to Russian accounting, when reporting under IFRS, the procedure for discounting future cash flows is widely used. What discount rate will be used depends on the result of evaluating the various elements of the financial statements. To justify the size of the discount rate, it is necessary not only to take into account the requirements of various standards, but also to have information about the risks specific to the company.
The situation when the receipts (or payments) of funds associated with certain elements of 1 reporting under IFRS are made with a significant delay is quite widespread. An example is the purchase of equipment with a deferred payment, the provision of an interest-free commercial loan to counterparties, the acquisition of fixed assets under financial lease agreements, etc. In order to correctly evaluate the value of such assets and liabilities in the preparation of financial statements, it is necessary to understand how much the future cash flows of the company are worth today, that is, to determine their current value. To calculate this value, the discounting procedure is applied.
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Personal experience Elena Shisharina, Deputy Chief Accountant of JSC Aeroflot Larisa Gorbatova, |
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Reference Where PV is the present value of future cash flows for n periods; |
When preparing financial statements in accordance with IFRS, discounting is usually applied if its effect can be significant. As a rule, we are talking about cases where the period of receipt or payment of funds associated with the item being assessed is at least one year.
Note that although discounting technique(see example 1) is the same for all cases of its application, the calculation of the discount rate used in this case differs in each specific case. At the same time, parameters based on market data and assessment of various risks are always used for the calculation.
Let us dwell in more detail on the methods proposed by IFRS for determining the discount rate for evaluating and accounting for individual business transactions.
Acquisition of non-current assets
If property, plant and equipment or intangible assets are acquired on a deferred basis without interest, these assets and associated liabilities are measured at initial recognition at the fair value of the consideration paid for them. This means that when reporting, it is necessary to take into account the time value of money, which implies discounting the nominal value of such assets. The discount rate in this case is usually taken equal to the market rate of interest at which the company could raise financing for the same period and in the same currency. The difference between the total payment (nominal value) and the fair value of the consideration paid (present value) should be treated as interest accrued on the loan.
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Example 1 |
Discount rate for leasing operations
Under IAS 17 Leases, leased assets are accounted for at the lower of the fair value of the property received at the effective date or the present value of the minimum lease payments 2 .
The amount of the minimum lease payments is discounted at the rate of interest implied in the lease agreement, if this rate is determinable. The value of the discount rate can be determined on the basis of the contract, if at the time of receiving the equipment on lease, its fair value and the total amount of payments under the contract are known (see example 2). Otherwise, the interest rate used is the rate at which the lessee could borrow the funds needed to purchase the asset on similar terms – for the same term, with the same collateral, etc. (see example 3).
| Table 1 Determining the value of the liability and the amount of interest on a finance lease | |||
| Commitment at the beginning of the year (January 1), thousand rubles | Interest on financial lease for the year (column 1 x 13.2016%), thousand rubles | Payment under the contract, thousand rubles | Liabilities at the end of the year (December 31), (group 1 + column 2 - column 3), thousand rubles |
| 1 | 2 | 3 | 4 |
| 3 500 000 | 462 056 | 1 000 000 | 2 962 056 |
| 2 962 055,6 | 391 038,4 | 1 000 000 | 2 353 094 |
| 2 353 094 | 310 645,8 | 1 000 000 | 1 663 739,8 |
| 1 663 739,8 | 219 640,2 | 1 000 000 | 883 380 |
| 883 380 | 116 620 | 1 000 000 | –– <1> |
| <1>By the end of the lease agreement, the company's obligation must be repaid in full. - Note. editions. | |||
| table 2 Calculation of discounted cash flows under a lease agreement | |||
| Year | Cash flows, thousand rubles | Discount factor 1/(1.15) | Discounted cash flows, thousand rubles |
| 2003 | 1 000 000 | 0,870 | 869 565 |
| 2004 | 1 000 000 | 0,756 | 756 144 |
| 2005 | 1 000 000 | 0,658 | 657 516 |
| 2006 | 1 000 000 | 0,572 | 571 753 |
| 2007 | 1 000 000 | 0,497 | 497 177 |
| Total | 5 000 000 | - | 3 352 155 |
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Example 2 |
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Example 3 |
Sale of products with deferred payment
Under IAS 18 Revenue, the need arises if the transaction is a customer financing transaction. For example, payment for goods occurs much later than their delivery, that is, in fact, a commodity credit is provided.
In this case, revenue is recognized at fair value, which is calculated as the sum of discounted cash flows. The discount rate is taken equal to one of two values:
- the prevailing market interest rate for a similar instrument (for example, a bond, a promissory note) issued by an enterprise with a similar credit rating;
- the rate of interest, which allows you to bring the nominal amount of remuneration under the contract (realization price) with a deferred payment to the cost of selling a similar product with payment upon delivery.
The choice should be made in favor of the interest rate that can be determined with a greater degree of certainty. The difference between the nominal amount of the consideration and its fair value is recognized as interest income 2 . It should be noted that if the payment grace period is less than one year, revenue is generally not discounted (provided that the effect of discounting is immaterial).
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Example 4 |
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Personal experience |
Discounting for asset impairment
IAS 36 Impairment of Assets requires an asset to be carried in the financial statements at its recoverable amount. At the same time, the standard stipulates that the higher of two values is considered to be the recoverable amount: the fair value less costs to sell and the asset's value in use 5 . If the carrying amount of an asset is greater than its recoverable amount, then the entity must recognize an impairment loss for the difference between the carrying amount and the recoverable amount.
To calculate the value in use of an asset, it is necessary to discount the future cash flows that will be generated by it. In this case, the discount rate is a market rate that reflects the market's current assessment of the risks inherent in the asset or group of assets being tested for impairment. The market rate is the rate of return that investors would receive on their investment in any asset that generates cash flows similar in terms of timing, risk and magnitude to those that the entity expects to receive from its asset.
The value of the discount rate when calculating the value in use of an asset is usually taken equal to the weighted average cost of capital (Weighted average cost of capital, WACC). However, the WACC will need to be adjusted to obtain a pre-tax value of this indicator that is independent of the capital structure (the future cash flows associated with an asset do not depend on how its acquisition was financed).
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Personal experience |
IAS 36 Impairment of Assets proposes to calculate the discount rate based on a long-term asset valuation model (Capital assets pricing model, CAPM) 6, rates at which a particular company attracts loans, and other market lending rates.
Perhaps the most commonly used model in practice is the valuation of long-term assets. It should be noted that statistical indicators of stock markets are used to calculate the discount rate based on the CAPM model. Since the Russian stock and industry markets are in the development stage, at present, American indicators are often taken as the base ones, which are then adjusted taking into account the risks specific to our country.
| Table 3 Calculation of the discount rate based on the CAPM model | |||
| N | Name of indicator | Index value, % | Explanations |
| 1 | risk free rate | 4,27 | Yield to maturity on 10-year US Treasury bonds |
| 2 | Risk premium for investing in an asset | 6,97 | Risk premium for investing in US stocks |
| 3 | The beta coefficient of assets without taking into account the capital structure | 0,57 | The necessary information can be found on the websites of investment companies and in special publications. |
| 4 | Preliminary cost of capital | 8,24 | Gr. 1 + gr. 2 × gr. 3 |
| 5 | Company size premium | 3,53 | The necessary information can be obtained from Ibbotson publications. |
| 6 | Risk premium for investing in a Russian company | 2,96 | Represents the difference between the yield of Russian foreign currency bonds of the Russian Ministry of Finance and 10-year bonds of the US Treasury |
| 7 | Foreign currency investment premium | 1,2 | Represents the difference between the yield of ruble and foreign currency bonds of the Ministry of Finance of Russia |
| 8 | Post-tax equity discount rate | 15,93 | Gr. 4 + gr. 5 + gr. 6 + gr. 7 |
| 9 | Pre-tax discount rate | 20,96 | All the data given above take into account income tax, therefore, to meet the requirements of the standard, you need to adjust the discount rate: gr. 8 / (1 - 0.24) (24% - effective income tax rate) |
The formula for calculating the discount rate based on the CAPM model can be presented as follows (see Table 3 for an example of calculation):
E(r) = rf + (E(rm) – rf)× β + x + y + f,
Where rf is the risk-free rate of return. The yield on ten-year US Treasury bonds is often used as this rate;
E(rm)– expected profitability in the market (average for the industry);
β
– coefficient "beta" for the relevant industry; characterizes the sensitivity of the returns on securities of companies from the analyzed industry to changes in market (systematic) risk. This coefficient is usually determined by appraisers on the basis of beta coefficients calculated by industry and published in special publications 7 .
x is the risk premium for investing in small businesses (company size premium). The risks of investing in shares of large and medium-sized companies cannot be considered the same. Long-term statistical observations revealed the presence of an inverse pattern between the size of the company (market capitalization) and the risk premium: the smaller the company, the higher the risks.
y– premium for the risk of investing in a Russian company. When determining the value of this indicator, you can use the difference between the yield of Russian currency bonds of the Russian Ministry of Finance and ten-year bonds of the US Treasury;
f– risk premium for investments in foreign currency (for example, the difference between the yield of ruble and foreign currency bonds of the Ministry of Finance of Russia).
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Personal experience |
The above examples of standards and options for applying discount rates are not exhaustive. When choosing a discount rate, an enterprise should be guided by market conditions and its own needs.
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Personal experience |
In conclusion, we note that the use of discounting in the stipulated cases is one of the main differences between IFRS and RAS. In Russian accounting, the discount rate is practically not used.
Discounting is provided for in RAS 19/02 Accounting for Financial Investments (approved by Order No. 126n of the Russian Ministry of Finance dated December 10, 2002) in respect of debt securities and loans provided by the organization (clause 23 RAS 19/02). At the same time, it is stipulated that no entries are made in the accounting records.
The present value and methods used for discounting financial instruments are disclosed in the explanatory note.
Discount rate, personal opinion
Artur Akopyan, CFO Synterra CJSC (Moscow)
The problem of choosing a discount rate is related to the priority of content over form - a fundamental requirement for information generated in financial accounting and reporting. In other words, where there is reason to believe that assets or liabilities are not measured at fair value and the real cash consideration is delayed in time, discounting should be applied.
The discount rate chosen should be as close as possible to the rate that the borrower would receive from an independent lender under market conditions and in a comparable situation.
The discount rate for a particular asset (such as a fixed asset or a subsidiary) is the rate that a company would have to pay to raise funds to purchase a similar asset.
If the data for determining the discount rate cannot be obtained directly from the market, an indicator is needed that reflects the time value of money. This means that you need to take into account "country risk", "industry risk", "currency risk", "pricing risks", etc. Such risks are best taken into account in the capital asset pricing model (CAPM).
In some particularly complex cases, it is even possible to involve independent experts in order to determine the value of the discount rate.
In my opinion, the main difficulty in applying the discount rate lies in the subsequent need to justify its level to auditors or investors. In any case, the choice of rate belongs to the sphere of professional judgment, which means that a certain subjectivity is implied here. Therefore, it is better to justify the bet using a range of values obtained by different methods.
1 The reporting elements are assets, liabilities, equity, as well as income and expenses of the company.
2 For details, see the article “Accounting for leasing under IFRS” (“Financial Director”, 2004, No. 7–8, p. 72). - Note. editions.
3 To calculate the rate, you can use the financial function "Rate" in Excel, which is used to calculate interest rates on annuities (payments made at the same frequency). - Note. editions.
4 For details, see the article “How to reflect income in financial statements” (“Financial Director”, 2006, No. 1, p. 30). - Note. editions.
5 For details, see the article “Accounting for Impairment of Assets” (“Financial Director”, 2004, No. 11, p. 42). - Note. editions.
6 For more details, see the article “Calculation of the discount rate” (“Financial Director”, 2003, No. 4, p. 36). - Note. editions.
7 Professional valuation companies most often use data from Ibbotson or Damodaran, well-known American companies with extensive experience in asset valuation. In their publications, you can find the necessary information about premiums for market risks, risks associated with the size of the company, beta values, etc. - Note. authors.
Discounting is the most important mechanism for representing the financial position of an organization reliably. This is one of the most difficult technical problems that a Russian accountant faces when preparing financial statements in accordance with IFRS. In Russian accounting, there are no similar requirements, while in Western systems, discounting is an integral part of accounting.
In RAS, the mention of discounting is contained in PBU 19/02 in relation to debt securities and loans granted, while discounting is the right of the organization, and is carried out only for disclosure in the explanatory note, and making entries in the accounting is prohibited (clause 23 of PBU 19/02 ). Similar to discounting is the procedure for accounting for the difference between the initial cost and the nominal value of debt securities for which the current market value is not determined: RAS 19/02 allows such a difference to be evenly attributed to financial results.
In IFRS, discounting can affect the carrying amount of any accounting item and thereby change the company's financial results.
The meaning of discounting is that the present value of future financial flows may differ significantly from their nominal value. The theory of the value of money says that the same amount paid at different points in time has a different value for the following two reasons:
1) risk of non-receipt;
2) the possibility of alternative investments.
For example, if a company purchased assets at a regular price, but was able to negotiate a significant delay in paying them, then it actually acquired assets at a lower price than usual. And if the company sold the asset with a significant deferred payment, then it will be reflected in IFRS not at its nominal value, but at the current, discounted one, and the difference will affect financial results. By taking into account the impact on financial performance of the time value of money, the comparability of financial statements increases, and it provides more opportunities for investment and management analysis.
Any, even the most complex, discounting operations are reduced to the discounting formula:
PV = FV/ (1+i)^n
FV - current value,
PV is the future value,
i - discount rate,
n – term (number of periods).
Basic IFRS discounting rules
Determination of the rate is not only the most important, but also the most difficult in discounting. There is no right or wrong discount rate. The discount rate tends to be different for different companies, for different transactions, at different times and for different purposes.
Determining the rate is the most important thing in discounting, as it significantly affects the results of all calculations. For example, the present value of an asset with a nominal value of $1 million, payable in 3 years:
- at a rate of 20% will be $578,704,
- at a rate of 3% will be $915,141,
- at a rate of 30% - $455,166
Depending on the specific objects of accounting, IFRS provides for various options for choosing the discount rate (see Table 1). At the same time, the following basic discounting rules in IFRS can be distinguished, which are applicable to all situations:
1. Discounting is usually not carried out if the impact of the time value of money is insignificant;
2. The interest generated by discounting is usually not accrued evenly, but at the effective interest rate. Accordingly, the discount rate is calculated using the compound interest method. According to IAS 39 Financial Instruments: Recognition and Measurement, the effective interest rate is the rate that exactly discounts the expected amount of future cash payments or receipts until the maturity of the financial instrument, or when as appropriate, over a shorter period, up to the net carrying amount of the financial asset or financial liability.
3. Financial instruments are acquired throughout the financial year, and the period for which the discount rate is determined (in the formula - "n") should be used not a year, but as short a period as possible (usually a month is enough). Otherwise, it will be much more difficult to calculate interest for each reporting date.
4. To determine the discount rate (except in special cases), market rates are usually used, including those adjusted for similar conditions, for example, for borrowing conditions that are similar in terms of currency, term, type of interest rate and other factors attracted by an organization with a similar credit rating;
5. The discount rate used for accounting usually depends on the creditworthiness of the debtor. If receivables are discounted, the discount rate is usually the rate at which the counterparty would be able to borrow on similar terms. If discounted, the discount rate usually corresponds to the interest rate at which the entity could obtain borrowed funds on similar terms.
6. Discount rates are applied before deducting income tax, that is, when assessing the rate, cash flows before tax are taken into account.
7. Discount rates do not take into account risks for which estimates of future cash flows have been adjusted. For example, if future cash flows are calculated in nominal terms, then the discount rate must include the effect of price increases.
In countries with a developed stock market, the weighted average cost of capital, WACC (weighted average cost of capital), which is calculated based on the cost of a company's equity capital and borrowed funds, can be used to calculate the discount rate. In Russia, it can reasonably be used only in relation to the debts of a small number of companies - public issuers of securities, as well as (with certain assumptions) companies comparable to them in size and nature of activity.
In relation to financial instruments of other companies, the calculation of the discount rate based on the estimated cumulative risk premium is usually applied. In this case, the risk-free interest rate is used as the base rate, which is adjusted based on the risk premiums inherent in this financial instrument for the main risk factors.
There is no consensus among valuation and investment analysts about what constitutes a risk-free interest rate in Russia, and whether there is one. As already mentioned, the discount rate will be different for solving different problems, moreover, within the framework of solving one problem, it will be different for different specialists. In accordance with ISA (ISA) 540 "Audit of Accounting Estimates", auditors of financial statements under IFRS will need to make sure that the company has chosen the right discount rate. At the same time, audit evidence obtained from sources independent of the audited entity is considered more reliable in accordance with ISA (ISA) 500. Therefore, if discounting significantly affects the financial position or financial performance of the company, then it is advisable to entrust the determination of the discount rate to an independent party (for example, appraisers or an audit company).
Cases where discounting is assumed in IFRS are presented in Table 1.
Table 1
Cases in which IFRS provides for discounting
IAS 2 Inventories paragraph 18, IAS 16 Property, Plant and Equipment (Property, Plant and Equipment) paragraph 23, IAS 38 Intangible Assets paragraph 32 |
If an asset is acquired with a grace period that exceeds normal terms, then the asset is carried at the present value of future payments. |
The most reliable asset valuation when using: 1. Rates at which the buyer can raise borrowed funds on similar terms; 2. Rates, the application of which allows obtaining the current value of the asset when it is paid in cash according to the discounting formula specified in paragraph 3 of the table |
A portion of interest costs that are directly attributable to the acquisition of a qualifying asset may be included in the cost of that asset if an entity chooses the alternative accounting for borrowing costs in accordance with IAS 23 Borrowing Costs |
IAS 39 Financial Instruments: Recognition and Measurement paragraph 43 |
Financial assets and liabilities at initial recognition are usually measured at fair value. When calculating fair value, discounting is often used in this case. |
Current market interest rate for similar financial instruments |
Discounting the future cash flows of a financial instrument is only one way of measuring its fair value (see IAS 39 Application Guide, AG64-82 for more details). Accounting for the impact of the time value of money on incremental costs associated with the acquisition of an asset or liability is determined in the same manner as described in paragraph 1 above |
IAS 39 |
After initial recognition, a portion of financial assets and liabilities continue to be measured at fair value and a portion is carried at amortized cost using the effective interest method. |
For those measured at fair value - at initial recognition. For those measured at amortized cost, the discount formula (PV = FV/(1+i)^n) is already used to estimate the interest rate (i) at which the value of an asset or liability increases as the maturity date approaches. The formula is modified as follows: i = ((FV/PV)^(1/n)) – 1, where FV – future payments on the financial instrument; n is the number of periods until the corresponding future payment; |
Discounting is the most important mechanism for representing the financial position of an organization reliably. This is one of the most difficult technical problems that a Russian accountant faces when preparing financial statements in accordance with IFRS. In Russian accounting, there are no similar requirements, while in Western systems, discounting is an integral part of accounting.
In RAS, the mention of discounting is contained in PBU 19/02 in relation to debt securities and loans granted, while discounting is the right of the organization, and is carried out only for disclosure in the explanatory note, and making entries in the accounting is prohibited (clause 23 of PBU 19/02 ). Similar to discounting is the procedure for accounting for the difference between the initial cost and the nominal value of debt securities for which the current market value is not determined: RAS 19/02 allows such a difference to be evenly attributed to financial results.
In IFRS, discounting can affect the carrying amount of any accounting item and thereby change the company's financial results.
The meaning of discounting is that the present value of future financial flows may differ significantly from their nominal value. The theory of the value of money says that the same amount paid at different points in time has a different value for the following two reasons:
1) risk of non-receipt;
2) the possibility of alternative investments.
For example, if a company purchased assets at a regular price, but was able to negotiate a significant delay in paying them, then it actually acquired assets at a lower price than usual. And if the company sold the asset with a significant deferred payment, then the accounts receivable in IFRS will be reflected not at its nominal value, but at the current, discounted one, and the difference will affect the financial results. By taking into account the impact on financial performance of the time value of money, the comparability of financial statements increases, and it provides more opportunities for investment and management analysis.
Any, even the most complex, discounting operations are reduced to the discounting formula:
PV = FV/(1+i)n
FV - current value,
PV is the future value,
i - discount rate,
n – term (number of periods).
Basic IFRS discounting rules
Determination of the rate is not only the most important, but also the most difficult in discounting. There is no right or wrong discount rate. The discount rate tends to be different for different companies, for different transactions, at different times and for different purposes.
Determining the rate is the most important thing in discounting, as it significantly affects the results of all calculations. For example, the present value of an asset with a nominal value of $1 million, payable in 3 years:
- at a rate of 20% will be $578,704,
- at a rate of 3% will be $915,141,
- at a rate of 30% - 455,166 dollars.
Depending on the specific objects of accounting, IFRS provides for various options for choosing the discount rate (see Table 1). At the same time, the following basic discounting rules in IFRS can be distinguished, which are applicable to all situations:
- Discounting is usually not carried out if the impact of the time value of money is immaterial;
- The interest generated by discounting is usually not accrued evenly, but at the effective interest rate. Accordingly, the discount rate is calculated using the compound interest method. According to IAS 39 Financial Instruments: Recognition and Measurement, the effective interest rate is the rate that exactly discounts the expected amount of future cash payments or receipts until the maturity of the financial instrument, or when as appropriate, over a shorter period, up to the net carrying amount of the financial asset or financial liability.
- Financial instruments are acquired throughout the financial year, and the period for which the discount rate is determined (in the formula - "n") should be used not a year, but as short a period as possible (usually a month is enough). Otherwise, it will be much more difficult to calculate interest for each reporting date.
- To determine the discount rate (except in special cases), market rates are usually used, including those adjusted for similar conditions, for example, for borrowing conditions that are similar in terms of currency, term, type of interest rate and other factors attracted by an organization with a similar rating creditworthiness;
- The discount rate used for accounting usually depends on the debtor's creditworthiness. If receivables are discounted, the discount rate is usually the rate at which the counterparty would be able to borrow on similar terms. If accounts payable are discounted, the discount rate is usually the rate at which the entity could borrow on similar terms.
- Discount rates are applied before income tax, i.e. pre-tax cash flows are taken into account when estimating the rate.
- Discount rates do not take into account risks for which estimates of future cash flows have been adjusted. For example, if future cash flows are calculated in nominal terms, then the discount rate must include the effect of price increases.
In countries with a developed stock market, the weighted average cost of capital, WACC (weighted average cost of capital), which is calculated based on the cost of a company's equity capital and borrowed funds, can be used to calculate the discount rate. In Russia, it can reasonably be used only in relation to the debts of a small number of companies - public issuers of securities, as well as (with certain assumptions) companies comparable to them in size and nature of activity.
In relation to financial instruments of other companies, the calculation of the discount rate based on the estimated cumulative risk premium is usually applied. In this case, the risk-free interest rate is used as the base rate, which is adjusted based on the risk premiums inherent in this financial instrument for the main risk factors.
There is no consensus among valuation and investment analysts about what constitutes a risk-free interest rate in Russia, and whether there is one. As already mentioned, the discount rate will be different for solving different problems, moreover, within the framework of solving one problem, it will be different for different specialists. In accordance with ISA (ISA) 540 "Audit of Accounting Estimates", auditors of financial statements under IFRS will need to make sure that the company has chosen the right discount rate. At the same time, audit evidence obtained from sources independent of the audited entity is considered more reliable in accordance with ISA (ISA) 500. Therefore, if discounting significantly affects the financial position or financial performance of the company, then it is advisable to entrust the determination of the discount rate to an independent party (for example, appraisers or an audit company).
Cases where discounting is assumed in IFRS are presented in Table 1.
Table 1 - Cases in which IFRS provides for discounting
|
IFRS |
Application of discounting |
Discount rate |
Exceptions and Clarifications |
|
1. Determination of the initial cost of the acquired assets |
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|
2. Determination of the cost of financial assets and liabilities |
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|
3. Subsequent measurement of financial assets and liabilities |
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|
4. Other cases of determining fair value |
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|
5. Accounting for income |
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|
6. Accounting for reserves |
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|
7. Impairment loss |
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|
8. Accounting for rent |
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|
Lease Type Qualification |
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|
Initial measurement of a finance lease item and liabilities on the lessee's balance sheet |
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|
Initial measurement of finance lease receivables on lessor's balance sheet |
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There are other rarer cases where IFRS require discounting. For example, the valuation and accounting of compound (combined) financial instruments (IAS 32), accounting for the costs of selling non-current assets held for sale (IFRS 5 “Non-current assets held for sale and discontinued operations” (Non-Current Assets Held for Sale and Discontinued Operations), pension plan accounting (IAS 19 Employee Benefits).
There are also situations where the use of discounting is not permitted by the standards, such as with respect to deferred taxes. In the opinion of the IASB, it is often impractical or extremely difficult to plot in detail the timing of the reversal of each temporary difference, and therefore deferred tax assets and liabilities are not discounted. This rule is contained in IAS 12 Income taxes paragraph 53.
An example of calculating the discounted cash flows of a company
On January 1, 2005, the Company acquired a fixed asset with a useful life of 10 years for $1 million with a 3-year grace period, with a discount rate of 20%. Fixed assets are depreciated on a straight-line basis.
In order to understand the impact of discounting on the company's accounting and reporting, the example shows the accounting entries for a fixed asset during the installment payment period for it and shows the reflection of these assets and liabilities in the company's balance sheet.
Postings according to RAS and IFRS for 2005-2007 are presented in Table. 2 (to simplify - without VAT):
Table 2 - Operations under RAS and IFRS for 2005-2006
|
Accounting entry |
RAS amount, USD |
IFRS amount, USD |
Calculation (for IFRS), USD |
Balance sheet indicators under IFRS (cumulative total, except for DS) |
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|
|
|
|
|
|
The main thing |
retained earnings |
Accounts payable |
|
Acquisition of an item of property, plant and equipment: |
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|
Depreciation charge: |
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|
Impact of discounting: |
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|
Depreciation charge: |
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|
Impact of discounting: |
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|
Depreciation charge: |
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|
Impact of discounting: |
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|
Payment to the OS vendor: |
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Thus, initially the fixed asset and accounts payable on it are reflected not at face value ($1,000,000), but taking into account the time value of money: in fact, the object cost the company less ($578,704). Subsequently, each item is depreciated based on its maturity: property, plant and equipment over 10 years (until the end of its useful life) using the straight-line method, and accounts payable over 3 years (until the maturity date) using the effective interest rate method.
Essentially, the company uses a supplier's loan and the effect of discounting accounts payable each period is shown as interest payable in the income statement. Accrued interest ($115,741 + $138,889 + $166,666) is added to the accounts payable each period, and by the end of the grace period it will equal the face value ($1,000,000).
After 10 years, the amount of depreciation under RAS will be $1 million. The amount of expenses under IFRS will consist of:
- depreciation, $578,704;
- interest expense – 115,741 + 138,889 + 166,666 = $421,296
- total $1,000,000
Thus, the example shows that discounting does not change the final financial result, but always changes its distribution over periods, and also changes the qualification of expenses. Given the going concern of the company, in many companies discounting changes the financial position and financial performance for each reporting period.
Discounting in calculations for IFRS purposes
FVn = PV (1 + r)n,
Where FVn - future value in n years (Future Value);
PV- modern, present or current value (Present Value);
r- annual interest rate (effective rate);
n- discount period.
From here present value:
PV = FV / (1 + r)n.
The most interesting and controversial point in this formula is the effective rate. It should be noted that there is no single approach to the effective interest rate for discounting. Experts use various methods to calculate it.
Cumulative Method
This method is an adjustment (increase) of the risk-free rate for the risks inherent in the country, market, company, etc. For this method, the company needs the influence of individual factors on the value of the risk premium, that is, to develop a scale of risk premiums.
d = R + I + r + m + n,
Where d- effective interest rate;
R
I- country risk;
r- industry risk;
m- the risk of unreliability of project participants;
n- the risk of non-receipt of the income provided for by the project.
The risk-free rate is the rate of return that can be earned on an instrument with zero risk. The most reliable investment instrument in the world is 30-year US government bonds. If we compare a similar instrument in the same for the same period, on the same conditions in Russia, the rates will differ by country risk. If we take bonds with similar terms, denominated in rubles, and compare with previous securities, we get the effect currency risk.
Weighted average cost of capital (WACC) model
The weighted average cost of capital is calculated as the sum of the return on equity and borrowed capital, weighted by their specific share in the capital structure.
Calculated using the following formula:
WACC = Ks × Ws + Kd × Wd × (1 – T),
Where Ks- cost of own capital;
ws- share of own capital (%) (according to the balance sheet);
kd- the cost of borrowed capital;
wd- the share of borrowed capital (%) (according to the balance sheet);
Capital Asset Pricing Model (CAPM)
With an efficient capital market, it is assumed that only market (systemic) risks will affect the future performance of a stock. In other words, the overall market sentiment will determine the future performance of a stock.
Rs = R + b × (Rm - R) + x + y + f,
Where Rs- real discount rate;
R- risk-free rate of return (%);
Rm- average market yield (%);
b- coefficient beta, which measures the level of risks, making adjustments and amendments;
x- premium for risks associated with insufficient solvency (%);
y- premium for the risks of a closed company related to the unavailability of information about the financial condition and management decisions (%);
f- country risk premium (%).
You can also refer to open source information. In particular, you can use the Bulletin of Statistics of the Central Bank of the Russian Federation, which provides monthly information on the level of interest rates broken down by legal entities and individuals, by currency and by terms of loan obligations.
Discounting in IFRS
The use of discounting is required by a number of international financial reporting standards.
- IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that if long-term provisions are made, the liability must be discounted.
According to IAS 18 Revenue, discounting must be applied if payment for goods occurs much later than their delivery, that is, in fact, this is a commodity credit. Finance costs will need to be excluded from revenue on recognition and recognized over the installment period (similar to IFRS 15 Revenue from Contracts with Customers).
IAS 17 Leases states that leased assets are accounted for at the lower of the discounted value of the minimum lease payments or the fair value of the property received.
IAS 36 Impairment of Assets requires an impairment test to be performed when there is evidence of impairment. The recoverable amount of an asset is determined, which is calculated as the higher of the fair value and value in use of the asset. The value in use of an asset is calculated as the present value of the future cash flows associated with that asset, most often discounted at the weighted average cost of capital.
Example 1
A well was purchased for 20,000 thousand rubles. The service life of a similar well is 20 years. According to the legislation, when decommissioning a well, it is necessary to carry out restoration work (land reclamation). The estimated cost of these works will be 3,000 thousand rubles. The effective rate is 9%.
Under IAS 16, the cost of decommissioning work must be included in the cost of property, plant and equipment. In this case, the estimated liability should be reduced to the current value:
3,000,000 / (1 + 0.09) 20 \u003d 535,293 rubles.
Thus, the initial cost of the fixed asset will be 20,535,293 rubles. and reserve. Amount RUB 535,293 is a discount. Each reporting period, the provision will increase by the amount of finance costs recognized, calculated using the effective rate.
- Under IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, if payment for an asset is made on a deferred basis, it is required to exclude finance costs from the cost of the asset on recognition and recognize expenses during the installment period.
Example 2
Stocks were purchased under the contract in the amount of 15,000 rubles. deferred payment for 12 months. The market interest rate is 8%. When reflected in the accounting, the reserves and the liability are recognized in the amount of the discounted future flow: 15,000 / (1 + 0.08) 1 = 13,888 rubles.
The amount is 1112 rubles. - a deferral fee, which will be recognized as a finance cost during the year and will reduce the cost of inventories.
Discounting is also required by IAS 39 Financial Instruments: Recognition and Measurement. Financial instruments are accounted for and measured in accordance with this standard until 31 December 2017. Starting January 1, 2018, the new standard IFRS 9 Financial Instruments will come into effect, early application of which is permitted.
New IFRS 9 Financial Instruments
The introduction of the new standard IFRS 9 Financial Instruments introduced some changes to the calculation and recognition of impairment compared to IAS 39 Financial Instruments: Recognition and Measurement.
Initially, financial instruments are recognized at their fair value at the date of the transaction less/plus transaction costs, regardless of which financial instrument is later measured at.
A financial asset is recognized at an amount equal to the actual amount or other consideration paid, payable, or the amount of receivables arising plus costs directly attributable to the transaction.
Financial liabilities are initially recognized at an amount corresponding to the amount of cash or other consideration received, less directly attributable costs to the transaction.
The fair value of assets and liabilities at the time of recognition may differ from the amount of funds received and consideration received, for example, if there is a temporary deferred payment. In such a case, it is necessary to discount future flows using the market rate to eliminate the deferral fee.
A significant difference between IFRS 9 and IAS 39 is that at the time of recognition, the company must not only reflect the fair value, but also assess the expected possible risks and create a provision upon initial recognition of financial assets in accounting:
assets at amortized cost;
assets carried at fair value through other comprehensive income;
lease receivables;
a number of other financial instruments.
Initially, an entity must measure and recognize expected credit losses for a period of 12 months based on the likelihood of adverse events occurring.
For trade receivables and lease receivables, expected credit exposures are measured and recognized over the entire period of ownership of the instrument.
At each reporting date, it is necessary to assess how the expected credit risks change, and in case of a significant increase, it is necessary to create a provision for the entire amount of expected losses during the holding period. A significant increase in risk occurs, for example, in the event of a delay in payment or adverse events for the borrower.
The borrower's condition may improve, and he will begin to make payments in accordance with the contract. Then, having assessed the reduction of risks, you can return to the assessment of future risks for 12 months.
Since there is no real impairment in the above cases, accrual of finance income should continue based on the asset's carrying amount and the effective interest rate.
When there is evidence of impairment at the reporting date (such as more than 90 days overdue), it is necessary to estimate the amount that is realistically obtainable under the contract and discount it using the original effective interest rate. The difference between the carrying amount and the new discounted cash flow amount is credit losses, they need to create a reserve. If there are clear indications of impairment, interest will only accrue on the amount that can be collected from the customer, so the effective rate should be multiplied by the difference between the carrying amount and the allowance.
Consider the difference in discounting with an example.
Example 3
On December 15, 2016, the company issued a loan in the amount of 200,000 rubles. for a period of three years.
The return period is 12/15/2019. The rate under the contract is 11% per annum. Interest is paid annually on December 31st. Interest is calculated monthly. The effective market rate is 14.12%.
According to the developed rules for this type of loans (without obvious signs of the risk of non-payment), the probability of a default is estimated at 1%.
It is known that as of December 31, 2017, the borrower was in arrears for 45 days; for such loans, the probability of default is estimated at 4.0%.
On December 30, 2018, it became known that the borrower had financial difficulties and payments would not be made in full. According to calculations, the company will be able to receive only 191,036 rubles.
Comparative information on the reflection of financial assets in accordance with IAS 39 and IFRS 9 (in rubles):
postings
According to IAS 39
According to IFRS 9
The moment of recognition 12/15/2016 Dt "Financial asset" (FA)
(statement of financial position, FPR)
CT "Cash" (OFP)
Dt "Profit and Loss"
(income statement, OFR)
CT "Financial asset" (OFP)200 000
14 357200 000
14 357Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)Reporting period 31.12.2016 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)Dt "FA" (OFP) Reporting period 31.12.2017 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)Dt "FA" (OFP)
CT "Financial income" (OFR)26 239
26 23926 239
26 239Reporting period 31.12.2018 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)30 000
30 00014 093
14 093Dt "FA" (OFP)
CT "Financial income" (OFR)26 837
26 83723 774
23 774Reporting period 31.12.2019 Dt "Profit and Loss" (OFR)
CT “FA Impairment” (OFP)Dt "FA" (OFP)
CT "Financial income" (OFR)26 131
26 13129 195
29 195The movement of debt can also be presented in the form of a table.
Period
Debt at the beginning or date of recognition
Interest accrued for the year
Debt with interest
Payouts
2016 2017 2018 2019
Period
Debt at the beginning or date of recognition
Debt after discounting expected flows, taking into account credit losses
Reserve upon receipt of FI
Interest accrued for the year
Debt with interest
Payouts
Provision for impairment at the end
2016 2017 2018 2019 Solution
1. Settlements at the time of recognition of a financial asset on December 15, 2016
1.1. We determine the fair value of FA as of December 15, 2016, since interest is paid unevenly and the nominal rate differs from the effective one:
Payment date
The amount of payments under the contract
Discount formula
Present (current) value of cash flows
31.12.2016 964 / (1 + 0,1412) ^ (16 / 365)
31.12.2017 22 000 / (1 + 0,1412) ^ (381 / 365)
31.12.2018 22 000 / (1 + 0,1412) ^ (746 / 365)
31.12.2019 221 036 / (1 + 0,1412) ^ (1095 / 365)
Total 1.2. Adjusting the carrying amount to fair value:
200,000 − 185,643 = 14,357 rubles
We recognize the difference in costs.
1.3. We charge a reserve for assessed financial risks for 12 months:
185,643 × 1% = 1856 rubles.
2. Calculations at the end of the reporting period 12/31/2016
2.1. We estimate the future credit risk as of 12/31/2016. There was no significant increase in credit risk. We create a reserve for 12 months based on the new amount of debt. Debt Amount:
185,643 + (185,643 × 14.12% × 16 / 365) - 964 = 185,828 rubles.
Reserve as of December 31, 2016: RUB 185,828 × 1% = 1858 rubles.
Change in the reserve in OFR: 1858 rubles. − 1856 rub. = 2 rub.
2.2. We accrue and recognize financial income at the effective rate of the carrying amount:
185,643 × 14.12% × 16 / 365 = 1149 rubles.
3. Calculations at the end of the reporting period 12/31/2017
3.1. We estimate the future credit risk as of 12/31/2017. There has been a significant increase in credit risk. We create a reserve based on the entire period of asset ownership based on the new amount of debt:
185,828 + (185,828 × 14.12% × 1) - 22,000 = 190,067 rubles.
RUB 190,067 × 4.0% = 7603 rubles.Change in the reserve in OFR:
7603 rub. − 1858 rub. = 5745 rubles.
3.2. Finance income is accrued and recognized at the effective rate of the carrying amount:
185,828 × 14.12% × 1 = 26,239 rubles.
4. Calculations at the end of the reporting period 12/31/2018
4.1. There are signs of impairment of the financial asset as of 12/31/2018.
As of December 31, 2018, we estimate the value of future cash flows, discounted at the original effective rate, taking into account the new cash flow:
4.2. Expected credit losses are:
190,067 − 168,371 = 21,696 rubles
Taking into account the amount of the provision already accrued in the OFR, we recognize impairment in accordance with IFRS 9:
21 696 - 7603 = 14 093 rubles.
Reserve under IAS 39: RUB 30,000 in OFR.
4.3. Finance income is accrued and recognized at the effective rate for 2018:
from the book value IAS 39: 190,067 × 14.12% × 1 = 26,837 rubles.
of the book value less credit losses on IFRS9:(190,067 - 21,696) × 14.12% × 1 = 23,774 rubles.
5. Settlements at the time of disposal of the financial asset on 12/16/2019
5.1. At the time of repayment of the loan on December 15, 2018, the amount of the recognized provision will be RUB 30,000.
The OFR reflects the additional accrual of credit losses up to 30,000 rubles:
30,000 − 21,696 = 8304 rubles
5.2. The amount of interest income is calculated as the balancing amount required to close the contract, taking into account the actual payment and the reserve. In our case, this is 29,195 rubles.
Thus, in addition to the method for calculating the effective discount rate, the introduction of IFRS 9 Financial Instruments introduced additional cases in which discounting is used and determined a new procedure for calculating credit losses.
IFRS discounting financial instruments
