POINTS ON ADDITIONAL INFORMATION 4 TO THE ICAN QUESTION


Now to the fourth additional information in the question; 


a.    Summary of additional information 4:

Here, Barewa purchased an equity instrument classified as available for sale for 100million pesos. That is, the equity was denominated in a foreign currency instead of Naira which is the presentation and functional currency of Barewa. On that date the rate of exchange was N5.1 to 1 peso but this dropped to N5.0 to 1 peso as at 31 May 2013.

In the same vein, the fair value of the instrument (i.e. available for sale) also fell from 100million pesos to 90million peso from 31 May 2012 to 31 May 2013. It was claimed that the fall was due to impairment.

b.    Explanation on what to do about additional information 4:

Here, we are faced with 2 major problems which are the determination of currency exchange loss and impairment loss on the available for sale. The former is covered by IAS 21, The Effects of Changes in Exchange Rates while the latter is covered by IAS 39, Financial Instruments: Recognition and Measurement.

The impairment loss on the available for sale instrument will be the difference between 100million pesos (i.e. value as at 31 May 2012) and 90million pesos (i.e. value as at 31 May 2013). To convert this to the functional and presentation currency which is Naira we shall have to multiply this difference by the average exchange rate between 31 May 2012 and 31 May 2013 (i.e. N5.05).

Now, to make matter very simple, IAS 21 posits that transactions should be converted or translated into a functional currency using the spot exchange rate (i.e. the exchange rate at the date or time of the transaction). Therefore, the translation difference as at 31 May 2013 for the available for sale instrument will be CLOSING VALUE OF THE AVAILABLE-FOR-SALE LESS OPENING VALUE OF THE AVAILABLE-FOR-SALE MINUS IMPAIRMENT LOSS. Please note that impairment loss or fair value loss here will be denoted with a negative value.

c.     Working note on additional information 4:

NOTE 10: Calculation of impairment loss on available for sale as at 31 May 2013:
=N= 'Million
[100million PESOS – 90million PESOS]
        10.00
MULTIPLY BY AVERAGE EXCHANGE RATE (N5 + N5.10)/2
X
    5.05
        50.50


NOTE 11: Calculation of translation difference (i.e. exchange gain or (loss)):
=N= 'Million
ACTUAL CLOSING VALUE OF AFS[90 PESOS X   N5.0]
450.00
LESS: OPENING VALUE [100 PESOS X N5.1]
510.00
LESS: IMPAIRMENT LOSS
(50.50)
(9.50)


 
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