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IFRS 9Case studies (Step 3 of 5)

Case study

Step 3 of 5
Practical caseIFRS 9L4 · Expert

File of an industrial group: hybrid contracts and separation, modification of an asset, assets credit-impaired from origination, loan commitments and maximum exposure period

8 documents20 tasks≈ 180 min
0 / 24 items completed
Standards
IFRS 9 — Financial Instruments
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Vestrel Industries SA (fictitious entity), an industrial group, closes its consolidated accounts on 31 December 20X6. Its central treasury holds a securitisation tranche and several loans, the group issued a bond indexed to copper, renegotiated a loan, acquired an already credit-impaired receivable and granted a revolving credit facility to its distributors. You prepare the analyses, calculations and entries of the file.

Your assignment

Classify the tranche and the loans, supporting the business model, the linked instruments, the absence of recourse and the cash flow features; compute the initial amount of the tranche; analyse the embedded derivative of the indexed bond and record its issue; compute the recalculated gross carrying amount of loan Z, the modification loss and record it; assess the increase in risk of the modified loan, compute the expected losses of loan Z and of the credit-impaired receivable acquired, its interest and its net amortised cost, then record the loss allowances; determine the exposure period of the revolving facility, compute its expected loss and record it; present the cumulative effect of the five entries and conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

8 documents: open each one to read it.

Document 1Memo

Group profile and file conventions

Vestrel Industries SA (fictitious entity), an industrial group, closes its consolidated accounts on 31 December 20X6. File conventions: amounts in EUR; the losses of each scenario are given discounted; the original effective interest rate and the credit-adjusted rate are data; the recalculated gross carrying amount of a modified asset is the present value of the modified cash flows at the original effective interest rate (the file's recalculation method); file convention (pedagogical assumption, not imposed by IFRS 9): the expected loss of the credit line is computed as exposure × probability of default × loss given default, without discounting; differences are expressed as percentages; the entries are illustrative.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Initial fair value of the Alvane tranche€1,500,000.00
Direct costs of the Alvane tranche€6,000.00
Proceeds of the indexed bond€5,000,000.00
Value of the host debt contract€4,680,000.00
Fair value of the embedded derivative at issue€320,000.00
Gross carrying amount of loan Z before modification€1,000,000.00
Modified cash flow of loan Z€1,060,000.00
Original effective interest rate of loan Z6%
Number of periods of the modified cash flow3 units
Loss of the central scenario (loan Z)€40,000.00
Probability of the central scenario (loan Z)50%
Loss of the downside scenario (loan Z)€120,000.00
Probability of the downside scenario (loan Z)35%
Loss of the severe scenario (loan Z)€260,000.00
Probability of the severe scenario (loan Z)15%
Purchase price of the Karvel receivable€320,000.00
Credit-adjusted effective interest rate14%
Change in losses of the central scenario (Karvel)€10,000.00
Probability of the central scenario (Karvel)70%
Change in losses of the downside scenario (Karvel)€60,000.00
Probability of the downside scenario (Karvel)30%
Expected exposure at default (revolving facility)€800,000.00
Probability of default over the exposure period (revolving facility)4%
Loss given default (revolving facility)50%
Planned outflows of the 2027 investment plan€12,000,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort8

  • Group profile and file conventions

  • Central treasury investment portfolio and the Alvane tranche

  • Solaris non-recourse loan and bond with a prepayment feature

  • Bond issue indexed to copper

  • Loan Z renegotiated

  • Karvel receivable acquired credit-impaired

  • Revolving credit facility granted to customers

  • 2027 industrial investment plan

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Classify the treasury investment portfolio and the Alvane senior tranche: business model, contractually linked instruments and cash flow test.

      2. Task 2Analysis

        Assess the contractual cash flows of the non-recourse Solaris loan, of the Midane bond (prepayment feature) and of the Dorvan loan, then retain their category.

      3. Task 3Analysis

        Compute the initial amount of the Alvane tranche.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the initial amount of the Alvane tranche.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Analysis

        Does the bond indexed to copper contain a derivative to be separated? Examine the conditions and the alternative of designating the whole contract.

      5. Task 5Journal entries

        Record the issue of the indexed bond.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        TotalsDebit0Credit0

      6. Task 6Calculation

        Compute the recalculated gross carrying amount of the modified loan Z.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the recalculated gross carrying amount of the modified loan Z.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Compute the modification gain or loss of loan Z.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the modification gain or loss of loan Z.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Modification loss on loan Z (amount recognised)

      8. Task 8Journal entries

        Record the modification loss on loan Z.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      9. Task 9Analysis

        Assess the significant increase in credit risk of the modified loan Z and retain the measurement basis.

      10. Task 10Calculation

        Compute the weighted expected credit loss of loan Z and the loss allowance of the Karvel receivable acquired credit-impaired.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the weighted expected credit loss of loan Z and the loss allowance of the Karvel receivable acquired credit-impaired.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Loss allowance of the Karvel receivable

      11. Task 11Journal entries

        Record the loss allowance of loan Z.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      12. Task 12Calculation

        Compute the 20X6 interest of the Karvel receivable at the credit-adjusted effective interest rate.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the 20X6 interest of the Karvel receivable at the credit-adjusted effective interest rate.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      13. Task 13Analysis

        Compute the amortised cost of the Karvel receivable before the loss allowance.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the amortised cost of the Karvel receivable before the loss allowance.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      14. Task 14Calculation

        Compute the net amortised cost of the Karvel receivable at the reporting date.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the net amortised cost of the Karvel receivable at the reporting date.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      15. Task 15Journal entries

        Record the loss allowance of the Karvel receivable.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      16. Task 16Analysis

        Which exposure period should be used for the revolving credit facility, and how does it differ from the maximum contractual period?

      17. Task 17Calculation

        Compute the expected loss of the credit facility (exposure × probability of default × loss given default).

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the expected loss of the credit facility (exposure × probability of default × loss given default).

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Expected loss of the revolving facility

      18. Task 18Journal entries

        Record the loss allowance of the credit facility.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      19. Task 19Effects on the financial statements

        What is the cumulative effect of the five entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      20. Task 20Conclusion

        Write the conclusion of the file.

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 24).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 9 §4.3.3
      • IFRS 9 §5.4.3
      • IFRS 9 §5.4.1
      • IFRS 9 §5.5.12
      • IFRS 9 §5.5.20
      • IFRS 9 §5.5.9
      • IFRS 9 §5.5.11
      • IFRS 9 §4.1.2
      • IFRS 9 §4.1.2A