on 1 january 2008 an entity invested euro 1 million in a loan with a par value of eu 599069

Derecognition of part of financial asset in its entirety

On 1 January 2008 an entity invested €1 million in a loan with a par value of €1 million. The loan pays interest of €75,000 on 31 December annually in arrears and is to be redeemed at par on 31 December 2017. The entity accounts for the loan at amortised cost.

On 1 January 2013 it unconditionally sells the right to receive the remaining five interest payments to a bank. The derecognition provisions of IAS 39 (IFRS 9) are applied to the interest payments as an identifiable part of the asset, leading to the conclusion that they are required to be derecognised.

The consideration received for, and the fair value of, the future interest payments (based on the net present value, as at 1 January 2013, of the payments at the current market interest rate that would be available to the borrower of 5%)¹⁸ is €324,711 (€75,000 × [1/1.05 + 1/1.05² … + 1/1.05⁵]). By the same methodology the fair value of the principal repayment can be calculated as €783,526 (€1,000,000 × 1/1.05⁵), giving a total fair value for the loan of €1,108,237.

In order to calculate the gain or loss on disposal, the total carrying value of the loan of €1,000,000 is allocated between the part disposed of and the part retained, based on the fair values of those parts. This allocates €292,998 (€1,000,000 × 324,711 ÷ 1,108,237) to the interest payments disposed of and €707,002 (€1,000,000 × 783,526 ÷ 1,108,237) to the retained right to the repayment of principal. This generates the accounting entry:

If the loan had instead been a quoted bond accounted for as available-for-sale, it would have already have been carried at €1,108,237, so that the basic disposal journal would simply be:

However, as the bond was accounted for as available-for-sale, it would also be necessary to recycle that portion of the cumulative revaluation gain of €108,237 that relates to the interest ‘component’ of the total carrying value from equity to the income statement. IAS 39 requires a pro-rata allocation of the cumulative gain or loss in equity based on the total fair value of the interest and principal – this would deem €31,713 (€108,237 × €324,711 ÷ 1,108,237) of the cumulative revaluation gain to relate to interest. This would give rise to the further journal, resulting in the same gain on disposal as above: