Debt obligation: present value technique [IFRS 13.IE43-47]
On 1 January 20X1 Entity C issues at par in a private placement a CU2,000,000 BBB-rated five-year fixed rate debt instrument with an annual 10% coupon. Entity C designated this financial liability as at fair value through profit or loss.
At 31 December 20X1 Entity C still carries a BBB credit rating. Market conditions, including available interest rates, credit spreads for a BBB-quality credit rating and liquidity, remain unchanged from the date the debt instrument was issued. However, Entity C”s credit spread has deteriorated by 50 basis points because of a change in its risk of non-performance. After taking into account all market conditions, Entity C concludes that if it was to issue the instrument at the measurement date, the instrument would bear a rate of interest of 10.5% or Entity C would receive less than par in proceeds from the issue of the instrument.
For the purpose of this example, the fair value of Entity C”s liability is calculated using a present value technique. Entity C concludes that a market participant would use all the following inputs when estimating the price the market participant would expect to receive to assume Entity C”s obligation:
(a) the terms of the debt instrument, including all the following:
(i) coupon of 10%;
(ii) principal amount of CU2,000,000 ; and
(iii) term of four years.
(b) the market rate of interest of 10.5% (which includes a change of 50 basis points in the risk of non-performance from the date of issue).
On the basis of its present value technique, Entity C concludes that the fair value of its liability at 31 December 20X1 is CU1,968,641.
Entity C does not include any additional input into its present value technique for risk or profit that a market participant might require for compensation for assuming the liability. Because Entity C”s obligation is a financial liability, Entity C concludes that the interest rate already captures the risk or profit that a market participant would require as compensation for assuming the liability. Furthermore, Entity C does not adjust its present value technique for the existence of a restriction preventing it from transferring the liability.