IAS 39 - Amortised Cost Method


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If a fund buys a portfolio of defaulted loans, say face value of £500m, at a 80% discount, so cash pay for the portfolio is £100m. This is an asset.

The fund expects total recoveries of £30m per year for 5 years (total expected recovery is thus £150m). This includes interest and principal already due.

How is the portfolio of receivables reflected on the balance sheet and how is it amortised?

At the end of year 1, what is the book value and where are the amortisations reflected?

Would appreciate the calculation here as just need to get my head around it.

Thanks,
 
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Triest123

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If a fund buys a portfolio of defaulted loans, say face value of £500m, at a 80% discount, so cash pay for the portfolio is £100m. This is an asset.

The fund expects total recoveries of £30m per year for 5 years (total expected recovery is thus £150m). This includes interest and principal already due.

How is the portfolio of receivables reflected on the balance sheet and how is it amortised?

At the end of year 1, what is the book value and where are the amortisations reflected?

Would appreciate the calculation here as just need to get my head around it.

Thanks,
=> Firstly, you should compute the interest rate for the default loans.
It is, in fact, a "present value of an annuity" question.

Present value is $100m and the annual (regular) payment is $30m
for five years, so you can deduce that the interest rate of the loans is around
15.2382%

The following table show the amortised costs for the default loans :

Year Annual payment Principal Interest earned
1 30m 26m 4m
2 30m 22m 8m
3 30m 20m 10m
4 30m 17m 13m
5 30m 15m 15m

Dr Long term investment 100m Cr Bank 100m
(To record the purchase of defaulted loans)

At the end of year 1 :
Dr Bank 30m
Cr Interest income 4m
Cr Long-term investment 26m
(To record the receipts from the default loans and interest earned
at the end of year 1)
 
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