Can anyone in forum explain the term " unwinding of Discount" its been used in P2.

If a liability (just an example) has been discounted to present value i.e. a provision of 100,000 payable in 3 years time at 5%, would be discounted to 86,430.

In subsequent years the discount will be unwound to move it closer, therefore the entries would be

year 1 - finance expense of 4,322 (86430 *5%) liability is now 90752
Year 2 - finance expense of 4538 (90752 * 5%) liability is now 95290
Year 3 - finance expense of 4765 (95290 * 5%) liability is now 100,000 (less a bit of rounding etc). This liability will be cleared when the provision is paid out.

Basically you are unwinding the present value of the liability each year so that at the end of the term the liability will equal the original provision.

Does this make sense?

thanx for the explanation with decent example.

it means whenever liability is discounted it should also add up the unwinding element & expensed to the P&L account.

I think it will pass through directly from reserves and involving P/L is wrong because entering anything in P/L directly and Reserves is having different meaning and follows different treatment.

Regards,

Muhammad Amir.

I'm not sure I understand what you mean?

Thankyou bluewednesday for superb explianation!

Hi Muhammad Amir,

Which reserve are you talking about? I am not so sure.
The accounting treatment for Unwinding is that you have to add in PnL as an expense in Finance cost and in Statement of Financial Position in the Liability element.

Regards,
Ayesha.

Yes your right upto some extent. However, there are some instances where we need to account for any increase/<Decrease> in the finance cost as an equity item(i.e. add or less directly from retained earnings[i.e. reserves] not through P/L) the example is items that are classified as "available for sale" under the regime of IAS-39 in which case any gains/<Losses> or interest costs should be recognised directly in Equity not through P/L.

Regards,

Muhammad Amir.

I don't agree.

This is quoted directly from the standard:

A gain or loss on an available-for-sale financial asset shall be recognised directly in equity, through the statement of changes in equity, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognised, at which time the cumulative gain or loss previously recognised in equity shall be recognised in profit or loss. However, interest calculated using the effective interest method is recognised in profit or loss. Dividends on an available-for-sale equity instrument are recognised in profit or loss when the entity’s right to receive payment is established.

Where have you got your information from?

Yes you are right i have just seen the IFRS-2008 book and yes its true that we only recognise Gains/<Losses> in equity untill they(AFS Assets) are impaired or dercognised and any dividends and interests that are recieved in course of available for sale financial assets are recognised in the P/L.

the exact wordings are given under para 55 of IAS-39 which are quoted below.



But in my tutor's notes, he has given us a draft like FTC's study text and he has written that "Gains/<Losses> and Interest & Dividends in 'Fair value through P/L' catagory is recognised in P/L and in case of 'AFS' they are recognised in the equity". however he is true in FVTP/L catagory but for AFS a slight modification in needed there.

We all are students and we all can committ mistakes and none of us is free from mistakes.

Anyway, thanks for your correction, its good that you have pointed my mistake.

Regards,

Muhammad Amir.

No thanks needed - it did me good to make me look for the information myself.

Your posts are always so useful and informative, I think one tiny mistake is allowed! Especially if your tutor told you incorrectly!

Thanks was due on you as you have corrected my mistake which could become blunder at some professional stage.



I am not even balming my teacher(I can't do this for him because he is a teacher with vast experience and i am just a little student) .He has given us a draft where he has tried to summarise both "Fair Value through P/L" and "Available For Sale Fianancial Assets" catagories but due to some printing mistake this has had happened.

Regards,

Muhammad Amir.

it's depend on whether the coupon rate is equal to the effective mkt interest rate= yield. take for example 6%convertible debt and effective interest rate is 9%, then pls split ( if instrument is affect by more then one factor ) and find pure debt value ( pv of future cash flow discounted at mkt yield ). residual value is equity. then recalculate the finance cost base on market interest rate on the pure debt value. the difference btw the current finance cost and the mkt rate finance cost base on pure debt is the ADDITIONAL finance cost which is to be debited to the P & L directly. and i never hear b4 what Muhammad Amir say goes to equity??? but amir seldom give wrong .

Both of you , Muhammad Amir & bluewednesday have done a great job .

thnx