My Co purchased interest-bearing bonds in Your Co on December 1, 2019 for $10m and classified these assets to be measured at amortized cost. The CFO of My Co had read the interim financial statements of Your Co, which were released just before this purchase; these statements had indicated a strong financial position and yearly growth prospects. External credit rating agencies had also graded the bonds as having a low credit risk.

In May 2020, Your Co released its annual financial statements that showed that the company had suffered weak trading performance in the final six months of the reporting period. In addition, its cash generating ability from operations showed a large decline compared to the previous year, and the company was in danger of breaking its loan contracts. The share price of Your Co has fallen by 20% since December 2019 despite the fact that bonds issued by other listed companies in the same sector show increase in prices. It has been rumored that the credit rating agencies are revising the credit rating of Your Co. Till now, despite being in financial trouble, Your Co. had been able to meet its obligations to its lenders and bondholders.

The directors of My Co need advice on how the above information will impact the carrying amount of its financial assets.

You are required to advise My Co on how the above transaction should be correctly dealt with in its financial statements with reference to relevant international financial reporting standards (IFRSs).

Answer rating: 100% (QA)

To assess whether there has been a significant increase in credit risk IFRS 9 requires entities to c... View the full answer