At the start of the year Cornish plc entered into a number of financial instruments and is considering how to classify these instruments under IAS 39. The instruments are as follows:
(a) Investment in listed 3% government bonds for €2 million. Cornish acquired the bonds when they were issued at their nominal value of €2 million. By the year-end, 31 December 2010, interest rates had fallen and the bonds had a market value of €2,025,000.
(b) Investment in shares in Schaenzler plc, a listed company, for €1,300,000. At 31 December 2010 the investment had fallen in value and was estimated to be worth only €1,200,000.
(c) Cornish plc borrowed €5 million at floating rate in the year and to hedge the interest rate took out an interest rate swap (floating to fixed) on the loan. The swap cost nothing to enter into but by 31 December 2010 because interest rates had fallen it had a fair value (liability) of €50,000.
Cornish plc does not use hedge accounting.
Required:
Discuss how the investments could be classified and measured under IAS 39 and the implications of the choices for the financial statements of Cornish plc.