Kaiteland

The directors of Kaiteland, a public limited company, are worried about the challenging market conditions which the company is facing. The majority of markets are volatile and some markets are illiquid. The central government is injecting liquidity into the economy. Kaiteland has the following financial instruments for the year ended 31 May 2019:

1. Kaiteland issued one million convertible bonds on 1 June 2016. The bonds had a term of three years and were issued with a total fair value of N$1,000 million which is also the par value. Interest is paid annually in arrears at a rate of 2% per annum and bonds, without the conversion option, attracted an interest rate of 7% per annum on 1 June 2016. The company incurred issue costs of N$1 million. The directors are uncertain how the bonds should have been accounted for up to the date of the conversion on 31 May 2019.

2. Kaiteland purchased debentures in Starlight on 1 June 2016 at 1.47408 of the face value. The face value of the debentures is N$100 000 and interest is paid annually in arrears at a coupon rate of 20% per annum. The debentures will be redeemed at a premium of 30% on 31 May 2019. The subsequent fair values of the debentures were as follows:

* 31 May 2017 and 1 June 2017 1.45350 of the face value * 31 May 2018 and 1 June 2018 1.48850 of the face value

The debentures have never been credit-impaired and there have been no significant increases in the credit risk of the debentures since their initial recognition. Expected credit losses were estimated as: 12 month expected credit losses: Lifetime expected credit losses: 01 June 2016 5 000 12 500 31 May 2017 7 000 15 000 31 May 2018 8 000 6 700

The debentures were held to collect contractual cash flows on acquisition. Kaitelands board however reclassified the asset to collect contractual cash flows and to sell on 1 February 2017.

What is the fair value gain or loss on reclassification?

a.

N$9 285 loss

b.

N$3 201 gain

c.

d.

N$3 201 loss

e.

N$9 285 loss

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