a) Kunal plc issued 6 million 6% convertible bonds on 1 January 2017 at par. The bonds are redeemable at par on 31 December 2020 or convertible at that date on the basis of 120 1 ordinary shares for every nominal 100 of bonds. At the date of issue the prevailing market rate for similar debt without conversion rights was 8%. The interest due was paid on 31 December 2017 and recorded within finance costs during the year. Required: Explain how convertible instruments are initially recognised in accordance with IFRS7 Financial Instruments: Presentation, and prepare the journal entry to record the issue of the bonds by Kunal plc. Note: Extracts from the present value table (present value of 1 per annum, receivable or payable at the end of each year for n years): Interest rates 7% 5% 6% 8% 9% Years (n) O AWN 0.952 0.907 0.864 0.823 0.784 0.943 0.890 0.840 0.792 0.747 0.935 0.873 0.816 0.763 0.713 0.926 0.857 0.794 0.735 0.681 0.917 0.842 0.772 0.708 0.650 Extract: Cumulative present value table: Years 5% 6% 7% 8% 9% (n) 0.952 1.859 2.723 3.546 4.329 0.943 1.833 2.763 3.465 4.212 0.935 1.808 2.624 3.387 4.100 0.926 1.783 2.577 3.312 3.993 0.917 1.759 2.531 3.240 3.890 b) Vivek plc issues three debt instruments, all with a nominal value of 100,000 redeemable in TWO years. The implicit rate of interest for all the financial instruments is 10%. Required: Explain (using calculations as appropriate), how EACH of the following financial instruments should be dealt with in the financial statements, for the two years (the coupon rate refers to the rate of interest): 1. The first has a coupon rate of 0%, and the debenture is redeemed at a premium of 21,000. 2. The second has a coupon rate of 0% and the debenture is issued at a discount of 17,355. 3. The third has a coupon rate of 2%, and the debenture is issued at a discount of 5,000 and redeemed at a premium of 10,750 (12 Marks) c) The current model in IAS39 Financial Instruments: Recognition and Measurement, requires an entity to account for credit losses in financial assets only if an event has occurred that has a negative effect on future cash flows and that effect can be reliably estimated (this is known as the incurred Loss model). The global financial crisis has led to criticism of the incurred loss model for presenting an initial, over-optimistic assessment of no credit losses, only to be followed by a large adjustment once a trigger event occurs. Responding to the request of the G20 leaders and others the IASB has reviewed that approach and now replaced IAS39 with IFRS 9, Financial Instruments. This introduces a new Expected Credit Loss model. Under this new model, expectations of future events must be taken into account and this will result in the earlier recognition of larger impairments. REQUIRED: Discuss the problems of the Incurred Loss model under IAS 39 and the benefits of the Expected Loss model in IFRS 9. (10 marks)