Reference no: EM133168057
Question - Hardware Direct Ltd is a major Australian retailer that sells home hardware, housewares, and garden products. Recently, the Board of Directors appointed Melissa Taylor, who has an extensive background in marketing and management, to the position of Chief Executive Officer.
Melissa Taylor has just read a report prepared by John Durham, the company's Chief Financial Officer, that analyses the company's investments. The report identified that the company's investments were in 'traditional' areas such as property, cash, and shares. The report concluded that the company should consider non- traditional investments such as debt instruments (for example, secured loans, unsecured loans, and mortgage loans) that are traded in a secondary loan market.
The report identified some debt instruments that were currently available for investment. One of these was a loan made by Abacus Finance Ltd to Wakefield Ltd. As at 1 July 2022, this loan has a remaining three-year term. The original term of the loan was five years. The loan has a principal amount of $1,000,000 (the amount payable on maturity) and interest coupon of 5% paid on 30 June each year.
The investment would involve Hardware Direct Ltd purchasing the loan from Abacus Finance Ltd on 1 July 2022 and collecting the contractual cash flows made by Wakefield Ltd. The interest receipts occur on 30 June each year and the principal is due on 30 June 2025.
Because she is unfamiliar with these types of investments, Melissa Taylor has requested some information about the applicable accounting requirements from Ross May, who is Hardware Direct Ltd's Chief Accountant. Ross May has requested that you draft a memorandum to Melissa Taylor for his signature.
Required -
Draft a memorandum for Ross May to sign that explains the accounting requirements for the investment. Your memorandum should address the following topics:
Explain how the loan would be classified under AASB 9 Financial Instruments?
When would the loan be recognised by Hardware Direct Ltd in their financial statements and how would it be measured on initial recognition? When would the loan be derecognised?
Explain why Hardware Direct Ltd might pay more or less than $1,000,000 to purchase the loan.
How would the loan be measured subsequent to initial recognition?
How would a payment greater or less than $1,000,000 to acquire the loan affect how the loan is accounted for?
Explain how the loan would be accounted for if it was purchased to collect the contractual cash flows and for sale? What about if it was held for short-term trading?
Briefly explain the classification and measurement requirements if Hardware Direct Ltd acquired the loan from Wakefield Ltd rather than Abacus Finance Ltd. Would Hardware Direct pay to acquire the loan?