Example 1: Income or loss from a financial asset (held-to-maturity)

Sandy owns SPECo, a CFC with a functional currency of CUA*. On 1 April 2011 SPECo purchases a bond newly issued by a foreign government, for CUB973,357. The bond has a term of 3 years, a face value of CUB1,000,000, and pays interest six-monthly at a rate of 6% per annum. The effective interest rate on the bond is 7% per annum. The CUA/CUB exchange rate is initially 1.00, but rises to 0.50 (CUA appreciates) on 31 March 2012. The bond is classified as a held-to-maturity investment under NZIAS 39, so is to be measured (subsequent to recognition) at amortised cost using the effective interest method.

On 31 March 2012, following the usual payment of interest, the foreign government announces that it is facing a fiscal crisis and will be unable to service its debt as previously agreed. In future, it will pay no interest and will repay only 80% of the face value of bonds on maturity. On 31 March 2013, SPECo sells the bond for CUB700,000.

The following table shows the financial accounting calculation of income and losses from the bond.

At recognition (CUB)
	Cash flows	Accrued interest	Interest received	Amortised cost
1-Apr-11	-973357			973357
30-Sep-11	30000	34068	30000	977425
31-Mar-12	30000	34210	30000	981635
30-Sep-12	30000	34357	30000	985992
31-Mar-13	30000	34510	30000	990502
30-Sep-13	30000	34668	30000	995169
31-Mar-14	1030000	34831	30000	0
Effective rate	7.00%

Actual outcome (CUB)
	Bond	Accrued interest	Interest received	Amortised cost	Impairment	Sale price	Gain/loss on sale
1-Apr-11	-973357			973357
30-Sep-11	30000	34068	30000	977425
31-Mar-12	30000	34210	30000	697154	-284481
30-Sep-12	0	24400	0	721554
31-Mar-13	0	25254	0	746809		700000	-46809
30-Sep-13	0	26138	0	772947
31-Mar-14	800000	27053	0	0

Actual outcome (CUA)
	Exchange rate	Accrued interest	Interest received	Amortised cost	Impairment	Forex gain/loss	Sale price	Gain/loss on sale
1-Apr-11	1.00			973357
30-Sep-11	1.00	34068	30000	977425		0
31-Mar-12	0.50	17105	15000	348577	-142240	-488712
30-Sep-12	0.50	12200	0	360777		0
31-Mar-13	0.50	12627	0	373404		0	350000	-23404

Attributable income in relation to the bond comprises the accrued interest earned over the period of ownership, the foreign exchange loss in the period ended 31 March 2012, and a loss on sale in the period ended 31 March 2013 (see bold type in the table above). The impairment loss is also intended to be included in attributable income. There is a total loss over the period of ownership, for the purposes of the test, of $578,357.

*CUA = Currency A
CUB = Currency B