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Ambush, a public limited company, is assessing the impact of implementing revised IAS 39, Financial Instruments: Recognition and Measurement. The directors realize that significant changes may occur in their accounting treatment of financial instruments and they understand that on initial recognition any financial asset or liability can be designated as one to be measured at fair value through profit or loss (the fair value option). However, there are certain issues that they wish to have explained and these are set out below.
(a) In a report to the directors of Ambush, outline the following information;
(i) How financial assets and liabilities are measured and classified, briefly setting out the accounting method used for each category. (Hedging relationships can be ignored.)
(ii) Why the 'fair value option' was initially introduced and why it has caused such concern.
(b) Ambush loaned $200 000 to Bromwich on 1 December 2003. The effective and stated interest rate for this loan was 8 per cent. Interest is payable by Bromwich at the end of each year and the loan is repayable on 30 November 2007. At 30 November 2005, the directors of Ambush have heard that Bromwich is in financial difficulties and is undergoing a financial reorganization. The directors feel that it is likely that they will only receive $100 000 on 30 November 2007 and no future interest payment. Interest for the year ended 30 November 2005 had been received. The financial year-end of Ambush is 30 November 2005.
(i) Outline the requirements of IAS 39 as regards the impairment of financial assets.
(ii) Explain the accounting treatment under IAS 39 of the loan to Bromwich in the financial statements of Ambush for the year ended 30 November 2005