CFA CFA Level 1 Reading 32, Example 6, page 500

Reading 32, Example 6, page 500

  • This topic has 3 replies, 2 voices, and was last updated Jun-17 by edulima.
  • Author
    Posts
    • agent1
      Participant
      Up
      0
      Down

      Hi All,

      Hopefully, somebody will clarify this for me.

      In example 6 on Debt Extinguishment Disclosure, in note 2, it says the following:

      “The carrying amount of the Company’s variable rate long-term debt approximates fair value”.

      In the same time, in the solutions it says:

      “the carrying amount equals the face value”.

      Surely it can’t be fair value and face value in the same time?!

      Thanks.

    • edulima
      Participant
      Up
      4
      Down

      @agent1, this is a good question.

      I believe the answer lies in the word “approximates” used in the disclosure note. I believe it means that, in principle, the carrying amount of the debt is not equal to its fair value (and in fact, a gain or a loss can be realized by redeeming the bonds before maturity when the company buys them for the fair value); however, for the example in question, it so happens that the fair value at that point in time (issuance of financial statements) is not far away from the book value (or carrying amount), hence “approximates”.

      This is how I understood the example, but anyone feel free to debunk my thoughts…

    • agent1
      Participant
      Up
      3
      Down

      Thanks for your answer.

      But no, they are not roughly similar – the difference is massive.

      Did anyone notice that as well? If you could look on page 500 of the accounting book – you’d know what I’m talking about. Will be happy to discuss.

    • edulima
      Participant
      Up
      3
      Down

      You may be right, since the gain from the retired debt is very significant (close to half of the carrying value). It does look a bit strange to include that sentence when it is clear that the company is not using fair value to report debt (they would have had gain/loss every year, not only when retiring debt).

      But the note refers to the whole long-term debt, so maybe it’s not so bad. I’m with you, though, that the book should probably have omitted that note if it was not relevant… or that it should at least explain it a bit better!

Viewing 3 reply threads
  • You must be logged in to reply to this topic.