Measurement of financial assets IAS 39 6.
There may also be other pre-payment features that cause the whole or part of the outstanding principal to be repaid early. As market interest rates go down and the bond price increases reflecting its above market interest ratethe bonds are likely to be called back.
As explained in paragraph 6. Consider the example given below. Example — Issuer call option in debt instrument Entity A issues a fixed rate loan for C1m and incurs issue costs of C30, resulting in an initial carrying value of C, However, under the contract, entity A can call the loan at any time after year 4 by paying a fixed premium of C50, As the fixed premium is required to be paid whenever the call option is exercised after year 4, it may or may not be equal to the present value of any interest lost during the remaining term after exercise of the issuer option what is it.
Therefore, the call option has to be separated from the host debt contract and accounted for separately. This assumes that the expected life of the instrument is the full 10 year term. However, if the expected life is assumed to be 4 years, the 10 year loan with a call option after 4 years is economically equivalent to a 4 year loan with a 6 year extension option.
Since there is no concurrent adjustment to the interest rate after 4 years, the term extension option would not be closely related and would need to be accounted for separately see chapter 6. Therefore, in this case whatever way the loan and option are viewed, the embedded derivative is separated. Since the value of a callable bond is equal to the value of a straight bond less the value of the option feature, the accounting entries at inception would be as follows: Dr.