Increased market interest rate impact on value

People generally hold investments in bonds and other securities  and thereby they normally receive fixed amount of interest as income, but as we all know market is dynamic there are multiple factors which alters the market interest rates and this will result in change in our value of investments held.

Say I am holding 10% debentures of nominal value usd100,000 having 5 years maturity, this simply means  I have put my usd100,000 capital on debentures, thereby I will be receiving interest as income of  usd10,000 annually (100000*.10).

But say market conditions changes and now the market rate of interest on such debentures is 15%, this simply means if anybody invests in debentures currently  under changed market interest rate he will be getting 15% interest as income annually (i.e usd15,000 annually), but since I have already invested @10% , I will be getting usd10,000 only. This simply means my investment value has decreased. My current value of investment is not usd100,000 rather it is usd66,666 (10000/.15). In other words the amount of income in the form of interest I am receiving i.e usd10,000 would have been received at principal amount of usd66,666 under current scenarios (i.e usd66,666*.15=10,000).  The amount of income I am receiving i.e usd10,000 can be possible by investing usd66,666 under current market scenarios(i.e at 15% rate of interest). In other words if somebody wants to receive usd 10,000 anually he need to invest only usd 66,666 and not 100,000 under changed interest rate. This denotes the value of my original investment of usd100,000 is usd66,666 only, i.e decrease of usd33334 due to increased market interest rate. (From 10% to 15%). Now what I am willing to do is to sell my existing debentures carrying 10% interest rate and buy new 15% debentures , but I will not get usd 100,000 from the buyer of my 10% debentures  rather I can only get usd 66,666 since now the value has decreased.

Since I have already mentioned market is dynamic , so there is always risk of value being deteriorated, so what one can do is to use means to avoid this risk through different techniques, and there are numerous techniques available such as forward and futures contract.

The question might arise in mind, does increased interest rates affects stock prices? The answer is yes. The reason is, due to increased borrowing rates corporation postpones it's lendings and thereby less spendings and this halts company's growth and which result in decrease in stock prices

How Stupid We humans are?

 One human is killing another, resources are being destroyed in building /manufacturing all these nonsense(weapons of mass destruction like hypersonic missiles, nuclear weapons) , the purpose is not to use against any perpetrator of Earth it is rather to kill humans themselves, manufacturing machines for killing ourselves. I won't mind if we would lost our existence because we deserve this, our actions are dictating this, what makes me sad is we are taking along with us other innocent living beings ,,,

The end of human civilization either by war or by natural disaster is certain to happen if these kindda power show continues.. moreover these action makes humans more stupid than any other living beings. Shall we call ourself most developed, clever and Smart living being despite of all this?

These words look too disturbing but this is going to be our fate if timely we don't halt our unethical, irresponsible actions. Right now world seems to be so imbalanced , everybody is in the race of developing more sophisticated weapons and the reason for such development is no other than destruction. We are using natural resources as if we alone own it.

I wish and Hope peace be maintained, ecological balance be checked, war that is happening around the world be halted. Wish the true value of humanity and Humans be established.

Earth is our home don't fight for political boundaries, this is happening because of our Ego and greed. Stop all this, save humanity, spread love, live happily and move in a direction that leads to flourishing human race where humanity should only be the religion.

IFRS 3 or Indas 103 "Business Combination"

 Summary

Note: IFRS is international financial reporting Standards and IndAs is Indian Accounting Standards

A business combination is a transaction in which the acquirer obtains control of another business (the acquiree). 

Control: Control is defined by IFRS 10 or Ind As 110 

An investor controls an investee if and only if the investor has all the following:

• Power over the investee;
• exposure or rights to variable returns from its involvement with the investee; and
• the ability to use its power over the investee to affect the amount the investor's  return.

The above definition is very wide and control assessment does not depend only on voting rights instead it depends on the following as well:

• Potential voting rights;
• Rights of Non-controlling Shareholders (NCI);
• Other contractual right of the investor if those are substantive in nature.

TO ascertain control not only voting rights but also control over the board, potential voting rights shall also be considered.

To gain more understanding on Control one has to refer IFRS 10 or Ind As 110 as may be applicable.

Business:

The term 'business' is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. 

Elements of Business:  Input----> Process----> output

• Input: Any economic resource that creates outputs or has the ability to contribute to the creation of outputs, when one or more processes are applied to it.
• Process: Any system, standard, protocol, convention or rule that when applied to an input or inputs, creates output or has the ability to contribute to the creations of outputs. 
• Output: The result of inputs and processes applied to those inputs that provide goods or services to customers, generate investment income (such as dividends or interest) or generate other income from ordinary activities.  

To be capable of being conducted and managed for the purpose identified in the definition of a business, an integrated set of activities and assets requires two essential elements—inputs and processes applied to those inputs. Therefore, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output.

Concentration test to ascertain if the transaction constitute acquisition of Business or Acquisition of Assets. Ascertaining whether transaction is Business or Acquisition of asset is necessary because different accounting treatment is necessary for Business acquisition and asset acquisition.

Based on the concentration test:

If test is met ----> It is not a business (i.e it is an asset acquisition) and no further assessment is needed.

If test is not met ----> Further assessment is needed to conclude it as Business.

What is Concentration Test?

Concentration test is optional test and the decision to apply is made on a transaction to transaction basis.

It is a test to determine if substantially all of the fair value of Gross assets acquired is concentrated on single identifiable asset or Group of similar identifiable asset. ( For simplicity If fair value of all assets acquired is Rs. 100 and single Building out of such asset acquired has value of 90 then we can say that value of transaction is concentrated on single Building/asset ,so it's asset acquisition rather than business acquisition and shall be outside the purview of IFRS 3 or Ind As 103)

Test Process:

Fair Value of Gross Asset acquired calculation:

1. Calculate Fair value of consideration transferred (including fair value of non-controlling interest and fair value of previously interest held)
2. Calculate Fair value of liabilities assumed. 
3.  Add 1 and 2
4. Subtract :Cash and cash equivalent and deferred tax assets and goodwill resulting from DTL’s.

Method of Accounting under Business Combination:

Acquisition method of accounting is prescribed by Standard to account for Business Combination.

The Following are the key steps  involved in the acquisition accounting for business combinations:

• Step 1:  Identify the acquirer (This is necessary because acquisition accounting is done in the books of Accounting Acquirer).
• Step 2: Determine the Acquisition Date ( This is necessary because accounting is done on the date of acquisition, and this is the date on which the acquirer obtains control over acquiree. The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree—the closing date).
• Step 3: Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree (These three figures are required to be computed in order to derive the figure of step 4, also these are the figures which are to be reflected in the Financial statement of Acquirer); and
• Step 4: Recognising and measuring goodwill or a gain from a bargain purchase (Goodwill arises when asset acquired net of liablilities is less than the consideration transferred and Non-controlling interest (if any) for those assets acquired).

Non-controlling interest (NCI) means Interest of the shareholders of Acquiree entity who donot control the entity. For example: A ltd. acquires 80% interest in B i.e A has 80% right over B and remaining 20 % interest is held by many other investors. Here Those other investors who donot have control have non- controlling interest(i.e have interest but that interest is not sufficient to control), Normally controlling interest is achieved when more than 50% interest is held by the Investor , here in this case it is 80% so A controls B, however IFRS has laid down other criteria as well as stated above like power over board, other contractual terms etc.

In simple words:

On the date of Acquisition( DOA), Acquirer records in its books the assets acquired and liabilities assumed at fair value. Non- controlling Interest on such date is also computed and there are two methods for computing NCI:

• Proportionate share of Identifiable Net assets (INA) acquired (For example fair value of asset acquired is 110 liabilities assumed is 10, then INA is (110-10) 100, suppose 80 % interest is acquired then, 20% is NCI , In value It is 20% of 100= 20, Hence NCI under proportionate share method also called partial Goodwill method is 20)

• Non-controlling interests are measured at fair value : This method of measuring NCI is also known as full goodwill method. In the above example value of 20% NCI is measured at Fair value. i.e for simplicity fair value of 20% shares held are measured at Fair Value. Here in this case Fair value of INA is not considered. 

Apart from the above summary the standard has prescribed the accounting treatment for many other items such as, Share based payment awards, Contingent consideration, Contingent liability and many more... ...