ou are required to identify and give reasons for the appropriate classification of the debt instruments A and B below:
You are required to identify and give reasons for the appropriate classification of the debt instruments A and B below:
Part A.
Macaroon holds certain debt investments to collect their contractual cash flows of interest and principle. The funding needs of the company are predictable and the maturity of such financial assets is matched to Macaroon’s estimated funding needs. Macaroon performs credit risk management activities with the objective of minimising credit losses.
In the past, Macaroon has sold some of its debt investments when the credit risk of the financial assets increased beyond the acceptable levels of risk as documented in the company’s investment policy. In addition, infrequent sales have occurred as a result of unanticipated funding needs. The managers reports to key management personnel focus on the credit quality of the financial assets and the contractual return.
Part B.
Macaroon holds certain debt investments with specified contractual cash flows of interest and principle. These debt instruments are held to collect contractual cash flows until such time as their sale is necessary to fund any cash shortfalls for capital expenditure or until such time that the opportunity arises to sell the financial assets in order to re-invest the cash in financial assets with a higher return.
Many of the financial assets have contractual lives that exceed Macaroon’s anticipated investment period. The managers responsible for the portfolio are remunerated based on the overall return generated by the portfolio.
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