Fair Value through Other Comprehensive Income – Accounting

Fair Value through Other Comprehensive Income STATES that ‘Financial Assets’ are Classified and Measured if they are held in a Business Model whose objective is achieved by BOTH collecting contractual Cash-flows and selling financial assets.

IFRS 9 – Financial Assets at Fair Value through Other Comprehensive Income (FVOCI)

1. Debt Investment at FVOCI

A ‘Debt Instrument’ that MEETS the following criteria Must be Measured at Fair Value through Other Comprehensive Income (FVOCI) UNLESS the asset is designated at FVPL under the fair value option:

  • Hold to Collect’ Business Model Test: The asset is held within a Business Model whose objective is achieved by BOTH holding the financial asset in order to collect the contractual cash flows and selling the financial asset; AND
  • SPPI’ Contractual Cash-flow Characteristic Test: The contractual terms of the Financial Asset give rise to cash flows that are SOLELY payments of principal and interest (SPPI) on the principal amount outstanding on a specified date.
Examples of Debt Instruments that are Likely to be cClassified and aAccounted for at FVOCI Under IFRS 9 Financial Instruments INCLUDE:
(a) Investments in ‘Government Bonds’ where the Investment Period is likely to be shorter than maturity.
(b) Investment in ‘Corporate Bonds’ where the Investment Period is likely to be shorter than maturity.

1.1 Accounting

The Accounting Requirement(s) for DEBT Instruments classified at FVOCI are:

  • Debt investment at FVOCI is initially Measured at fair value PLUS transaction costs;
  • Debt investment at FVOCI is subsequently Measured at fair value;
  • Interest income is recognized in P&L using the effective interest rate (IRR);
  • Foreign exchange gains and losses are recognized in P&L;
  • Credit impairment losses/reversals are recognized in P&L using credit impairment methodology;
  • Change in the carrying amount on Re-Measurement to fair value is recognized in OCI; AND
  • The cumulative fair value gain/loss recognized in OCI is recycled from OCI to P&L when the related financial asset is de-recognized.
Fair Value through Other Comprehensive Income

2. Equity Investment at FVOCI

‘Equity Investment’ can be Measured at Fair Value through Other Comprehensive Income (FVOCI), provided that the Following conditions are Complied with:

The Equity Instrument Must NOT be held for trading; AND
There Must have been an ‘Irrevocable Choice‘ for this designation upon initial recognition of the asset.

2.1 Accounting

The Accounting Requirement(s) for EQUITY Instruments classified at FVOCI are:

  • Equity investment at FVOCI is initially Measured at fair value PLUS transaction costs;
  • Equity investment at FVOCI is subsequently Measured at fair value;
  • Dividend is recognized in P&L;
  • Foreign exchange gains and losses are recognized in OCI;
  • Subsequent changes in the fair value of the ‘Equity Instrument’ are recognized in OCI; AND
  • On disposal of the investment, the cumulative change in fair value is required to remain in OCI and is not recycled to P&L. However, entities have the ability to transfer amounts between reserves within equity (i.e. between FVOCI reserve and retained earnings).

The Bottom Line

Fair Value through Other Comprehensive Income concept STATES that ‘Financial Assets’ are Classified and Measured if they are held in a Business Model whose objective is achieved by BOTH collecting contractual cash flows and selling financial assets. The ‘Objective‘ of IFRS 9 is to ESTABLISH principles for the financial reporting of Financial Assets and Financial Liabilities.

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