IFRS 9 INTRODUCED the concept of Fair Value through Profit or Loss (FVPL). This classification APPLIES to financial instruments that are held for trading purposes and those that are designated at fair value through profit or loss.
Table of Contents
FVPL (Fair Value through Profit or Loss)
IFRS 9, is an International Financial Reporting Standard developed by the International Accounting Standards Board (IASB). It replaces IAS 39, Financial Instruments: Recognition and Measurement, and became EFFECTIVE for annual periods beginning on or after January 1, 2018.
One of the key changes introduced by IFRS 9 is the way in which financial instruments are measured and classified.
Financial instruments in the FVPL category are MEASURED at fair value, with changes in fair value recognized in profit or loss. This contrasts with financial instruments that are held to maturity, which are measured at amortized cost, and those that are available for sale, which are measured at fair value but with changes in fair value recognized in Other Comprehensive Income (OCI).
The FVPL category is intended to reflect the economic reality of an entity’s financial instruments and the effects of changes in their fair value on the entity’s profit or loss. By recognizing changes in fair value in profit or loss, the FVPL category provides a better representation of an entity’s financial performance and position, compared to other categories that may delay the recognition of changes in fair value.
1. Fair Value
Fair Value is a market-based measurement that reflects the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The MEASUREMENT of fair value requires significant estimation and judgment, particularly in cases where there is limited market activity or market participants are not independent.
1.1 Measurement of Fair Value (IFRS 9)
IFRS 9 includes comprehensive requirements for the measurement of fair value and the recognition of changes in fair value in profit or loss.
These Requirements INCLUDE:
- A three-level hierarchy for the classification of fair value measurements based on the level of observability of the inputs used in the measurement.
- Requirements for the use of observable inputs in the measurement of fair value, including market data and broker quotes, where available.
- Requirements for the use of unobservable inputs in the measurement of fair value, including the use of valuation techniques such as discounted cash flow analysis or option pricing models.
- Requirements for the consideration of both positive and negative credit risks in the measurement of fair value.
FVPL – Disclosures
IFRS 9 also includes disclosure requirements for Financial Instruments Classified as FVPL. These disclosures INCLUDE the level of the fair value hierarchy used in the measurement, the nature and extent of any credit risk, and the amount of any gains or losses recognized in profit or loss during the period.
The Bottom Line
FVPL category under IFRS 9 provides a more accurate and transparent representation of an entity’s financial instruments, compared to other categories that may DELAY the recognition of changes in fair value.
However, the MEASUREMENT of fair value requires significant estimation and judgment and is subject to market risks. To address these challenges, IFRS 9 includes comprehensive requirements for the measurement of fair value and the recognition of changes in fair value in profit or loss, as well as disclosure requirements for financial instruments classified as FVPL.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)