Except in cases where financial assets meet both the ‘hold to collect business model’ and SPPI (solely payments of principal and interest) tests, and are therefore classified and measured at amortised cost, IFRS 9 Financial Instruments otherwise requires financial assets to be measured at fair value. Fair value movements are usually recognised in profit or loss, however, in some cases, they are recognised in other comprehensive income (OCI) and classified as being at fair value through other comprehensive income (FVTOCI).
In this article we highlight two cases where FVTOCI cannot be used, i.e. for:
In most cases, fair value movements are recognised in profit or loss. However:
If the instrument is … | It may be measured at… | If… |
A debt instrument of the counterparty | Fair value through other comprehensive income (FVTOCI) with recycling allowed | It meets both:
IFRS 9, paragraph 4.1.2A |
An equity instrument of the counterparty | Fair value through other comprehensive income (FVTOCI) with no recycling allowed | It :
IFRS 9, paragraph 4.1.4 |
Measuring fair value movements in other comprehensive income (OCI) for investments in debt instruments is mandatory.
Where this occurs:
On 1 July 2016, Entity A invests $10,000 in 1,000 units of Mutual Fund that invests in listed shares. Unitholders can ‘put’ the units (i.e. redeem the units) back to Mutual Fund at any time.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Definition of ‘equity instrument’ in IAS 32 Financial Instruments: PresentationMutual Fund’s units do not meet the definition of ‘equity instruments’ because Mutual Fund has an obligation to pay out cash if investors ‘put’ their units back to it for an amount that equates to their share of the net assets of the fund. However, Mutual Fund’s units are classified as ‘equity’ in its financial statements because they meet the provisions of IAS 32, paragraphs 16A-B.
Is Entity A permitted to irrevocably designate its investment in units of Mutual Fund at FVTOCI under the FVTOCI option contained in IFRS 9, paragraph 4.1.4?
Answer
No.
To be eligible for the election under IFRS 9, paragraph 4.1.4, the investment must be an ‘equity instrument’ as defined in IAS 32, i.e. a residual interest in the assets of an entity after deducting all of its liabilities.
The IFRS Interpretations Committee (Committee) concluded in its meeting in September 2017 that only equity instruments that meet the definition of equity under IAS 32 are eligible for this election.
Because these units are not equity instruments, Entity A would:
The fair value of these units on 30 June 2017, 2018 and 2019 are as follows:
| Fair value | |
| 30 June 2017 | $12,500 |
| 30 June 2018 | $15,000 |
| 30 June 2019 | $13,000 |
Under IAS 39, Entity A classified this instrument as ‘available-for-sale'.
Entity A transitions to IFRS 9 on 1 July 2018 and has chosen not to restate prior periods.
What is the transition journal entry to be processed by Entity A on transition date, 1 July 2018?
Answer
The carrying amount of the investment on 30 June 2018 (transition date) under IAS 39 is $15,000, with $5,000 recognised in accumulated OCI (comprising the $15,000 available-for-sale investment at fair value less $10,000 cost).
No measurement adjustment is required on transition because the investment is measured at fair value under both IAS 39 and IFRS 9. However, Entity A would need to reclassify $5,000 from accumulated OCI to retained earnings on transition:
1 January 2018
| Dr ($) | Cr ($) | |
| Accumulated OCI | 5,000 | |
| Opening retained earnings | 5,000 |
What are the journal entries for the year ended 30 June 2019?
Answer
As Entity A measured its units in Mutual Fund at FVTPL, it recognises a loss of $2,000 in profit or loss, being the fair value movement of the units from $15,000 at 30 June 2018, to $13,000 at 30 June 2019.
30 June 2019
| Dr ($) | Cr ($) | |
| Profit or loss | 2,000 | |
| Investment in Mutual Fund units | 2,000 |
Note:
Some options are classified as ‘equity instruments’ of the issuer but are nevertheless, derivative financial instruments (for example, if ABC Ltd holds an option that allows it to purchase 100 shares in XYZ Ltd for $5 per share).
The FVOTOCI measurement category for equity instruments is only available for equity instruments that are non-derivatives. Although this option meets the ‘fixed for fixed’ criteria under IAS 32 for equity classification from XYZ Ltd’s perspective, it does not qualify for the FVTOCI measurement category from the investor’s perspective because the option is a derivative instrument. ABC Ltd must therefore account for the option at FVTPL.