As explained in our chapter “classification of financial assets”, it is a residual measurement category, which means that financial assets (debt instruments) which vày not meet the classification requirements of financial assets at amortized cost and FVOCI are classified as fair value through profit or loss (FVTPL).

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In addition, default classification of investment in equity instruments is fair value through profit or loss (FVTPL). However, an entity can irrevocably opt khổng lồ classify any investment in equity instrument not held for trading purposes as financial asmix at FVOCI.

Now, let’s study the accounting of financial assets classified as “financial assets at fair value through profit or loss (FVTPL)”.

Initial recognition

An entity will recognize a financial asphối when it becomes các buổi party khổng lồ a contract of the financial instrument. Initially, a financial asset at FVTPL is recognized at its fair value. Unlượt thích financial assets at amortized cost & FVOCI, transaction costs incurred khổng lồ acquire the financial asphối are NOT added in the cost of the financial asset. Transaction costs are charged lớn the statement of profit or loss directly. Formula for initial recognition of a financial asset at FVTPL is as follows:

Initial recognition of FVTPL financial asset = Fair value

Subsequent measurement

Financial asphối at fair value through profit or loss (FVTPL) is subsequently measured at fair value. Gains & losses on fair valuation are recorded in the statement of profit or loss. Any dividkết thúc income from the investment in equity instruments is also recorded in the statement of profit or loss.

For debt instruments, interest income is recorded in the statement of profit or loss. IFRS 9 does not contain specific guidance, so entities CAN either use nominal interest rate or if possible, the effective interest rate khổng lồ calculate interest income. However, if effective interest rate is used, the amortization table of financial asset & effective interest rate needs khổng lồ be revised at the over of each reporting period as the financial asset’s carrying amount is changed due to lớn fair valuation.

Let’s take a look at the following examples to clarify our concepts related to lớn the accounting of financial assets at FVTPL.

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Example – FVTPL investment in equity instrument

On 1 January 20X1, XYZ Company invested $300,000 in shares of a multinational company. Commission of $6,000 was paid to the broker. As the company has bought these shares for trading, it has classified this investment as fair value through profit or loss (FVTPL). The company received dividkết thúc of $5,000 & $7,000 in years 20×1 và 20×2. Information regarding fair values of the investment is as follows:

Fair value on 31 December 20×1: $302,000Fair value on 31 December 20×2: $315,000

How will this financial asmix be accounted for by XYZ Company in the financial statement for the years ended 31 December 20×1 & 20×2?

Answer

On 1 January 20×1, financial asmix will be recognized at its fair value. Transaction costs of $6,000 are directly charged as expense in the statement of profit or loss.

Financial asphối = $300,000

Following are the journal entries related to lớn financial year 20×1:

Bank A/C – Dr. $5,000

Dividover income (recorded in profit or loss) – Cr. $5,000

Financial asphối – Dr. $2,000

Revaluation gain (P&L) – Cr. $2,000

(Revaluation gain is calculated by comparing the fair value of investment at year end with its carrying amount i.e. $302,000 – $300,000)

Following are the journal entries related to financial year 20×2:

Bank A/C – Dr. $7,000

Dividkết thúc income (recorded in profit or loss) – Cr. $7,000

Financial asmix – Dr. $13,000

Revaluation gain (P&L) – Cr. $13,000

(Revaluation gain is calculated by comparing the fair value of investment at year kết thúc with its carrying amount i.e. $315,000 – $302,000)

Example – FVTPL investment in debt instrument

On 1 January 20X1, XYZ Company invested $200,000 in debentures carrying interest rate of 6% per annum. Interest is receivable annually in arrears. Commission of $4,000 was paid khổng lồ a dealer who arranged this investment. As per contractual terms, the debentures will be redeemed at a premium of $10,000 over their nominal value. Term of the debentures is four years and will be redeemed on 31 December 20×4.

Fair values of the financial asphối are given below:

Fair value on 31 December 20×1: $212,000Fair value on 31 December 20×2: $215,000

On 31 December 20×2, the company sold the debentures for $215,000.

How will this financial asphối be accounted for by XYZ Company, if the company’s policy is to designate such investments as FVTPL to lớn avoid an accounting mismatch?

Answer

On 1 January 20×1, financial asmix will be recognized at its fair value. Transaction costs of $4,000 are directly charged as expense in the statement of profit or loss.

Financial asphối = $200,000

Subsequent measurement of the financial asmix is shown below.

NOTE: In the following example, the entity is using effective interest rate khổng lồ calculate the interest income. An entity may choose to lớn apply nominal interest rate to lớn calculate interest income as well.