Debt Instruments At FVOCI – FAQ | IFRS

Debt instruments at FVOCI

A debt instrument is classified as subsequently measured at fair value through other comprehensive income (FVOCI) under IFRS 9 if it meets both of the following criteria:

  • Hold to collect and sell 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 contractual cash flows and selling the financial asset; and
  • SPPI contractual cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

This business model typically involves greater frequency and volume of sales than the hold to collect business model. Integral to this business model is an intention to sell the instrument before the investment matures.

What? Greater frequency and volume of sales

IFRS 9 does not specify a threshold value or frequency of sales that must occur under the hold to collect and sell business model.

However, in its Basis for Conclusions, the IASB has noted that information about sales and sales patterns are useful in determining how an entity manages its financial assets and how the related cash flows will be realised. This is because information about past sales combined with expectations about future sales (including the frequency, value and nature of such sales) provide evidence about the objective of the business model. Information about historical sales helps an entity to support and verify its business model assessment. Nevertheless, entities should consider the reasons for any sale (e.g. whether it arises from an isolated event) and whether sales are consistent with a hold to collect and sell business objective.

Examples of financial instruments that may be classified and accounted for at FVOCI under IFRS 9 include:

  • Investments in government bonds where the investment period is likely to be shorter than maturity;
  • Investments in corporate bonds where the investment period is likely to be shorter than maturity.

It is unlikely that intercompany loans or trade receivables would be classified in the FVOCI category.

The accounting requirements for debt instruments classified as FVOCI are:

  • Interest income is recognised in profit or loss using the effective interest rate method that is applied to financial assets measured at amortised cost;
  • Foreign exchange gains and losses on the amortised cost are recognised in profit or loss;
  • Credit impairment losses/reversals are recognised in profit or loss using the same credit impairment methodology as for financial assets measured at amortised cost;
  • Other changes in the carrying amount on remeasurement to fair value are recognised in OCI;
  • The cumulative fair value gain or loss recognised in OCI is recycled from OCI to profit or loss when the related financial asset is derecognised.

Fair value and amortised cost (effective interest rate method)

For debt instruments that are classified as FVOCI entities will need to track both the amortised cost and fair value. The amounts recorded in profit or loss will reflect amortised cost and the balance sheet will reflect the fair value of the financial asset.

Example: FVOCI for debt instruments

On 1.1.20X1 a financial asset is purchased at its face value of €1,000. The contractual term is ten years with an annual coupon of 6%.

On 31.12.20X1 a coupon payment is reached. The fair value of the financial asset decreases to €950. 12 month expected credit losses as determined under the impairment model are €30. On 1.1.20X2 the financial asset is sold for €950.

Question: What are the journal entries on initial recognition, 31.12.20X1 and 1.1.20X2 under the FVOCI category?

Initial recognition at 1 January 20×1

(in €)

DR

CR

Financial asset

1,000

Cash

1,000

Being the initial recognition of the financial asset at FVOCI.

31 December 20×1

(in €)

DR

CR

Cash Debt instruments at FVOCI

60

Interest income

60

Impairment loss (in P&L)

30

OCI – Loss on remeasurement at fair value

20

Financial asset Debt instruments at FVOCI

50

Being the receipt of the coupon payment, recognition of a €30 impairment loss at the end of the reporting period and the change in fair value of the financial asset of €20 (total loss €50, €30 allocated to impairment based on ECL estimation). The impairment allowance is recognised in OCI instead of reducing the carrying amount of the financial asset in the balance sheet, because the carrying amount is required to be the fair value of the debt instrument.

1 January 20×2

(in €) Debt instruments at FVOCI

DR

CR

Financial asset Debt instruments at FVOCI

1,000

Cash Debt instruments at FVOCI

1,000

Being the sale of the financial asset and reclassification adjustment of the accumulated loss from OCI to profit or loss.

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