Equity investments at FVOCI

IFRS 9 requires all equity investments to be measured at fair value. The default approach is for all changes in fair value to be recognised in profit or loss.

However, for equity investments that are neither held for trading nor contingent consideration recognised by an acquirer in a business combination, entities can make an irrevocable election at initial recognition to classify the instruments as at FVOCI, with all subsequent changes in fair value being recognised in other comprehensive income (OCI). This election is available for each separate investment.

Under this new FVOCI category, fair value changes are recognised in OCI while dividends are recognised in profit or loss (unless they clearly represent a recovery of part of the cost of the investment). Although it might appear similar to the ‘Available-for-Sale’ category in IAS 39, it is important to note that this is a new measurement category which is different.

In particular under the new category, on disposal of the investment the cumulative change in fair value is not recycled to profit or loss. However entities have the ability to transfer amounts between reserves within equity (i.e. between the FVOCI reserve and retained earnings).

Example – Equity investments classified at FVOCI

Entity X has a 31 December financial year end and pays tax at a rate of 30%. It prepares financial statements on an annual basis (it does not prepare interim financial statements). On 1 January 20X3, Entity X acquires 100 shares of List Co for CU10,000. The journal entry at 1 January 20X3 is as follows:

1 January 20×3

(in €)

DR

CR

Financial asset – Equity investment at FVOCI

10,000

Cash

10,000

Being the purchase of 100 shares in List Co for €10,000.

On 31 December 20X3, the fair value of the 100 shares in List Co has declined to €8,000. The journal entries at 31 December 20X3 are as follows:

31 December 20×3

(in €)

DR

CR

OCI

1,000

Financial asset – Equity investment at FVOCI

1,000

Deferred tax asset

600

OCI

600

Being the change in fair value of the equity investment and its related tax effects.



Carrying values at 31 December 20X3 are:

Carrying value

Financial asset – Equity investment at FVOCI

8,000

Deferred tax asset

600

Accumulated OCI

-1,400

On 31 March 20X4, Entity X receives a cash dividend of €500. The journal entry at 31 March 20X4 to record the dividend is as follows:

31 March 20×4

(in €)

DR

CR

Cash

500

Profit or loss – Dividends from subsidiary

500

Being the receipt of the cash dividend of €500.

On 31 December 20X4, the fair value of the 100 shares in List Co is €13,000 and Entity X decides to dispose of the entire investment. The journal entries at 31 December 20X4 are as follows (before recording the disposal):

31 December 20×4

(in €)

DR

CR

Financial asset – Equity investment at FVOCI

5,000

OCI – Profit on disposal equity investment

5,000

OCI – Tax on disposal equity investment

1,500

Deferred tax asset

600

Deferred tax liability

900

Being the change in fair value of the equity investments during the period to 31 December 20X4 and the related tax effects.

Carrying values at 31 December 20X4 before recording the disposal are:

Carrying value

Financial asset – Equity investment at FVOCI

13,000

Deferred tax liability

-900

Accumulated OCI

2,100

The journal entry for the disposal is:

31 December 20×4

(in €)

DR

CR

Cash Equity investments at FVOCI

13,000

Financial asset – Equity investment at FVOCI

13,000

Deferred tax liability

900

Tax payable Equity investments at FVOCI

900

Being disposal of the equity investment and the related tax effects.

The following table sets out the carrying values at 31 December 20X4 after disposal:

Carrying value

Cash Equity investments at FVOCI

13,000

Financial asset – Equity investment at FVOCI

Deferred tax liability

-900

Accumulated OCI Equity investments at FVOCI

2,100

Note: On disposal, the cumulative changes in fair value remains in OCI. Entities can transfer the cumulative OCI balance to another reserve within equity, such as retained earnings.

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