Accounting mismatch

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Last Updated on 21/03/2021 by 75385885

An accounting mismatch could occur where, in the absence of the fair value option, a financial asset would be classified as available for sale (with most changes in fair value recognised directly in equity) while a related liability is measured at amortised cost (with changes in fair value not recognised).

The following examples show circumstances in which an accounting mismatch may cause the related financial assets and financial liabilities to qualify for designation as at FVPL:

  • An entity has liabilities whose cash flows are linked contractually to the performance of certain assets that would otherwise have been classified as available-for-sale – e.g. liabilities with a discretionary participation feature that pay benefits based on realised investment returns of a specified pool of the insurer’s assets,
  • An entity has liabilities under insurance contracts that are measured using current information as allowed under IFRS 4, and related financial assets that otherwise would be classified as available for sale or measured at amortised costs,
  • an entity has financial assets and financial liabilities that share a particular risk, such that their fair values change in opposite directions, tending to offset each other. However:
    • only some of the instruments are measured at FVPL , notably derivatives and those that are held for trading,
    • hedge accounting cannot be applied because:
      • the hedge criteria (e.g. the effectiveness requirements) are not met, or
      • none of the instruments is a derivative and without hedge accounting there is a significant inconsistency in the recognition of gains or losses, or
    • even tough hedge accounting is applicable, hedge documentation or effectiveness testing for example, is too onerous,
  • An entity has issued financial liabilities whose cash flows are linked to both (1) the cash flows received from investment property measured at fair value under IAS 40, and (2) the fair value of that property. The entity determines that the contractual linkage does not constitute an embedded derivative and, without designation, the financial liabilities would be accounted for at amortised costs.

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Accounting mismatch

IFRS Synonyms:
The accounting mismatch