Investments in equity instruments are always measured at fair value. Equity instruments are those that meet the definition of “equity” from the perspective of the issuer as defined in IAS 32. equity-instruments that are held for trading are required to be classified at FVPL. For all other equities, management has the ability to make an irrevocable election on initial recognition, on an instrument-by-instrument basis, to present changes in fair value in OCI rather than profit or loss.
FVOCI election for equity instruments
At initial recognition of an equity investment, that is not held for trading or a contingent consideration (recognised by the acquirer in a business combination), an entity may irrevocably elect to present in other comprehensive income (OCI) subsequent changes in its fair value. If an equity investment is held for trading it is classified and measured at fair value through profit or loss.
For equity investments for which subsequent changes in fair value are presented in other comprehensive income, the amounts recognised in other comprehensive income are never reclassified to profit or loss. However, dividend income on these investments is generally recognised in profit or loss.
The Board noted that presenting fair value gains and losses in profit or loss for some investments in equity instruments may not be indicative of the performance of the entity – in particular if these equity-instruments are held for non-contractual benefits rather than primarily for their increase in value.
However, the Board did not specify a principle that defined the equity investments to which the exception should apply. It had previously considered developing such a principle – including a distinction based on whether the equity-instruments represented a ‘strategic investment’ – but concluded that it would be difficult if at all possible, to develop a robust and clear principle. As a result, it made the fair value through other comprehensive income election generally available for all investments in equity-instruments in the scope of IFRS 9 that are not held for trading. However, the election is not available for:
- investments in subsidiaries held by investment entities that are accounted for at fair value through profit or loss under IFRS 9; and
- investments in associates and joint ventures held by venture capital organisations or mutual funds that are measured at fair value through profit or loss under IFRS 9.
IFRS 9 replaced the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ The new model applies to financial assets that are not measured at fair value through profit or loss, including loans, lease and trade receivables, debt securities, contract assets under IFRS 15 and specified financial guarantees and loan commitments issued. It does not apply to equity investments.
Example – Non-recourse to portfolio of equity-instruments
A bank has provided a loan to a borrower with a fixed rate of interest and fixed maturity date. The loan is secured on a non-recourse basis on a portfolio of equity-instruments (shares). As such, at maturity of the loan, the borrower intends to sell the shares and use the proceeds to repay the loan. The borrower would keep any upside in the share price, but the bank would suffer any loss. The pricing in this case is the same as a written put option on the shares.
Analysis: This loan is likely to fail the SPPI requirement, as the amount of cash to be repaid varies with the performance of the equity-instruments.
Example – Investment in a puttable share
An entity (the holder) invests in a fund that has puttable shares in issue – that is, the holder has the right to put the shares back to the fund in exchange for its pro-rata share of the net assets.
Analysis: The puttable shares might meet the requirements to be classified as equity from the issuer’s perspective, but this is an exception within IAS 32. Instruments meeting the provisions of paragraphs 16A-16E of IAS 32 do not meet the definition of equity in IAS 32.
So, investments in puttable shares are required to be classified as FVPL, as they cannot be regarded as equity instruments for IFRS 9. Although they are considered investments in debt, they do not meet the SPPI condition.
|Example – Equity instruments |
An entity (the holder) invests in a subordinated perpetual note, redeemable at the issuer’s option, with a fixed coupon that can be deferred indefinitely if the issuer does not pay a dividend on its ordinary shares.
Analysis: The issuer has no contractual obligation to pay the cash flows associated with the instrument, so it classifies the instrument as equity under IAS 32. The holder has the option to classify this investment at FVOCI under IFRS 9 or to classify it as at FVPL.
Equity instrument Equity instrument
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