Financial assets measured at fair value through other comprehensive income – this is part of the classification of financial assets. A financial asset is classified as subsequently measured at fair value through other comprehensive income (FVOCI) if:
- 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 (the SPPI test, see Solely Payments of Principal and Interest); and Fair value through other comprehensive income
- is held in a business model (see business model test) in which assets are managed both in order to collect contractual cash flows and for sale (see Hold to collect and sell). [IFRS 9 4.1.2A]
Assets at FVOCI
The following financial assets are measured at fair value through other comprehensive income:
- Loans and receivables (loans, receivables, investments in debt instruments and other similar assets). Interest revenue, impairment gains and losses, and a portion of foreign exchange gains and losses, are recognized in profit and loss on the same basis as for assets at amortized cost.Changes in fair value are recognized initially in other comprehensive income (OCI). When the asset is derecognized or reclassified, changes in fair value previously recognized in OCI and accumulated in equity are reclassified to profit and loss on a basis that always results in an asset measured at FVOCI having the same effect on profit and loss as if it were measured at amortized cost.
- Investments in equity instruments – Not held for trading Dividends are recognized when the entity’s right to receive payment is established, it is probable the economic benefits will flow to the entity and the amount can be measured reliably. Dividends are recognized in profit and loss unless they clearly represent a recovery of a part of the cost of the investment, in which case they are included in OCI. Changes in fair value are recognized in OCI and are never recycled to profit and loss, even if the asset is sold or impaired.
- Investments in equity instruments – Held for trading These equity instruments are valued at fair value through profit or loss. All changes in fair value are recorded in profit or loss. Dividends are recognized when the entity’s right to receive payment is established, it is probable the economic benefits will flow to the entity and the amount can be measured reliably. Dividends are recognized in the movements for the year of the investment in the equity instrument (deducted from fair value). Fair value through other comprehensive income
Additional options in IFRS 9
Optional FVOCI designation for qualifying investments in equity instruments
At initial recognition an entity at its sole option may irrevocably designate an investment in an equity instrument as FVOCI, unless the asset is:
- Held for trading, or Fair value through other comprehensive income
- Contingent consideration in a business combination. Fair value through other comprehensive income
Under this option, only qualifying dividends are recognized in profit and loss. Changes in fair value are recognized in OCI and never reclassified to profit and loss, even if the asset is impaired, sold or otherwise derecognised. Fair value through other comprehensive income
The IASB provided the FVOCI option in response to objections that some investments are made primarily for non-financial benefits (e.g., strategic alliances). Rather than trying to define the term “strategic alliance” or a general principle for identifying such assets the IASB decided to make FVOCI classification optional. Entities should carefully consider the implications of designating a particular investment as FVOCI considering that changes in fair value of the investment will never find their way to profit and loss. An entity that decides to designate an investment at FVOCI will have to disclose the reasons for doing this.
Optional reclassification of gains and losses within equity
While an entity is precluded from recognizing changes in fair value of a FVOCI equity instrument in profit and loss IFRS 9 permits changes in the fair value of investments in equity instruments designated as FVOCI to be transferred directly from the equity account in which other comprehensive income is accumulated to other equity accounts, such as retained earnings (e.g., on the sale of the investment). Fair value through other comprehensive income
Other optional designations
Fair value designation options under IFRS 9 Fair value through other comprehensive income
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Option allowed? |
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Option |
Requirements |
IFRS 9 |
IAS 39 |
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Eliminates or significantly reduces a measurement or recognition inconsistency, sometimes known as an ‘accounting mismatch’, that otherwise would arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases. (IFRS 9 4.1.5) / (IAS 39 9 Definitions of four categories of financial instruments (b)(i) – 2014 text) |
Yes |
Yes |
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A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management strategy, and information about the group is provided internally on that basis to key management personnel. (IAS 39 9 Definitions of four categories of financial instruments (b)(ii) – 2014 text) |
No |
Yes |
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Contract contains one or more embedded derivatives not closely related to the economic risks and characteristics of the host contract. (IAS 39 11(a) IAS 39 Appendix A IAS 39 AG30 – 2014 text) |
No |
Yes |
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FVOCI |
Any asset that otherwise would qualify for measurement at Amortised Cost. |
No |
Yes |
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FVOCI |
Investments in equity instruments designated at FVOCI (IFRS 9 4.1.4 / IFRS 9 5.7.5) |
Yes |
No |
IFRS 9 extends the “accounting mismatch” designation option to contracts for the purchase or sale of non-financial items that may be settled net in cash or another financial instrument and that were entered into for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. Fair value through other comprehensive income
Financial liabilities designated at FVPL
Under IAS 39, the entire change in the fair value of financial liabilities designated as FVPL always is recognized in profit and loss. IFRS 9 modifies this requirement to specify that the portion of the change attributable to changes in the entity’s own credit risk is recognized in OCI, with no recycling, unless:
- OCI presentation would create or enlarge an accounting mismatch in profit and loss; or
- The liability is a loan commitment or financial guarantee contract.
This applies only to financial instruments that have been designated optionally by the entity at FVPL, not to those which are required to be carried at FVPL (such as freestanding derivatives). All other guidance in IAS 39 related to the recognition and measurement of financial liabilities has been carried forward into IFRS 9.
Why Other comprehensive income?
When you sell an investment, you include the amount of money you received on the income statement as part of your income. Suppose you haven’t sold an investment, but it lost $10,000 in value in the past year. If you include that loss with your income it will make your company look less profitable than it really is. Likewise, an increase in value would pad your income. Fair value through other comprehensive income
The solution is to include it in a separate category, “other comprehensive income.” This section of the statement covers gains and losses that don’t affect your income but do affect the equity, the worth of your business assets. You can combine income and comprehensive income into one statement, or separate them into two.
All-inclusive income statement
Comprehensive income is derived from the concept of the all-inclusive income statement, which refers to all the changes in assets and liabilities other than those that involve transactions with owners. Statement of Financial Accounting Concepts (SFAC) No. 6, Elements of Financial Statements, defines comprehensive income as “the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.
It includes all changes in equity during a period except those resulting from investments by owners and distribution to owners.” As Loudell Ellis Robinson notes in “The Time Has Come to Report Comprehensive Income,” it satisfies financial statement users’ desire for one figure encompassing all the components of income that lead to changes in the overall financial position of organisations (Accounting Horizons, June 1991). Fair value through other comprehensive income
Clean surplus
The concept of comprehensive income is closely related to the income statement concept of “clean” vs. “dirty” surplus. Under the clean surplus approach, all income items must pass through the income statement; they sometimes are referred to as items that are reported above the line (the net income line) or items that pass through the income statement. Thus earned surplus (equivalent to retained earnings) is “clean” of these items. Fair value through other comprehensive income
Dirty surplus
Under the dirty surplus approach, certain items skip the income statement and are reported directly in the statement of owners’ equity. Accordingly, the notion of a dirty surplus includes items that are reported below the net income line, such as unrealised holding gains and losses on available-for-sale securities, additional minimum pension liability adjustments, currency translations, gains and losses of cash flow hedges, and asset revaluations. Items that used to bypass the income statement were then given the name “Other Comprehensive Income.” Fair value through other comprehensive income
Fair value through Other comprehensive income
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