Fair value through profit or loss

Fair value through profit or loss—any financial assets that are not held in one of the two business models (‘Hold to collect‘ and ‘Hold to collect and sell‘) mentioned are measured at fair value through profit or loss.

Financial assets measured at fair value through profit or loss. This is part of the classification of financial assets. At each balance sheet date, the financial asset, classified and measured at fair value through profit or loss, is re-measured at fair value. Changes in fair value from reporting date to reporting date are recognized in profit and loss as they arise.

Remaining class of financial assets – Fair value through profit or loss 2

Financial assets that do not meet the criteria for classification as subsequently measured at either amortised cost or fair value through other comprehensive income (FVOCI) – are classified as subsequently measured at fair value through profit or loss. [IFRS 9 4.1.4]

In addition, similar to IAS 39, an entity has the option at initial recognition to irrevocably designate a financial asset as at FVPL if doing so eliminates or significantly reduces a measurement or Fair value through profit or lossrecognition inconsistency – i.e. an ‘accounting mismatch’ – that would otherwise arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. [IFRS 9 4.1.5]

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Financial assets at fair value through profit or loss may include the following financial instruments:

  • Investments in money market funds,
  • Preference shares (equity instruments),
  • Listed equity investments (including, for example, NYSE-listed, LSE-listed,  or ISE listed),
  • (Un)listed equity investments that are held for trading or available for sale,
  • (Un)listed equity investments for which the reporting entity has not elected to classify and measure them at fair value through other comprehensive income,
  • Derivatives,
  • Contingent consideration,
  • Debt instruments (loans, bonds) that do not meet the criteria for classification as subsequently measured at either amortised cost or fair value through other comprehensive income (FVOCI).

Changes in the fair value option compared to IAS 39 [IFRS 9 BC4.77 – 80]

IAS 39 allowed entities an option to designate, on initial recognition, any financial asset or financial liability as at FVPL if one or more of the following conditions are met:

  1. doing so eliminates or significantly reduces an accounting mismatch;
  2. 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 or investment strategy, and information about the group is provided internally on that basis to the entity’s key management personnel, as defined in IAS 24 Related Party Disclosures; or
  3. the financial asset or financial liability is a hybrid contract that contains one or more embedded derivatives that might otherwise require separation (subject to certain conditions).

IFRS 9 retains only designation option (a) for financial assets. Options (b) and (c) have been removed for financial assets under IFRS 9, because:

  • any financial asset that is managed on a fair value basis is mandatorily measured at FVPL under IFRS 9 (see Other business models); and
  • option (c) was intended to reduce the costs of complying with the requirements for the separation of embedded derivatives, whereas under IFRS 9 embedded derivatives are not separated from a hybrid financial asset (see Embedded derivatives).
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IFRS 9 retains all three designation options for financial liabilities because the other requirements for the classification of financial liabilities have not substantively changed from IAS 39.

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:

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.

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).

Other optional designations

Fair value designation options under IFRS 9

Option allowed?

Option

Requirements

IFRS 9

IAS 39

FVPL

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.

Yes

Yes

FVPL

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.

No

Yes

FVPL

Contract contains one or more embedded derivatives not closely related to the economic risks and characteristics of the host contract.

No

Yes

FVOCI

Any asset that otherwise would qualify for measurement at Amortised Cost.

No

Yes

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.

Examples of financial assets

Examples of financial assets that are likely to fall into the FVPL category include:

  • Investments in shares of listed companies that the entity has not elected to account for as at FVOCI;
  • Derivatives that have not been designated in a hedging relationship, e.g.:
  • Interest rate swaps;
  • Commodity futures/option contracts;
  • Foreign exchange futures/option contracts;
  • Investments in convertible notes, commodity linked bonds;
  • Contingent consideration receivable from the sale of a business;
  • Any other financial assets that fail SPPI.
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Other than for held for trading financial assets that must be carried at FVPL (e.g. derivatives), the FVPL category under IFRS 9 is a residual category. This is in contrast to IAS 39, where the residual category is ‘Available-for-Sale’ (FVOCI). Under IFRS 9, consideration is first given to whether a financial asset is to be measured at amortised cost or FVOCI and, if it is not, it will be measured at FVPL.

Financial liabilities designated at FVPL

Under IAS 39, the entire change in the fair value of financial liabilities designated as FVPL always are 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.

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Fair value through profit or loss 

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