This Financial assets at fair value through other comprehensive income is part of the decision model for the classification and measurement of financial assets, that started in the IFRS 9 Framework for financial assets. But you can also read it without doing the test …. off course?
This is the classification arrived at.
Both below conditions have been met: Financial assets at fair value through other comprehensive income
The financial asset represents an equity instrument, Financial assets at fair value through other comprehensive income
- the equity instrument is not held for trading Financial assets at fair value through other comprehensive income
Subsequent measurement Financial assets at fair value through other comprehensive income
- Fair value, with all gains and losses recognised in other comprehensive income Financial assets at fair value through other comprehensive income
- Changes in fair value are not subsequently recycled to profit and loss Financial assets at fair value through other comprehensive income
IASB explanations: Financial assets at fair value through other comprehensive income
Recycling can provide a confusing presentation of performance Financial assets at fair value through other comprehensive income
When a company using IFRS 9 chooses to recognise changes in the value of equity investments in OCI, those amounts are not subsequently recycled to P&L when the equity investment is sold. This is consistent with the Board’s view that when an investment is held for strategic purposes (ie the intended narrow population), these gains and losses are not part of an investor’s performance.
It is also consistent with the principle in the Conceptual Framework that amounts included in OCI in one period are recycled to P&L in a future period only when doing so provides more relevant information, or provides a more faithful representation of the company’s performance for that future period.
The Board designed the election in IFRS 9 to recognise value changes on particular equity investments in OCI specifically for circumstances in which such changes are not indicative of the investor’s performance. In other words, for these investments, such gains and losses are never indicative of the investor’s performance; they do not become so in the future period when the strategic investment is sold.
In addition, recycling provides an incomplete picture in P&L of the investor’s performance because only the effects of investments that are sold and any impairment are recognised in P&L. As a result, an investor may show a profit in P&L from the sale of ‘good’ assets even when its investment portfolio is loss-making overall.
This incomplete picture provided in P&L of performance also gives rise to a serious lack of prudence in accounting because a company can delay loss recognition by holding loss-making investments and mask the deterioration of its performance by selling profit-making investments.
We note that such earnings management, particularly deciding to sell profit-making investments in order to avoid or reduce negative earnings, is possible even if equity investments are subject to impairment requirements, which is discussed later in this paper. Identifying an impairment model for equity investments that is capable of broad acceptance and that results in timely recognition of impairment is fraught with difficulty and prone to complexity.
Indeed, academic research has shown that there is robust and significant evidence that companies use the discretion that is provided to them by accounting standards to selectively recycle gains and losses on available for sale (AFS) investments in order to manage earnings.
Depending on their circumstances, such as the amount of gains and losses that they have accumulated in OCI and whether they otherwise have positive or negative earnings, companies choose to recycle in order to smooth earnings, avoid or reduce losses, or take ‘a big bath’ (ie make poor results look even worse so that future results look better). The research suggests that recognising gains or losses in P&L as they arise is necessary in order to eliminate recycling as an earnings management tool.