An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
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 OCI, the amounts recognised in OCI 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 FVOCI 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 FVPL under IFRS 9; and
- investments in associates and joint ventures held by venture capital organisations or mutual funds that are measured at FVPL under IFRS 9.
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ The new model applies to financial assets that are not measured at FVPL, 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.
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