Financial asset classified at fair value through profit or loss

FVPL

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.

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 recognition 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]

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).

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.

FVPL

FVPL

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