This Is the Fair value OCI applied? test 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?
OK we are looking at an equity instrument not held for trading.
An entity may make an irrevocable election at initial recognition for particular investments in equity instruments that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in other comprehensive income. Is the Fair value OCI applied
At initial recognition, an entity may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of IFRS 9 that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies. Such an investment is not a monetary item. The gain or loss that is presented in other comprehensive income includes any related foreign exchange component. [IFRS 9 5.7.5]
If an entity makes this election, it shall recognise in profit or loss dividends from that investment as follows: Is the Fair value OCI applied
Dividends are recognised in profit or loss only when: Is the Fair value OCI applied
- the entity’s right to receive payment of the dividend is established; Is the Fair value OCI applied
- it is probable that the economic benefits associated with the dividend will flow to the entity; and Is the Fair value OCI applied
- the amount of the dividend can be measured reliably. Is the Fair value OCI applied
The question is: Do you want to make an irrevocable election at initial recognition for particular investments in equity instruments that would otherwise be measured at fair value through profit or loss to present subsequent changes in fair value in 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.
See also: The IFRS Foundation