[Kok Yau]

All questions have been answered very well.

Thank you very much!

[Kok Yau]

Thank you for the response.

For (1), if I understand properly, the transfer of the OCI to RE should be automatic and immediate when the financial asset has been disposed.

I am not certain wether I have fully understand the message behind the answer for (3). So I put a simple example below and the accounting treatment based on current understanding.

During year 1, Co. A bought a 3 years bond for $10m, with an intent to sell it in 2 years time. At the reporting date of year 1, the fair value of the bond was $12m.
Then during year 2, there was liquidity problem for the bond issuer and Co. A immediately sold the bond for $9m.

At year 2 before disposal, we have:
$12m of financial asset measured under FVOCI.
A revaluation reserve of $2m in OCI.

Treatment on disposal:
$12m financial asset is derecognised from SFP.
Loss of disposal $3m in SPL .
The transfer of revaluation reserve $2m to SPL.
[Nett impact of this transaction is $1m of loss in SPL]

I have some questions on the treatment above:
1) Is the treatment appropriate?
2) should the loss directly recognised in SPL? Or should we recognise the loss in revaluation reserve first and then transfer the nett figure to SPL?

[Kok Yau]

The question is very interesting and thank you for putting it up.

The following is my analysis (probably wrong, just an attempt to approach it):

According to the opentuition notes,
A financial asset is measured at amortised cost if it fulfils both of the tests:
1) Business model test: hold till maturity
2) contractual cash flow test: contractual cash receipt for the asset

Now here’s the important part:
If the contractual cash flow test is satisfied but there is no intention to hold the asset till maturity; it is held under FVOCI. In other words, if the item satisfied (2) but not (1), it is held under FVOCI

Our case in Tokyo’s here is:
The guy bought the bond solely for trading and want to re-selling it asap for some easy money, so it is not satisfying the business model test and at the same time the contractual cash flow test, since he doesn’t buy it and hold it with the purpose to receive both redemption and interest income; it satisfies neither thus may classified under FVTPL.

Or second possibility:
maybe there are accounting mismatch if Tokyo’s measure it under FVOCI. Therefore, it is more faithfully representing the substance if Tokyo’s present it under FVTPL.

A tutor insight will be much appreciated.

[Author]

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