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From my intepretation on the matter:
Equity instrument we purchased with a strategic intent to hold it for long-term should be measured as a financial asset under FVTOCI.
Subsequently, the gain on re-measurement and the gain on disposal are all dump into OCI and can never be reclassified into profit or loss.
So my questions will be:
1) will those gains or losses that we recognised will be imprisoned in our OCI forever under current accounting standard?2) How do we account for the loss on re-measurement and disposal, given the amount exceed the credit balance that it has?
Do we still put it in OCI as a debit balance even though there are no credit balance prior to the loss?
(iirc for PPE we recognise revaluation loss to SPL if there are no revaluation balance we could offset against)3) And for the rare case, we purchased a debt instrument and holding it under FVOCI if it satisfied contractual cash flow test but not the business model test.
Is the accounting treatment for this item is similar with the financial asset of equity measured under FVOCI (all gain and loss dump into OCI and can never be reclassified to SPL)?4) This question probably is not covered under SBR, just personal curiosity.
If we are a company that is set up for trading financial instruments as our main operating activity. Then the treatment of the item in question (3) may seem inappropriate if it is measured at FVOCI. Is there another standard or set of accounting rules on financial instruments for trading company; or simply FVTPL for most of the normal cases?Thank you for your time and effort on reading and responding the questions.
1. Yes – imprisoned forever, but you would make a reserve transfer on disposal of the asset.
2. You can have a negative revaluation reserve with financial instruments (unlike PPE)
3. If debt is FVOCI, then gains and losses ARE recycled to P&L on disposal of asset.
4. IFRS 9 is the only standard – but you won’t be asked to do a bond dealer’s FS.
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?This is what I would book on disposal:
Dr Cash 9
Dr OCI / RR 3
Cr Fin Asset 12then recycle cumulative net loss (1)
Dr P&L 1
Cr OCI / RR 1
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