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I am confused regarding the classification of financial instruments- my understanding is that a financial asset can be either an equity or a debt instrument. it was my understanding that equity instruments can be measured at;
1. FVTPL
2. FVTOCI
and debt instruments can be measured at;
1. FVTPL
2. FVTOCI
3. amortised cost
i am however reading the SBR article regarding FI and it states that FVTOCI can be only used on equity instruments .could you please confirm which understanding is correct?
thanks and regards
AM
Dear Antsam31, your understanding is correct for this IFRS 9. Under this IFRS 19, you can apply FVTOCI for both equity instrument and debt instrument.
Under debt instrument (ie bonds) , FVTOCI be applied when it applies to business model test and cash flow characteristics test. Please be careful the business model test between FVTOCI and amortised cost is slightly different and you must read carefully to spot the keyword to distinguish which method it fits in during the exam . It is to the extent that the under FVTOCI, the business model test must have 2 identity which it has both collecting contractual cash flows and SELLING FINANCE ASSETS. and amortized costs method has no intention to sell it to any other third party.
In conjunction with your understanding, for debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option is elected. Whilst for equity investments, the FVTOCI classification is an election.
Eequity instrument under financial assets can be valued under fair value through other comprehensive income (FVTOCI) too.
However, the requirements for reclassifying gains or losses recognised in other comprehensive income are different for debt instruments and equity investments. When derecognition, for FVTOCI under debt instrument is recycled through profit and loss while FVTOCI under equity instrument is recorded under OCE.
Hope it helps.
Please contact me Whatsapp +60165270093 if you will willing to share you ideas for further clarity.
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