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No.
FA = equity investment in another company or contractual right to receive cash.
DT is just an accounting adjustment.
Measurement of financial liabilities
Where a company has a financial liability that is measured at FVTPL, the fair value of the liability can depend on the credit worthiness of the company.
As a result, where the credit worthiness of a company deteriorates the fair value of the liability will typically reduce, resulting in a fair value gain. ( HOW? ) What’s the rationale behind this?
And where the credit worthiness of a company improves the fair value of the liability will typically increase, resulting in a fair value loss( HOW? )!
MY QUESTION IS:
Teacher, I don’t get this. How does a worse credit worthiness reduces the fair value of the bonds, and instead of recording it as a a low in demand bond in the market – as a loss. we are recording it as a GAIN in the OCI. and Vice versa.If the bond was an ASSET we would agree that there would be a LOSS due to bad credit worthiness.
Dr P&L Cr Financial asset
So, in theory, if the bond is a LIABILITY, there will be a GAIN due to bad creditworthiness.
I owe you $500. I am a bad credit person. I am only likely to be able to give you $200.
Dr Financial liability 300 Cr OCI 300 (crediting P&L would be going too far!)
Crazy? Yes a bit.
🙂
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