No Question Gets Left Behind (Revision Session supplementary)

Relates to Question 1b June 2010 (pastpaper):

Financial instruments are initially measured at the fair value of the consideration given or received (for example, the cost plus any transaction costs that are directly attributable to the acquisition or issue of the financial instrument).

However, their is an exception to the rule and this is where a financial instrument is designated as at fair value through profit or loss. In this case, transaction costs are not added to fair value at initial recognition.

Remember, the fair value of the consideration is normally the transaction price or market prices or an estimate using valuation techniques if the market prices are not reliable.

THE RULE BEFORE: Any financial instrument can be designate as fair value through profit or loss. HOWEVER, THIS IS A ONCE AND FOR ALL CHOICE AND HAS TO BE MADE ON INITIAL RECOGNITION. IT CANNOT LATER BE RECLASSIFIED EVEN IF IT WOULD OTHERWISE BE POSSIBLE TO MEASURE IT AT COST OR AMORTIZE COST.

AMENDMENT TO THE RULE (October 2008): Allow reclassification of some non-derivative financial assets out of fair value through profit or loss and available for sale. Permits reclassification of debt and equity financial assets meeting specified criteria out of fair value through profit or loss.

For example, where “loans and receivables” would have met the definition of such had it not been classified as fair value through profit or loss it can be (meeting criteria) be reclassified out of fair value through profit or loss.