CHAPTER 31
FINANCIAL ASSET AT FAIR VALUE
QUESTION 31-1
What are the classifications of financial assets?
ANSWER 31-1
Under PFRS 9, paragraph 4.1.1, financial assets are classified into three, namely:
1. Financial assets at fair value through profit or loss
2. Financial assets at fair value through other comprehensive income
3. Financial assets at amortized cost
Financial assets at fair value through profit or loss and through other comprehensive income include both
equity securities and debt securities.
Financial assets at amortized cost include only debt securities.
The classification depends on the business model for managing financial assets which may be:
a. To hold investments in order to realize fair value changes
b. To hold investments in order to collect contractual cash flows.
QUESTION 31-2
What financial assets are measured at fair value through
profit or loss or FVPL?
ANSWER 31-2
1. Financial assets held for trading or popularly known as “trading securities”. These financial assets
are measured at fair value through profit or loss “by requirement,” meaning, required by the
standard.
2. All other investments in quoted equity instruments. These financial assets are measured at fair
value through profit or loss ““by consequence” in accordance with Application Guidance B5.1.14
of PFRS 9.
3. Financial assets that are irrevocably designated on initial recognition as at fair value through
profit or loss. These financial assets are measured at fair value through profit or loss “by
irrevocable designation” or “by option. This fair value option is applicable to investments in
bonds and other debt instruments which can be irrevocably designated as at fair value through
profit or loss even if the financial assets satisfy the amortized cost measurement. This designation
is the fair value option allowed in accordance with Paragraph 4.1.5 of PFRS 9.
4. All debt investments that do not satisfy the requirements for measurement at amortized cost and
at fair value through other comprehensive income. These financial assets are measured at fair
value through profit or loss “by default” in accordance with PFRS 9, paragraph 4.1.4.
QUESTION 31-3
Define financial asset held for trading.
ANSWER 31-3
Appendix A of PFRS 9 provides that a financial asset is held for trading when:
a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a portfolio of identified financial assets that are managed
together and for which there is evidence of a recent actual pattern of short-term profit taking.
c. It is a derivative, except for a derivative that is a financial guarantee contract or a designated and
an effective hedging instrument.
QUESTION 31-4
Explain the measurement of equity investment “at fair value through other comprehensive income” or
FVOCI.
ANSWER 31-4
At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an irrevocable election
to present in other comprehensive income subsequent changes in fair value of an investment in equity
instrument that is not held for trading.
The irrevocable approach is to impose discipline in accounting for nontrading equity investment.
The amount recognized in other comprehensive income is not reclassified to profit or loss under any
circumstances.
However, on derecognition, the amount may be transferred to equity or retained earnings.
If the investment in equity instrument is “held for trading”, the election to present unrealized gains and
losses in other comprehensive income is not allowed.
If the investment in equity instrument is held for trading, subsequent changes in fair value are always
included in profit or loss.
QUESTION 31-5.
Explain the measurement of debt investment at fair value through other comprehensive income.
ANSWER 31-5
PFRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
a. The business model is achieved both by collecting contractual cash flows and by selling the
financial asset.
b. The contractual cash flows are solely payments of principal and interest on the principal
outstanding.
Note that the business model includes selling the financial asset in addition to collecting contractual
cash flows.
In this case, interest income is recognized using the effective interest method as in amortized cost
measurement.
On derecognition, the cumulative gains and losses recognized in other comprehensive income are
reclassified to profit or loss.
QUESTION 31-6
Explain the measurement of debt investment at amortized cost.
ANSWER 31-6
PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at amortized cost if both of the
following conditions are met:
a. The business model is to hold the financial asset in order to collect contractual cash flows on
specified date.
b. The contractual cash flows are solely payments principal and interest on the principal amount
outstanding.
In other words, the business model is to collect contractual cash flows if the contractual cash flows
are solely payments of principal and interest.
In such a case, the financial asset shall be measured amortized cost.
QUESTION 31-7
What are the simple rules on the measurement of financial assets?
ANSWER 31-7
Measurement of equity investments
1. Held for trading – at fair value through profit or loss
2. Not held the trading – as a rule, at fair value through profit or loss
3. Not held for trading – at fair value through other comprehensive income by irrevocable election
4. All other investments in quoted equity instruments – at fair value through profit or loss
5. Investments in unquoted equity instruments – at cost
6. Investments of 20% to 50% – equity method of accounting
7. Investments of more than 50% – consolidation method to be taken up in an advanced accounting
course
Measurement of debt investments
1. Held for trading – at fair value through profit or loss
2. Held for collection of contractual cash flows – at amortized cost
3. Held for collection of contractual cash flows- at fair value through profit or loss by irrevocable
designation or fair value option
4. Held for collection of contractual cash flows and for sale of the financial asset – at fair value
through other comprehensive income
5. Held for collection of contractual cash flows and for sale of the financial asset – at fair value
through profit or loss by irrevocable designation or fair value option
QUESTION 31-8
Explain reclassification of financial assets.
ANSWER 31-8
PFRS 9, paragraph 4.4.1, provides that an entity shall reclassify financial assets only when it changes its
business model for managing the financial assets
Only debt investments can be reclassified because the change in business model applies appropriately to
debt investments
However, debt investments measured at FVPL by irrevocable election cannot be reclassified simply
because the election is irrevocable.
All equity investments cannot be reclassified.
Equity investment held for trading or measured at FVPL cannot be reclassified by reason of the
consequential requirement of PFRS 9.
