financial assets with contractual cash flows

Financial instruments:
Classification and measurement – the ball continues to roll

In May 2012, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (collectively, the Boards) decided that financial assets with contractual cash flows that are solely payments of principal and interest (e.g., plain vanilla bonds) would be classified for fair value through other comprehensive income (FVOCI) classification and measurement at initial recognition if the entity’s business model for a portfolio is both:

  1. to hold to collect contractual cash flows; and
  2. to sell financial assets.

At their meeting on 13 June 2012, the  Boards reaffirmed their previous decision that a debt instrument (such as a loan or a debt security) will be measured at FVOCI only if it passes the contractual cash flow characteristics assessment and the debt instrument is managed within the relevant business model (as described above).

This means that financial assets with contractual cash flows that are not solely payments of principal and interest will not qualify for the FVOCI category and must therefore be measured at fair value through profit or loss (FVTPL).

Furthermore, the IASB tentatively decided to extend the option in IFRS 9 for designating financial assets at FVTPL under the fair value option (FVO) to debt instruments that would otherwise be measured at FVOCI. This means that an entity may, on initial recognition, irrevocably elect to designate a debt instrument at FVTPL, if doing so eliminates or significantly reduces an accounting mismatch.

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