The contractual cashflow characteristics test is whether the contractual terms of the financial asset give rise, on specified dates, to cashflows that are solely payments of principal and interest on the principal amount outstanding. All recognised financial assets that are in the scope of IAS 39 will be measured at either amortised cost or fair value. The standard contains only the two primary measurement categories for financial assets, unlike IAS 39 where there were multiple measurement categories.
Thus the existing IAS 39 categories of held to maturity, loans and receivables and available for sale are eliminated, as are the tainting provisions of the standard. A debt instrument, such as a loan receivable, that is held within a business model whose objective is to collect the contractual cashflows and has contractual cashflows that are solely payments of principal and interest generally must be measured at amortised cost.
An investment in a convertible loan note would not qualify for measurement at amortised cost because of the inclusion of the conversion option, which is not deemed to represent payments of principal and interest. This criterion will permit amortised cost measurement when the cashflows on a loan are entirely fixed, such as a fixed-interest-rate loan or where interest is floating or a combination of fixed and floating interest rates.
IFRS 9 contains an option to classify financial assets that meet the amortised cost criteria as at FVTPL if doing so eliminates or reduces an accounting mismatch.
An example of this may be where an entity holds a fixed-rate loan receivable that it hedges with an interest rate swap that changes the fixed rates for floating rates. Measuring the loan asset at amortised cost would create a measurement mismatch, as the interest rate swap would be held at FVTPL. In this case, the loan receivable could be designated at FVTPL under the fair value option to reduce the accounting mismatch that arises from measuring the loan at amortised cost. All equity investments within the scope of IFRS 9 are to be measured in the statement of financial position at fair value with the default recognition of gains and losses in profit or loss.
Only if the equity investment is not held for trading can an irrevocable election be made at initial recognition to measure it at fair value through other comprehensive income FVTOCI with only dividend income recognised in profit or loss. The amounts recognised in other comprehensive income OCI are not recycled to profit or loss on disposal of the investment although they may be reclassified in equity.
The standard eliminates the exemption allowing some unquoted equity instruments and related derivative assets to be measured at cost. However it includes guidance on the rare circumstances where the cost of such an instrument may be appropriate estimate of fair value. The classification of an instrument is determined on initial recognition and reclassifications are only permitted on the change of an entity's business model and are expected to occur only infrequently.
An example of where reclassification from amortised cost to fair value might be required would be when an entity decides to close its mortgage business, no longer accepting new business, and is actively marketing its mortgage portfolio for sale.
When a reclassification is required it is applied from first day of the first reporting period following the change in business model. Asking the better questions that unlock new answers to the working world's most complex issues. Trending topics. C-suite agendas. EY helps clients create long-term value for all stakeholders. Enabled by data and technology, our services and solutions provide trust through assurance and help clients transform, grow and operate.
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