The three categories of financial assets

Learning objectives

• Identify the three measurement categories for financial assets (amortised cost, FVOCI, FVTPL) and the two criteria that determine them (business model and contractual cash flows).L1, L2
• Prepare a workpaper documenting the three categories of financial assets.L1, L2
• Support in writing, from the facts of the case, the judgement made on the three categories of financial assets.L1, L2

Normative references

• IFRS 9 §4.1.1Financial assets are classified as subsequently measured at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL), on the basis of the entity's business model for managing the assets and the contractual cash flow characteristics.
• IFRS 9 §4.1.4A financial asset is measured at FVTPL unless it is measured at amortised cost (4.1.2) or at FVOCI (4.1.2A): FVTPL is the residual category, which by default includes investments in equity instruments. The paragraph also allows, for particular investments in equity instruments that would otherwise be at FVTPL, an irrevocable election at initial recognition to present subsequent changes in fair value in OCI, referring to paras. 5.7.5 and 5.7.6, which set its conditions and effects. Portfolios managed on a fair value basis or held for trading are addressed in para. B4.1.6, not in this paragraph.
• IFRS 9 §B4.1.6A portfolio of financial assets that is managed and whose performance is evaluated on a fair value basis (as described in para. 4.2.2(b)), or that meets the definition of held for trading, is held neither to collect contractual cash flows nor both to collect contractual cash flows and to sell: collecting contractual cash flows is only incidental and the portfolio is measured at FVTPL.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Which two elements determine the subsequent measurement category of a financial asset (amortised cost, FVOCI or FVTPL)?L1
• An equity instrument held as an investment is measured at fair value through profit or loss by default.L1
• Kappa SA manages a portfolio of bonds whose performance is evaluated and monitored on a fair value basis. The contractual cash flows of these bonds are payments of principal and interest. Which measurement category applies?L2