1.16 Accounting for financial assets at fair value through profit or loss in accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’

Enquiry:

Technical advice is sought on the following matters:

Enquiry A:

A Public Interest Company has made investments in listed securities and has categorized such investments at fair value through profit or loss in accordance with lAS 39 ‘Financial Instruments: Recognition and Measurement’. Explanation is required in respect of recognising gain or loss on disposal of investments in profit or loss with the following scenario:

Script “A” is purchased at Rs. 80 during the year 1 (transaction cost is charged to profit & loss account separately) and have market price at year end at Rs. 100 per share. The Company has recongised Rs 20 gain in profit and loss account as “unrealized gain on investments at fair value through profit & loss” and debited its investment account. In subsequent year 2, the Company has disposed of its investment at Rs. 110. What would be correct accounting treatment in case of disposal in year 2?

  1. The company will recognise gain of rupees 10 in profit and loss account as “Gain on disposal of investments” or
  2. The company will recognise gain on disposal of securities at Rs. 30 (difference between the original cost of Rs. 80 and the sale price i.e. Rs. 110) in year 2 and    reverse the gain of Rs. 20 previously recongised as “Unrealized gain or loss on investments available for sale” in year 2.

Enquiry B: Is the Company is required to disclose the list of all investments (individually name wise -scripts) made in marketable securities or aggregate value of such securities is sufficient under the Companies Act, 2017 and IAS 39?

Enquiry C: IFRS 9 – Financial instruments is required to be adopted for financial statements beginning on or after July 1, 2018. What would be the treatment of reserve created for “Investments available for sale” which is created in accordance with IAS 39 as IFRS 9 is required to recognize gain or loss on “Non-Trading Investments” to Other Comprehensive Income (OCI) instead of fair value reserve in equity?

Opinion:

 The Board views on the subject enquiries are as under:

Enquiry A

The financials assets at fair value through profit or loss are measured at fair value at each reporting date, until derecognition of such assets. The gains and losses arising from the changes in the fair value are included in the statement of profit or loss in the period in which they occur.

Further, the accounting for derecognition of financial assets, including financial assets at fair value through profit or loss is explained in paragraph 26 of IAS 39 (reproduced as under):

“On derecognition of a financial asset in its entirety, the difference between:

  1. the carrying amount and
  2. the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in other comprehensive income shall be recognised in profit or loss.”

Based on the above requirement of IAS 39, in the enquired scenario following accounting treatment would be followed:

  • In year 1: Recognise unrealized gain of Rs. 20 arising from the change in fair value of investment i.e. difference between the acquisition of investment of Rs. 80 and year end fair value of investment of Rs. 100. The fair value of Rs. 100 would be the carrying value of the investment at the end of year 1.
  • In year 2: Recognise the realized gain of Rs. 10 which is the difference between the carrying amount of investment of Rs. 100 and the consideration received of Rs. 110.

Enquiry B

The disclosure requirements for financial instruments are contained in IFRS 7 ‘Financial Instruments: Disclosures’.

In context of the enquiry, paragraph 8 of IFRS 7 requires disclosure of carrying amount of categories of financial assets and liabilities. Under the Companies Act, 2017, the financial statements disclosure requirements are prescribed in the fourth and fifth schedules. The investment related disclosures relate to investments made in foreign companies and associated companies.

The Board is of the view that the detailed listing of all investments (individually name wise-scripts) made in marketable securities is not prescribed under IFRS 7 and under the Companies Act, 2017.

Enquiry C

IFRS 9 ‘Financial Instruments’ will replace the multiple classification and measurement models for financial assets of IAS 39. In context of the enquiry, under IFRS 9 a previously classified ‘available for sale’ (AFS) financial asset can be categorized either as ‘financial asset measured at fair value through other comprehensive income’ (FVOCI) or financial asset measured at fair value through profit or loss’ (FVPL).

The accounting of FVOCI and FVPL under IFRS 9 in comparison to IAS 39 is summarized below:

  • FVOCI – An equity instrument classified as AFS under IAS 39 may be irrevocably designated upon initial application of IFRS 9 as FVOCI. In this case, the recognition and presentation of gain or loss of this instrument is same under IFRS 9 and IAS 39. The unrealized gain or loss on such instrument is recognized in other comprehensive income and the cumulative gain is reported as a separate component of equity. However, under IFRS 9 this unrealized accumulated gain (presented as a separate component of equity) cannot be reclassified to profit and loss on disposal of FVOCI asset. However, it can be transferred within equity (i.e. between the FVOCI reserve and retained earnings).
  • FVPL – Upon initial application of IFRS 9, if ‘available for sale’ equity instrument under IAS 39 is classified as ‘financial asset measured at fair value through profit or loss’, the change shall be accounted for under paragraph 7.2.1 of IFRS 9 retrospectively, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

(April 17, 2018)