Question

All of the following OCI items may not be reclassified to profit or loss, except

A. Unrealized loss on debt investment at FVOCI

B. Unrealized loss on equity investment at FVOCI

C. Remeasurement loss on defined benefit plans

D. Revaluation surplus

Answer 1

A)UNREALIZED LOSS ON DEBT INVESTMENT AT FVOCI

OCI items that cannot be reclassified into profit or loss:

• Changes in revaluation surplus (IAS 16 and IAS 38)

• Actuarial gains and losses on defined benefit plans (IAS 19.93A)

• Gains and losses from investments in equity instruments measured at fair value through OCI (IFRS 9)

• For those liabilities designated at fair value through profit or loss, changes in fair value attributable to changes in the liability’s credit risk (IFRS 9)

For a debt instrument, the classification into FVOCI is predominantly driven by the set of criteria that are specified in the standard. There is no choice that is granted to the investor as in the case of equity investments.

A debt instrument would be classified as Amortized cost asset if it satisfies SPPI test. Further the Business Model Objective should be to hold the asset for collecting contractual cash flows only. An entity should assess whether contractual cash flows are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding for the currency in which the financial asset is denominated.

If the SPPI test is passed and the business model objective is to collect contractual cash flows and also to sell the same, then the classification is FVOCI. Debt instruments classified as FVOCI, are likely to be sold at any time by the investor. Since it can be sold at any time, the balance sheet should show the fair value of such investment in debt security. The unrealized profit or loss belongs to the shareholders of the company and hence should be reflected in the reserves of the company and more specifically the other comprehensive income.

However, since the debt instrument may or may not be sold, the realisation of profits/loss on such investment is not assured till the time the liquidation happens. And when such a liquidation event happens then the profits/losses are crystalized and should be shown in the profit and loss account.

This is the reason why the unrealized profits/losses are taken to the other comprehensive income initially and when the liquidation happens, the same is ploughed back to the profit and loss account.