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Firms may hold financial assets to earn returns. How the firm would classify financial assets? What...


Firms may hold financial assets to earn returns. How the firm would classify financial assets? What treatment will such financial assets get in the financial statements in accordance with US GAAP and IFRS standards?

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Expert Solution

Classification of financial assets

According to IFRS, the financial assets are classified into: amortized cost, FVOCI and FVTPL. FVOCI is fair value through other comprehensive income, and FVTPL is fair value through profit or loss.

  • In IFRS, A financial asset, if its cash flows are of principal and interest which is calculated on the amount of principal outstanding (SPPI) it is classified as measured at amortized cost. And moreover the asset must be held in the held-to-collect business model.

Unlike IFRS Standards, in US GAAP, the debt securities classified as held-to-maturity, and loans and trade receivables are measured at amortized cost

  • In IFRS, If the financial asset is held within a held to-collect-and-sell business model, it is classified as measured at FVOCI. Its cash flows must be of principal and interest which is calculated on the amount of principal outstanding.

In , US GAAP there is no classification and prescribed FVOCI for financial assets. Debt securities which are not under held-for-trading or held-to-maturity are taken as available-for-sale. And they are measured at fair value.

  • In IFRS, A financial asset that fails to qualify for measuring at amortized cost or FVOCI, is measured at FVTPL. Equity instruments fail the SPPI criterion and are therefore FVTPL.

When certain financial assets fails to qualify for measuring at FVTPL, the eligibility criteria for applying the fair value option in US GAAP differ from IFRS in certain respects.

Treatment of financial assets in the financial statements as per IFRS and US GAAP

According to IFRS, the disclosure of financial instruments in the financial statements is required so that the users get information regarding the company’s financial position and performance. More than that, the nature and extent of risks involved in the financial instruments should be disclosed. The management of those risks by the entity also must be disclosed. In short, both qualitative and quantitative information are required.

In US GAAP also disclosures on the financial instruments are required which enable the users to analyse the role of financial instruments in the financial position and performance of the company. Also, the extent of risk involved in financial instruments should be disclosed.


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