Question

Describe the various approaches to subsequent measurement of financial assets permitted by AASB 9/IFRS 9 and the circumstances in which each approach may be applied.

Answer 1

IFRS 9 divides all financial assets into two classifications

- those measured at amortised cost

- those measured at fair value

Where assets are measured at fair value, gains and losses are either recognised entirely in profit or loss (fair value through profit or loss, FVTPL), or recognised in other comprehensive income (fair value through other comprehensive income, FVTOCI).

Amortised costs is the amount at which some financial assets or liabilities are measured and consists of: initial recognition amount, subsequent recognition of interest income/expenses using the effective interest method, repayments and credit losses.

The classification of a financial asset is made at the time it is initially recognised, namely when the entity becomes a party to the contractual provisions of the instrument. If certain conditions are met, the classification of an asset may subsequently need to be reclassified.

The FVTOCI classification is mandatory for certain debt instrument assets unless the option to FVTPL (‘the fair value option’) is taken.

Whilst for equity investments, the FVTOCI classification is an election.