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Journal entry — Classification and measurement of financial instruments — Boards agree on FV-OCI category and reclassification of assets

Published on: May 22, 2012

At yesterday’s joint meeting with the FASB, the IASB tentatively decided to introduce fair value through other comprehensive income (FV-OCI) as a measurement category for eligible1 debt financial instruments. The FASB’s tentative model already includes such a measurement category.

FV-OCI Measurement Category

For debt instruments classified and measured at FV-OCI, the IASB agreed that both amortized cost and fair value information are relevant. Therefore, the IASB tentatively agreed that:

  • Such financial assets would be measured at fair value on the balance sheet.
  • Interest income would be recognized in net income (NI) by using the effective interest rate method that is applied to financial assets measured at amortized cost.
  • The impairment method used to recognize impairment losses/reversals in NI would be the same as that for financial assets carried at amortized cost.
  • Fair value gains and losses would be recognized in OCI over the life of the financial asset, and the cumulative fair value gain or loss would be reclassified to NI (i.e., recycled) when the financial asset is derecognized or impaired.

In addition, the boards discussed when eligible debt instruments should be measured at FV-OCI on the basis of the business model within which they are held. The boards tentatively agreed that investments in debt instruments would be classified in FV-OCI if they are included in a portfolio managed with the objective of both collecting contractual cash flows and selling financial assets. FV-NI would be the residual classification category for eligible debt instruments that do not meet the business model tests for amortized cost2 or FV-OCI.

Reclassifications of Assets

The boards also tentatively agreed to require reclassifications of financial assets when the business model changes (expected to be very infrequent). The boards will discuss the accounting and disclosures related to reclassifications of assets at a future meeting.


[1] At their February 2012 joint meeting, the boards tentatively agreed that, in a manner consistent with IFRS 9, Financial Instruments, a financial asset could be eligible for a measurement category other than fair value with changes in fair value recognized in net income (FV-NI) if, at initial recognition, the "contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding."

[2] As tentatively decided at the boards’ April 2012 joint meeting, financial assets could qualify for amortized cost if the assets are held within a business model whose objective is to hold the assets to collect contractual cash flows.

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