CIMA F2 Syllabus B. Financial reporting standards - Financial Assets - Initial Measurement - Notes ^{5 / 7}

Financial assets that are Equity Instruments

e.g. Shares in another company

These are easy - Just 2 categories

• FVTPL 

  FVTPL = Fair Value through Profit & Loss

  These are Equity instruments (shares) Held for trading

  Normally, equity investments (shares in another company) are measured at FV in the SFP, with value changes recognised in P&L

  Except for those equity investments for which the entity has elected to report value changes in OCI.

• FVTOCI

  FVTOCI = Fair Value through Other Comprehensive Income

  These are Equity instruments (shares) Held for longer term

• NB. The choice of these 2 is made at the beginning and cannot be changed afterwards

  There is NO reclassification on de-recognition

Financial Assets that are Receivable Loans

There are basically 3 types:

1. Fair Value Through Profit & Loss (FVTPL)

   A receivable loan where capital and interest aren’t the only cashflows

2. FVTOCI

   Receivable loans where the cashflows are capital and interest only BUT the business model is also to sell these loans

3. Amortised Cost

A financial asset that meets the following two conditions can be measured at amortised cost:

1. Business model test: 

   Do we normally keep our receivable loans until the end rather than sell them on?

2. Cashflows test
    
   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 outstanding

   In other words:
   Are the ONLY cashflows coming in capital and interest?

So what sort of things go into the FVTPL category?

• If one of the tests above are not passed then they are deemed to fall into the FVTPL category

  This will include anything held for trading and derivatives.

INITIAL measurement

• Good news! Initially both are measured at FV. 

  Easy peasy to remember.

  The FV is calculated, as usual, as all cash inflows discounted down at the market rate.

FVTPL can be:

1. Equity items held for trading purposes

2. Equity items not held for trading (but OCI option not chosen)

3. A receivable loan where capital and interest aren’t the only cashflows

Derivative assets are always treated as held for trading

Initial recognition of trade receivables

1. Trade receivables without a significant financing component

   Use the transaction price from IFRS 15

2. Trade receivables with a significant financing component

   IFRS 9 does not exempt a trade receivable with a significant financing component from being measured at fair value on initial recognition.

   Therefore, differences may arise between the initial amount of revenue recognised in accordance with IFRS 15 – and the fair value needed here in IFRS 9

   Any difference is presented as an expense.

FVTOCI - Receivable loans held for cash and selling

Interest revenue, credit impairment and foreign exchange gain or loss recognised in P&L (in the same manner as for amortised cost assets)

Other gains and losses recognised in OCI

On de-recognition, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss