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FINANCIAL ACCOUNTING AND REPORTING

RECLASSIFICATION OF FINANCIAL ASSETS

Conditions for Reclassification of Financial Assets

Under PFRS 9, reclassification of financial assets is required if, and only if, the objective of the entity’s
business model for manages those financial assets changes.

Timing of Reclassification of Financial Assets

If the entity determines that its business model has changed in a way that is significant to its operations,
then it reclassifies all affected assets prospectively from the first day of the next reporting period
(the reclassification date). Prior periods are not restated.

Original Category New Category Accounting Impact

Fair value is measured at

reclassification date. Difference from
Amortized cost FVPL carrying amount should be recognized
in profit or loss.

Fair value at the reclassification date

FVPL Amortized Cost becomes its new gross carrying
amount

Fair value is measured at

reclassification date. Difference from
amortized cost should be recognized
Amortized cost FVOCI in OCI. Effective interest rate is not
adjusted as a result of the
reclassification.

Fair value at the reclassification date

becomes its new amortized cost
carrying amount. Cumulative gain or
FVOCI Amortized cost loss in OCI is adjusted against the fair
value of the financial asset at
reclassification date.

Fair value at reclassification date

FVPL FVOCI becomes its new carrying amount.

Fair value at reclassification date

becomes carrying amount. Cumulative
FVOCI FVPL gain or loss on OCI is reclassified to
profit or loss at reclassification date

Let us assume the following amounts for cost, fair value and amortization from 2016 to 2018. All
amounts have no basis for computation and have been simplified for expediency. The original cost of the
financial asset is 4,600,000 with a face value of 5,000,000 and the following information has been
gathered at the end of the year on December 31, 2016, 2017 and 2018.

12/31/16 12/31/17 12/31/18

Fair Value 5,200,000 5,400,000 5,500,000
Amortization on original cost 50,0000 70,000 90,000
Amortization on 12/31/2016 FV 40,000 60,000
Amortization on 12/31/2017 FV 70,000

KEY OBSERVATIONS

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 The financial asset was acquired at a 400,000 discount (5,000,000 – 4,600,000) therefore the
amortization of 50,000, 70,000 and 90,000 shall be added to the carrying amount of the asset if
AC or FVOCI shall be the classification.
 If the fair value on 12/31/2016 and 12/31/17 shall be used in the examples, the amortization of
40,000 and 60,000 for 2017 and 2018, respectively and 70,000 for 2018 shall be deducted from
the carrying amount because the fair value represents a premium.
 Let us assume that the business model changes in 2017, therefore the financial asset shall be
accounted for using the rules for the original classification until 12/31/2017 because the
reclassification date shall be 1/1/2018.
 We will also forego the entry for the nominal interest and the entire effective interest and
journalized the amortization only in the succeeding examples.

AMORTIZED COST TO FVPL FVPL TO AMORTIZED COST

12/31/2016 12/31/2016
FA at AC 50,000 FA at FVPL 600,000
Interest Income 50,000 Unrealized gain 600,000
12/31/2017 12/31/2017
FA at AC 70,000 FA at FVPL 200,000
Interest Income 70,000 Unrealized gain 200,000
1/1/2018 1/1/2018
FA at FVPL 5,400,000 FA at AC 5,400,000
FA at AC 4,720,000 FA at FVPL 5,400,000
Unrealized Gain (P/L) 680,000
12/31/2018
Interest Income 70,000
FA at AC 70,000

AMORTIZED COST TO FVOCI FVOCI TO AMORTIZED COST

12/31/2016 12/31/2016
FA at AC 50,000 FA at FVOCI 50,000
Interest Income 50,000 Interest Income 50,000

FA at FVOCI 550,000
Unrealized gain – OCI 550,000
12/31/2017 12/31/2017
FA at AC 70,000 FA at FVOCI 70,000
Interest Income 70,000 Interest Income 70,000

FA at FVOCI 130,000
Unrealized gain – OCI 130,000
1/1/2018 1/1/2018
FA at FVOCI 5,400,000 FA at AC 5,400,000
FA at AC 4,720,000 FA at FVOCI 5,400,000
Unrealized Gain - OCI 680,000
Unrealized gain - OCI 680,000
12/31/2018 FA at AC 680,000
Interest Income 70,000
FA at FVOCI 70,000 12/31/2018
FA at FVOCI 170,000 FA at AC 90,000
Unrealized gain - OCI 170,000 Interest Income 90,000
(5,500,000 – (5,400,000 – 70,000) = 170,000

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FVPL TO FVOCI FVOCI TO FVPL

12/31/2016 12/31/2016

FA at FVPL 600,000 FA at FVOCI 50,000

Unrealized gain 600,000 Interest Income 50,000

FA at FVOCI 550,000
Unrealized gain – OCI 550,000

12/31/2017 12/31/2017

FA at FVPL 200,000 FA at FVOCI 70,000

Unrealized gain 200,000 Interest Income 70,000

FA at FVOCI 130,000
Unrealized gain – OCI 130,000

1/1/2018 1/1/2018

FA at FVOCI 5,400,000 FA at FVPL 5,400,000

FA at FVPL 5,400,000 FA at FVPL 5,400,000

12/31/2018 Unrealized gain - OCI 680,000

Interest Income 70,000 Gain on FVPL 680,000
FA at AC 70,000
12/31/2018
FA at FVOCI 170,000
Unrealized gain - OCI 170,000 FA at FVPL 100,000
Unrealized gain (P/L) 100,000
(5,500,000 – (5,400,000 – 70,000) = 170,000

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