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18 Reclassification of Financial Assets
18 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.
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.
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.
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.
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 FVOCI 550,000
Unrealized gain – OCI 550,000
12/31/2017 12/31/2017
FA at FVOCI 130,000
Unrealized gain – OCI 130,000
1/1/2018 1/1/2018
- - END - -
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