FINANCIAL ASSETS

Investment in equity Investment in debt

FVPL FVOCI Amortised cost FVOCI FVPL
Default Not held for short Business model: Business model: If it doesn’t pass
term trading Keep to Keep to maturity the criteria for
maturity or sell amortised cost
Irrevocable or FVOCI
designation Contractual Contractual cash
cash flows: flows: Interest
Interest and and capital
capital
Initially At fair value At fair value plus At fair value At fair value plus At fair value
(transaction transaction costs plus transaction transaction costs (transaction
costs to P&L) costs costs to P&L)
Subsequently Dividends Dividends received Amortised cost Amortised cost Interest
received go to go to P&L using the using the received goes to
P&L effective effective interest P&L
interest rate rate (= coupon rate x
Nominal value)
FX gain/loss To P&L To OCI To P&L To P&L To P&L
At year end Restate to FV, Restate to FV, Restate to FV, Restate to FV,
gains/losses go gains/losses go to gains/losses go to gains/losses go
to P&L OCI OCI to P&L
On disposal Proceeds X Restate to FV Proceeds X Proceeds X Proceeds X
CA (X) (movement to OCI) CA (X) CA (X) CA (X)
Profit X Profit X Profit X Profit X
Proceeds X
Gain/loss on CA (X) Gain/loss on Gain/loss on Gain/loss on
disposal→P&L Profit X disposal→P&L disposal→P&L disposal→P&L

Gain/loss (if any)

on disposal→P&L
When sell: don’t
recycle FVOCI
reserve to P&L (can
do reserves
transfer in SOCE)
When sell: recycle
FVOCI reserve to
P&L
Loss allowance needed

DERIVATIVES

Definition:

• Value depends on an underlying item

• Little or no initial investment
• Will be settled net at a future date

Accounting treatment: FVPL

FINANCIAL ASSETS: EXTRA CONSIDERATIONS

Bid-ask spread

If shares are quoted at a bid-ask spread:

• Pay the ask price to buy a share

• The difference between the bid and ask price is a transaction cost: expense to P&L for FVPL
investments; capitalise for FVOCI investments
• The bid price is the FV (cost) of a share
• If the co already owns the shares at the end of the year, value them using the bid price

Eg, Bid–ask spread is £2–£2.50

If you buy the asset:

FVPL Dr FA £2 (cost of FA = bid price)

Dr P&L £0.50 (transaction cost)
Cr cash £2.50 (total paid = ask price)

FVOCI Dr FA £2.50 (total cost incl transaction cost)

Cr cash £2.50 (total paid = ask price)

If you already own the asset at the year end, the FV is £2 (= bid price)

Derecognition

Derecognise a financial asset if:

• Lost the risks and rewards of ownership; or

• No contractual rights (expired? Transferred to third party?)

Common derecognition issues:

• Factoring receivables
• Sale and repurchase agreements
• Securitisations