If both of the following conditions are met, financial asset (debt instrument) is classified as financial asset measured at fair value through other comprehensive income (FVOCI). the contractual cash flows arising from the financial asset are solely payments of principal and interest (SPPI).įair value through other comprehensive income (FVOCI).the entity’s business model is to hold the financial asset and obtain benefits by collecting the contractual cash flows associated with the financial asset and.If both of the following conditions are met, financial asset (debt instrument) is classified as financial asset measured at amortized cost. Contractual cash flows of the financial asset (SPPI contractual cash flows test).Classification of debt instrumentsįollowing two factors are evaluated to determine the classification of financial assets which are debt instruments. Dividend income is recorded in statement of profit or loss. Under FVOCI category, investments in equity instruments are carried at fair value and any changes in fair value are taken to the statement of comprehensive income. It means that if such equity instruments are classified as FVOCI investments at initial recognition, they cannot be reclassified as FVTPL investments subsequently. The go-to category for equity instruments is FVTPL, however, equity instruments not held for trading purposes can be irrevocably classified as financial assets measured at fair value through other comprehensive income (FVOCI). Under FVTPL, investments in equity instruments are carried at fair value and any changes in fair value are taken to the statement of profit or loss. Default classification approach for investments in equity instruments is fair value through profit or loss (FVTPL). Investments in equity instruments are measured at fair value, therefore, there are two classification options i.e. Let’s discuss the classification basis of both equity instruments and debt instruments. This post will help you understand the basis of classification of financial assets. If the financial assets are classified incorrectly, it will result in subsequent accounting being inaccurate and erroneous. It is important to understand the basis for classifying the financial assets into the correct measurement categories.
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