1. Reclassification OF Financial Asset PDF

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ACFAR 2233RECLASSIFICATION OF FINANCIAL ASSETRequirement for Reclassification  PFRS 9, Paragraph 4.  Provides that an entity shall reclassify financial assets only when it changes the business model for managing the financial assets  When reclassification occurs, paragraph 5.6 provides that the e...

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ACFAR 2233 RECLASSIFICATION OF FINANCIAL ASSET Requirement for Reclassification  PFRS 9, Paragraph 4.4.1  Provides that an entity shall reclassify financial assets only when it changes the business model for managing the financial assets  When reclassification occurs, paragraph 5.6.1 provides that the entity shall APPLY THE RECLASSIFICATION PROSPECTIVELY FROM THE RECLASSIFICATION DATE o The entity shall NOT restate any previously recognized gains, losses, and interest  As defined in Appendix A of PFRS 9, the reclassification date is the first day of the reporting period following the change in business model that results in an entity reclassifying the financial asset o This means that if the change in business model is in 2020, the reclassification date is January 1, 2021, the first day of the next reporting period o However, the entity must DISCLOSE the change in business model in the 2020 financial statements because the change in the entity’s business model is a significant and demonstrable event o Disclosure is required in the period of the change happened Exemptions from Reclassification a. Equity investment held for trading or measured at FVPL cannot be reclassified by reason of the consequential requirement of PFRS 9  Actually, ALL EQUITY INVESTMENTS CANNOT BE RECLASSIFIED b. Equity investment measured at FVOCI by irrevocable election cannot be reclassified simply because the election is irrevocable c. Only debt investments can be reclassified because the change in business model applies appropriately to debt investment  However, debt investment measured at FVPL by irrevocable election cannot be reclassified simply because the election is irrevocable Reclassification from FVPL to Amortized Cost  PFRS 9, Paragraph 5.6.3 a. The fair value at the reclassification date becomes the new carrying amount of the financial asset at amortized cost b. The difference between the new carrying amount of the financial asset at amortized cost and the face amount of the financial asset shall be AMORTIZED through profit or loss over the remaining life of the financial asset using the effective interest method c. A new effective interest rate must be determined based on the new carrying amount or fair value at reclassification date  Prepare the reclassification entry the following year: Investment in Bonds Financial Asset – FVPL

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Reclassification From Amortized Cost to FVPL  PFRS 9, Paragraph 5.6.2  Provides that when an entity reclassifies a financial asset from amortized cost to fair value through profit or loss, the fair value is determined at reclassification date  THE DIFFERENCE BETWEEN THE PREVIOUS CARRYING AMOUNT AND FAIR VALUE IS RECOGNIZED IN PROFIT OR LOSS Reclassification From Amortized Cost to FVOCI  PFRS 9, Paragraph 5.6.2  Provides the following if a financial asset is reclassified from amortized cost to FVOCI: a. The financial asset is measured at fair value at reclassification date b. The difference between the amortized cost carrying amount and the fair value at reclassification date is recognized in other comprehensive income c. The original effective interest rate is NOT adjusted Reclassification from FVOCI to Amortized Cost  PFRS 9, Paragraph 5.6.5  Provides the following if a financial asset is reclassified from FVOCI to amortized cost: a. The fair value at reclassification date becomes the new amortized cost

carrying amount b. The cumulative gain or loss previously recognized in other comprehensive income is ELIMINATED AND ADJUSTED against the fair value at reclassification o As a result, the investment is reverted back to amortized cost measurement c. The original effective rate is NOT adjusted Reclassification From FVPL to FVOCI...