18 Reclassification of Financial Assets PDF

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PAGE 1FINANCIAL ACCOUNTING AND REPORTINGRECLASSIFICATION OF FINANCIAL ASSETSConditions for Reclassification of Financial AssetsUnder 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.Timin...

Description

PAGE 1

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

Amortized cost

FVPL

Fair value is measured at reclassification date. Difference from carrying amount should be recognized in profit or loss.

FVPL

Amortized Cost

Fair value at the reclassification date becomes its new gross carrying amount

FVOCI

Fair value is measured at reclassification date. Difference from amortized cost should be recognized in OCI. Effective interest rate is not adjusted as a result of the reclassification.

FVOCI

Amortized cost

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

FVPL

FVOCI

Fair value at reclassification date becomes its new carrying amount.

FVPL

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

Amortized cost

FVOCI

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.

Fair Value Amortization on original cost Amortization on 12/31/2016 FV Amortization on 12/31/2017 FV

KEY OBSERVATIONS

12/31/16 5,200,000 50,0000

12/31/17 5,400,000 70,000 40,000

12/31/18 5,500,000 90,000 60,000 70,000

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PAGE 2  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 12/31/2016 FA at AC Interest Income

12/31/2016 50,000 50,000

12/31/2017 FA at AC Interest Income

FVPL TO AMORTIZED COST

FA at FVPL Unrealized gain

600,000 600,000

12/31/2017 70,000 70,000

1/1/2018

FA at FVPL Unrealized gain

200,000 200,000

1/1/2018

FA at FVPL FA at AC Unrealized Gain (P/L)

5,400,000 4,720,000 680,000

FA at AC FA at FVPL

5,400,000 5,400,000

12/31/2018 Interest Income FA at AC

AMORTIZED COST TO FVOCI 12/31/2016 FA at AC Interest Income

50,000 50,000

FVOCI TO AMORTIZED COST

FA at FVOCI Interest Income

50,000

FA at FVOCI Unrealized gain – OCI

550,000

50,000

550,000

12/31/2017 70,000 70,000

1/1/2018 FA at FVOCI FA at AC Unrealized Gain - OCI

70,000

12/31/2016

12/31/2017 FA at AC Interest Income

70,000

FA at FVOCI Interest Income

70,000

FA at FVOCI Unrealized gain – OCI

130,000

70,000

130,000

1/1/2018 5,400,000 4,720,000 680,000

FA at AC FA at FVOCI Unrealized gain - OCI FA at AC

12/31/2018 Interest Income FA at FVOCI

70,000

FA at FVOCI Unrealized gain - OCI

170,000

70,000

12/31/2018

170,000

FA at AC Interest Income

(5,500,000 – (5,400,000 – 70,000) = 170,000

5,400,000 5,400,000 680,000 680,000

90,000 90,000...