Under PFRS 9, reclassification of financial assets is required if an entity's business model for managing those assets changes. If the business model changes significantly, all affected assets are reclassified prospectively from the first day of the next reporting period. The document provides examples of reclassifying a financial asset between amortized cost, fair value through profit or loss, and fair value through other comprehensive income. It shows the accounting entries for reclassifying the asset between the different categories at the start of 2018 when the business model changed in 2017.
Under PFRS 9, reclassification of financial assets is required if an entity's business model for managing those assets changes. If the business model changes significantly, all affected assets are reclassified prospectively from the first day of the next reporting period. The document provides examples of reclassifying a financial asset between amortized cost, fair value through profit or loss, and fair value through other comprehensive income. It shows the accounting entries for reclassifying the asset between the different categories at the start of 2018 when the business model changed in 2017.
Under PFRS 9, reclassification of financial assets is required if an entity's business model for managing those assets changes. If the business model changes significantly, all affected assets are reclassified prospectively from the first day of the next reporting period. The document provides examples of reclassifying a financial asset between amortized cost, fair value through profit or loss, and fair value through other comprehensive income. It shows the accounting entries for reclassifying the asset between the different categories at the start of 2018 when the business model changed in 2017.
Under PFRS 9, reclassification of financial assets is required if an entity's business model for managing those assets changes. If the business model changes significantly, all affected assets are reclassified prospectively from the first day of the next reporting period. The document provides examples of reclassifying a financial asset between amortized cost, fair value through profit or loss, and fair value through other comprehensive income. It shows the accounting entries for reclassifying the asset between the different categories at the start of 2018 when the business model changed in 2017.
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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 entitys 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
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
KEY OBSERVATIONS
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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
