CFM21600 - Accounting for corporate finance: International Financial Reporting Standards: IAS 39: classification of financial assets: reclassification

For those entities applying IFRS or FRS 101 with an accounting period beginning on or after 1 January 2018 refer to IFRS 9 for the recognition and measurement of financial instruments at CFM 21800+.

Financial assets fall into two broad categories:

  • HTM investments and L&R , which are measured at amortised cost, and
  • FVTPL assets, those financial instruments that are either classified as HFT or are designated as such on initial recognition, and AFS assets, which are measured at fair value.

There is, however, an exception from the second category. An investment in an equity instrument may not have a quoted market price in an active market, and it may not be possible to reliably measure its fair value. Where this is the case, the investment is measured at cost.

Reclassification of assets between ‘cost’ and ‘fair value’ categories is possible in certain limited circumstances.

  • Amendments to IAS 39 in October 2008, which can be used from 1 July 2008, changed the standard to allow HFT assets to be reclassified from FVTPL to L&R if management’s intentions for the assets changed, or in ‘rare circumstances’ (such as those encountered in Q3 2008). The amendment also made it possible to reclassify AFS assets which met the definition of L&R to be reclassified to that category if the entity has the intention and ability to hold that financial asset for the foreseeable future.
  • HTM investments may be reclassified as AFS, either because the company’s intention has changed, or because the company’s HTM portfolio has been ‘tainted’ by a sale (CFM21570). Conversely, AFS assets may be reclassified as HTM, either because of a change in intention or ability, or because “tainting” has expired after two financial years.
  • If a financial instrument is measured at cost because no reliable measure of its fair value is available, it must subsequently be measured at fair value if a reliable measure becomes available. Exceptionally, the reverse may happen if a reliable measure ceases to be available.

If an asset is transferred from a fair value category to an amortised cost category the fair value immediately prior to transfer becomes the ‘cost’ in the new category. Any cumulative gains or losses held in equity on the asset are ‘recycled’ into the income statement over the period to maturity using the effective interest method or if there is no stated maturity, on sale, or if it becomes impaired.

The fair value adjustment on reclassification from amortised cost to an AFS basis is taken directly to equity.