CFM21660 - Accounting for corporate finance: International Financial Reporting Standards: IAS 39: measurement of financial assets: effect of different asset classifications

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+

Suppose that a company acquires a debt security for its fair value of £76.5 million. At the end of the year, its fair value is £82 million. During the year, interest of £5 million is receivable on the security. The return on the security, on a level yield to maturity basis (i.e. using the effective interest rate - see CFM21180), is £8 million in the year.

If the company classifies the asset as loans and receivables (CFM21580), it will measure the asset at amortised cost. Assuming that the debt security is not impaired, the company would recognise a credit of £8 million to profit and loss. The amortisation amount is £3 million - £8 million less the £5 million interest receivable. The carrying value at the end of the year is therefore £76.5 million plus £3 million, i.e. £79.5 million.

Suppose that instead the asset is classified as fair value through profit and loss (CFM21530). The closing balance sheet will show the asset at fair value, £82 million. There will be a credit of £10.5 million to profit and loss, representing the £5.5 million increase in fair value plus the £5 million interest receivable.

If the debt security is classified as an available for sale asset (CFM21590), it will again be measured at fair value, so the closing balance sheet will again show an asset of £82 million. But now interest income, calculated using an effective interest method, is taken to profit and loss, with other fair value changes going to equity. Again, the total credit is £10.5 million. But in this case the yield of £8 million is credited to profit and loss, with the remaining £2.5 million credited directly to equity.