Debt instrument measured at FVOCI
For financial assets that are debt instruments measured at FVOCI, both the amortised cost and the fair value of the instrument are relevant. The reason for this is the objective of categorising a debt instrument as FVOCI is that both the contractual cash flows characteristic and the fair value of the instrument are relevant as the asset is held to receive contractual cash flows as well as to buy or sell such assets. For the contractual cash flow characteristic, amortised cost is relevant as the interest revenue would be based on the effective rate calculated at the time of inception of the debt instruments. The fair value of such instruments is also relevant because the entity would want to profit from the sale of such instrument whenever the opportunity for the same exists. As a result of this, the debt instrument should always be shown at the fair value in the balance sheet and for the purpose of recognising interest revenue, the effective interest rate method should be applied to such assets based on the amortised cost. The disclosure requirements for debt instruments measured at FVOCI, specifically requires that the impairment allowance should not be reduced from the fair value nor should it be shown as a deduction from the fair value of the instrument but, instead, should be shown as accumulated loss allowance (OCI) as part of equity. So, in a nutshell, the expected credit losses are not reduced from the carrying amount in the balance sheet and the carrying value remains at fair value only.
- Interest revenue is calculated based on EIR at the opening amortised cost.
- Foreign exchange gains and losses on such instruments are recognised in the profit and loss account
- Impairment gains and losses are recognised in the profit and loss account.
- The corresponding impairment gain or loss, as the case may be, is shown as part of the accumulated impairment account.
- When the financial asset is de-recognised, the cumulative gains and losses previously recognised as other comprehensive income is reclassified or recycled from equity to profit or loss as reclassification adjustment including the balance in the accumulated impairment account, if any.