FVOCI (equity instruments) and FVOCI (debt instruments)

What is the difference FVOCI (equity instruments) and FVOCI (debt instruments)

Debt instruments are classified as FVOCI if and only if both the following conditions are satisfied, viz, (a) financial asset is held within the business model whose objective is achieved by both collecting directly cash flows and selling of financial assets, and (b) the contractual terms of the financial assets represents solely payments of principal and interest. However, in the case of equity shares, the entity has irrevocable election choice that can be exercised on an instrument by instrument basis to classify such instruments as FVOCI. The main difference between debt instruments classified as FVOCI and equity instruments classified as FVOCI is that in the former the classification arises on account of evaluation of the business model as well as characteristics of the contractual cash flows, whereas, in the later, an entity can exercise the option to classify an equity instrument as FVOCI by exercising the option to do so, albeit irrevocable with certain strings attached to the same.

The main difference between the two is the way in which the accumulated gains or losses from such instruments are treated. The accumulated gains or losses from debt instruments (FVOCI) are reclassified to the profit and loss account on liquidation of the financial assets, whereas, for equity, the instruments (FVOCI), the accumulated gains or losses in the OCI remains in OCI even on liquidation of such financial assets and is never recycled to the profit and loss account.

Change in contractual cash flows

Change in contractual cash flows When change in the terms is altering the contractual cash flows, should the SPPI test be carried out afresh? A proper assessment should be made afresh whenever there could be contractual term potentially changing the timing or amount of the contractual cash flows. A typical example is …
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Long-term financial liability classified as FVTPL

Long-term financial liability classified as FVTPL Can a long-term financial liability be classified as subsequent measured at fair value through profit or loss? Yes. An entity may, on initial recognition, designate a financial liability as measured at fair value through profit or loss. If an entity exercises this option, then it cannot …
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Measurement categories for financial assets

Measurement categories for financial assets What are the principal measurement categories for financial assets?  Principal measurement categories for financial assets are amortised cost, fair value through other comprehensive income – FVOCI and fair value through profit or loss – FVTPL.  As per the previous version, viz, IAS 39, the financial assets were classified …
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Difference between amortised cost & held-to-maturity

Difference between amortised cost & held-to-maturity What is the difference between amortised cost classification as per Ind AS 109 and held-to-maturity classification as per IAS 39? A financial asset shall be measured at amortised cost if both of the following conditions are met: the financial asset is held within a business model whose …
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Financial asset categorised as FVOCI

Financial asset categorised as FVOCI When will a financial asset be categorised as fair value through other comprehensive income? A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met: the financial asset is held within a business model whose objective is achieved …
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Is there a choice to designate as FVTPL?

Is there a choice to designate as FVTPL? An entity has choice to designate a financial asset as measured at fair value through profit or loss. Explain. The option to designate a financial asset at fair value through profit or loss (FVTPL) is not without restrictions. There are certain conditions to be …
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Classification of derivative instruments

Classification of derivative instruments How are derivative instruments classified? Derivative instruments are a subset of financial instruments. In the definition of financial asset, we have the following phrase, viz, “to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity” and in the definition …
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SPPI test & business model objective test

SPPI test & business model objective test Which criteria should be applied first – SPPI test or business model test? SPPI test refers to the evaluation of contractual cash flows that analyses if such cash flows represent solely payments of principal and interest on the principal amount outstanding. Business model is in fact …
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What does Interest represent?

What does Interest represent? Interest represents only the consideration for the passage of time. Do you agree? While interest is predominantly the consideration for time value of money, it also includes consideration for the credit risk associated with the principal amount outstanding during a particular period of time. It also includes consideration …
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