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 satisfied and above all, the option should be exercised at the inception of the financial asset.

An entity may, at initial recognition irrevocably, designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. The option to designate at fair value through profit or loss however is irrevocable.

Designation as fair value through profit or loss is permitted provided that by doing so, it results in the financial statements presenting more relevant information. It should be noted that such a designation can be made only at initial recognition which is not revocable subsequently. The Standard also allows an entity to designate a group of financial instruments which may include financial assets, financial liabilities or both as at fair value through profit or loss provided that doing so results in more relevant information. The decision of an entity to designate a financial asset or financial liability as at fair value through profit or loss is similar to an accounting policy choice. However, unlike an accounting policy choice, it is not required to be applied consistently to all similar transactions.

Measurement categories for financial assets

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Difference between amortised cost & held-to-maturity

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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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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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FVOCI (equity instruments) and FVOCI (debt instruments)

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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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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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