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Reclassification of Business Model

Posted: 30 Jun 2020, 18:34
by Lorina Vangjeli
Hi everyone,

In case I decide to reclassify part of my FVOCI portfolio in amortized cost, the new amortized cost will be the fair value amount.
Decrease of fair value (assets side) will be adjusted with the equity reserve(debit OCI reserve Equity). My question is: the fair value incorporated in the cost of the new assets, with what will be adjusted, which should be the crediting part.

Thanks for your support,

Best

Re: Reclassification of Business Model

Posted: 01 Jul 2020, 09:53
by Marek Muc
the new amortized cost will be the fair value amount
not exactly, see IFRS 9.5.6.5

Re: Reclassification of Business Model

Posted: 01 Jul 2020, 12:00
by Irfan Mustafa
See this example in part B of IFRS 9: Para ref IE 104 and onwards:

An entity purchases a portfolio of bonds for its fair value (gross carrying amount) of CU500,000. The entity changes the business model for managing the bonds in accordance with paragraph 4.4.1 of IFRS 9. The fair value of the portfolio of bonds at the reclassification date is CU490,000.


Scenario 2: Reclassification out of the fair value through profit or loss measurement category and into the amortised cost measurement category
[Refer: paragraphs 5.6.3 and B5.6.2]

Bank A reclassifies the portfolio of bonds out of the fair value through profit or loss measurement category and into the amortised cost measurement category. At the reclassification date, the fair value of the portfolio of bonds becomes the new gross carrying amount and the effective interest rate is determined based on that gross carrying amount. The impairment requirements apply to the bond from the reclassification date. For the purposes of recognising expected credit losses, the credit risk of the portfolio of bonds at the reclassification date becomes the credit risk against which future changes in credit risk shall be compared.
Bonds (gross carrying amount of the amortised cost assets) CU 490,000
Bonds (FVPL assets) CU 490,000
Impairment loss (proit or loss) CU 4000
Loss allowance CU4000

Re: Reclassification of Business Model

Posted: 01 Jul 2020, 12:46
by Marek Muc
this relates to FVTPL, but the original question related to FVOCI

Re: Reclassification of Business Model

Posted: 02 Jul 2020, 08:30
by Irfan Mustafa
Sorry. I overlooked. I should have referred to Scenario 4:

Scenario 4: Reclassiication out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category
[Refer: paragraphs 5.6.5 and B5.6.1]
Bank A reclassifies the portfolio of bonds out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category. The portfolio of bonds is reclassified at fair value. However, at the reclassification date, the cumulative gain or loss previously recognised in other comprehensive income is removed from equity and adjusted against the fair value of the portfolio of bonds. As a result, the portfolio of bonds is measured at the reclassification date as if it had always been measured at amortised cost. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification. The credit risk at initial recognition continues to be used to assess changes in the credit risk on the bonds. The loss allowance is recognised
as an adjustment to the gross carrying amount of the bond (to reflect the amortised cost amount) from the reclassification date.

Bonds (gross carrying value of the amortised cost assets) CU490,000 (Debit)
Bonds (FVOCI assets) CU490,000 (Credit)
Bonds (gross carrying value of the amortised cost assets) CU10,000 (Debit)
Loss allowance CU6,000 (Credit)
Other comprehensive income (a) CU4,000 (Credit)


(To recognise the reclassiication from fair value through other comprehensive income to amortised cost including the recognition of the loss allowance deducted to determine the amortised cost amount. The measurement of expected credit losses is however unchanged.)
(a) The cumulative loss in other comprehensive income at the reclassification date was CU4,000. That amount consists of the total fair value change of CU10,000
(ie CU500,000 – 490,000) offset by the accumulated impairment amount recognised (CU6,000) while the assets were measured at fair value through other comprehensive income.