Interest Income on a Loan Asset Measured per FVTPL

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IMCO
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Interest Income on a Loan Asset Measured per FVTPL

Post by IMCO »

Assume a loan asset that incorporates an embedded derivative and so must be classified and subsequently measured per fair value through profit and loss. Can the lender elect to report interest income on the non-ED component of the loan per the effective rate method and report changes in the value of the ED per FVTPL?

PWC suggest this is possible, stating: "Gains and losses on financial instruments measured at FVTPL are recognised directly in profit or loss. There is no requirement to recognise interest income separately nor to recognise an impairment loss. However, if interest income is calculated, it has to be done by using the effective interest rate method: IFRS 9: What’s new in financial instruments accounting for asset management: February 20128

I see no justification for this view in the terms of IFRS 9 itself. Is it acceptable to report interest income on the non-ED component of the loan per the effective rate method and report changes in the value of the ED per FVTPL?
JRSB
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Re: Interest Income on a Loan Asset Measured per FVTPL

Post by JRSB »

I thought if its deemed FVTPL then it's all FV movement but I know it's more complicated than that...
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Marek Muc
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Re: Interest Income on a Loan Asset Measured per FVTPL

Post by Marek Muc »

https://www.ifrs.org/news-and-events/up ... ch-2018/#7
In contrast, amortised cost accounting is not applied to financial assets that are subsequently measured at fair value through profit or loss.
IMCO
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Re: Interest Income on a Loan Asset Measured per FVTPL

Post by IMCO »

Thank you for this reference. However, the Committee's determination states (my italics)

the Committee concluded that the requirement in paragraph 82(a) of IAS 1 to present separately an interest revenue line item calculated using the effective interest method applies only to those assets that are subsequently measured at amortised cost or fair value through other comprehensive income

which appears to leave open the possibility of an accounting policy to report interest income on the non-ED component of the loan per the effective rate method and report changes in the value of the ED per FVTPL, as PWC suggested (admittedly prior to this determination by the Committee). Thoughts?
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Marek Muc
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Re: Interest Income on a Loan Asset Measured per FVTPL

Post by Marek Muc »

I guess you can split changes in FV into interest accrued and other impacts, and then present them in separate lines in P&L. Remember that FV changes will arise on non-ED component as well and it won't be the impact of accrued interest only (eg changes in credit risk, changes in risk free rates etc).
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