FVTPL bonds interest shares dividend

[karleon37]

If we use FVTPL for bonds and shares in our portfolio, can we record all received interest and dividends as Dr. 'Cash' - Cr. 'Portfolio Investments,' and then recognize changes in fair value in profit or loss? Or should dividends in any case be recorded as Dr. 'Cash' - Cr. 'Dividend Revenue' (we cannot track for each share when our right to receive payment of the dividend is established)?

[Ketan Marwah]

Hi,

Both items should be recorded on the PnL in the specific case you mentioned unless dividend distribution represents a recovery of part of the cost of the investment, or accumulated profits. Refer the below:

Interest: https://ifrscommunity.com/knowledge-bas ... est-income
Dividend: https://ifrscommunity.com/knowledge-bas ... end-income

Also, as per IFRS 9 para 5.7. 6, Dividends are recognized in profit or loss only when: (a) the entity's right to receive payment of the dividend is established; (b) it is probable that the economic benefits associated with the dividend will flow to the entity; and (c) the amount of the dividend can be measured reliably.
Therefore, don't go about conveniently recording dividend income until the above criteria is not fulfilled irrespective of how much complexity following the above requirements might entail.

[hubertd]

There's quite a difference in booking dividends on shares and interest on bonds with both instruments held at FV. Dividends on shares (as long as they are equity) are posted in PnL as 'dividend income' whereas interest on FV bond is posted as FV gains.

[Ketan Marwah]

Hi,

Paragraph 85 of IAS 1 permits an entity to present additional line items in the income statement where such a presentation is relevant to an understanding of the entity’s financial performance. This is consistent with paragraphs B5 and BC34 of IFRS 7 which envisage that an entity can present interest separately from other movements in fair value on financial assets and financial liabilities measured at FVTPL.

[karleon37]

Thank you for your cooperation, Hubertd and Ketan!
However, how can you explain IAS 7 B5(e), which states: 'For financial instruments, such disclosure may include:... how net gains or net losses on each category of financial instrument are determined (see paragraph 20(a)), for example, whether the net gains or net losses on items at fair value through profit or loss include interest or dividend income'?
Based on this, I understand that FV gains and losses can include interest and dividend income. Am I mistaken?

[Ketan Marwah]

Hi,

What it means is that assume a scenario where the instrument measured at FVTPL has suffered significant FV losses, entities may need to consider whether the presentation of gross ‘interest’ separately from the fair value gains and losses is still appropriate. If such a presentation is adopted, each component is required to be appropriately presented and labelled in accordance with paragraph 85A(b) of IAS 1. In addition, the entity’s accounting policy, including how such amounts are calculated and on which instruments, should be disclosed in accordance with paragraph 117 of IAS 1.
Alternatively, an entity might present ‘interest’ on all or some of its instruments measured at FVTPL as part of fair value gains or losses on those items.
Some local regulators have expressed views on the presentation of interest income for financial instruments measured at FVTPL, in which case regard should be had to those views. Dividends from financial assets at FVTPL are recognised in P/L as per IFRS 9.5.7.1A

[karleon37]

Hi Ketan,
So if, for example, I purchased a bond for $100, then received interest of $20, and the bond's fair value was $110 at the end of the year, can I report only a fair value income of $30 in the P&L?

[Ketan Marwah]

Hi,

Yes you can do that unless you want to show them separately as a matter of accounting policy for the reasons which I shared previously. The separate line item for interest revenue calculated using the effective interest method (that might be labelled ‘interest revenue’ or ‘interest income’ or similar) only includes: interest on instruments measured at amortised cost and fair value through other comprehensive income in accordance with IFRS 9; and gains and losses arising from related qualifying hedging relationships to which hedge accounting is applied in accordance with IFRS 9. Under IFRS 9, the effective interest method does not apply to derivatives and other instruments measured at FVTPL.

[hubertd]

Great explanation Ketan. Helps in furthering my understanding as well. It’s first time I’m holding some debt at FV this year. Thanks

[Marek Muc]

@karleon37 - Can you explain a bit more why is it that you're not able to track dividends declared while being able to measure FV of the underlying investments?

Re. Interest income on debt at FV. IFRS 7.B5(e) introduces an interesting nuance I didn't appreciate before. So it's acceptable to present interest income on debt at FVTPL separately from FV gains/losses. But this interest income shouldn't be labelled as calculated using the effective interest method. IFRS Staff picked up this matter when briefing the IFRS IC:
https://www.ifrs.org/content/dam/ifrs/m ... uments.pdf
https://www.ifrs.org/content/dam/ifrs/m ... evenue.pdf

I need to add this to our KB!