How to account for gov bond at initial recognition

Topics related to universal accounting principles and best practices, local GAAP, audit, laws and regulations affecting financial reporting, and other financial reporting topics.
This is also the appropriate forum for beginners to ask any questions, even if they pertain to IFRS.
Post Reply
JBHF
Posts: 37
Joined: 22 Apr 2023, 14:47

How to account for gov bond at initial recognition

Post by JBHF »

Hi everyone, on initial recognition do we account for bond investment at cost or fair value?
User avatar
JakobLavrod
Trusted Expert
Posts: 190
Joined: 15 Apr 2022, 17:11
Location: Stockholm
Contact:

Re: How to account for gov bond at initial recognition

Post by JakobLavrod »

As per IFRS 9, there are two assessments that needs to be made:

SPPI assessment: Do the bond's cash flows represent solely payments of principal and interest at specific dates? This is the case for your standard government bond but will not be the case on, for example, a convertible bond.

Business model assessment: How will your company use the government bond in your business model? If you buy it with the purpose of taking a short term position and later generate profit by selling it, it is fair value. If you instead buy it and plan to hold it to maturity (given that you passed SPPI), you hold it at amortized cost. The in between is if you buy it to mostly hold it, but from time to time you might have to sell it, for example for liquidity or financing purpose. In that case you account for it as FVOCI, so on the PnL it will be like amortized cost, but in the balance sheet it will look like fair value.

So in your case, if you invest in the bond to hold it to maturity, then amortized cost.
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: How to account for gov bond at initial recognition

Post by Leo »

Bonds are accounted at fair value on initial recognition, and amortised by using amortised costs method over subsequent accounting period or fair value approach.
User avatar
JakobLavrod
Trusted Expert
Posts: 190
Joined: 15 Apr 2022, 17:11
Location: Stockholm
Contact:

Re: How to account for gov bond at initial recognition

Post by JakobLavrod »

Good point Leo, I probably should have added the fair value on initial recognition part!
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: How to account for gov bond at initial recognition

Post by Marek Muc »

Classification isn't actually irrelevant, as for assets carried at amortised cost the initial recognition amount includes transaction costs as well, so strictly speaking it's fair value + transaction costs (in practice: cash paid in 99% of cases)
User avatar
JakobLavrod
Trusted Expert
Posts: 190
Joined: 15 Apr 2022, 17:11
Location: Stockholm
Contact:

Re: How to account for gov bond at initial recognition

Post by JakobLavrod »

Good remainder Marek :)
I know there has been some example in the past with high transaction fees. We also had a case in Sweden in which a pension fund was charged 60 % transaction fees on the instrument they purchased, but that turned out to be fraud... X)
https://europeanpensions.net/ep/Success ... appeal.php
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: How to account for gov bond at initial recognition

Post by Marek Muc »

oh wow!
JBHF
Posts: 37
Joined: 22 Apr 2023, 14:47

Re: How to account for gov bond at initial recognition

Post by JBHF »

Thanks everyone for the replies. That's very helpful:)
Post Reply