How to account for gov bond at initial recognition
How to account for gov bond at initial recognition
Hi everyone, on initial recognition do we account for bond investment at cost or fair value?
- JakobLavrod
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Re: How to account for gov bond at initial recognition
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.
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
Risk Control at Svenska Handelsbanken
Re: How to account for gov bond at initial recognition
Bonds are accounted at fair value on initial recognition, and amortised by using amortised costs method over subsequent accounting period or fair value approach.
- JakobLavrod
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Re: How to account for gov bond at initial recognition
Good point Leo, I probably should have added the fair value on initial recognition part!
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
Risk Control at Svenska Handelsbanken
Re: How to account for gov bond at initial recognition
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)
- JakobLavrod
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Re: How to account for gov bond at initial recognition
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
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
Risk Control at Svenska Handelsbanken
Re: How to account for gov bond at initial recognition
Thanks everyone for the replies. That's very helpful:)