Home > Accounting Entries > Assets > Financial Assets > Investments > Fair Value through other comprehensive income (FVOCI)
Definition:
Accounting for Investment in Financial Assets is governed under IFRS 9 according to which it can be categorised under three types of financial assets, (i) held at Amortised Cost, (ii) held at Fair Value through Other Comprehensive Income (FVOCI) and (iii) held at Fair Value through Profit or Loss (FVPL).
Categorisation depends upon the business model under which the investment is made by the organisation. First test is with respect to nature of payments from the asset, whether the payments from asset are 'Solely Payments for Principal and Interest' (SPPI test). If the first test is passed, second test is for the business model, whether the asset is held to maturity and collect all contractual cashflows or collect cashflows and sell before maturity as opportunity occurs.
In case SPPI test is failed at the first instance itself, the financial asset is directly categorised as Fair Value through Profit or Loss (FVPL).
Below is brief matrix for categorisation:
Meet SPPI Test Business Model Accounting Category
Yes Collect contractual cashflows Amortised Cost (AC)
Yes Collect contractual cashflows Fair Value through Other Comprehensive Income (FVOCI)
and gain from sale
Yes Held for Trading and gain from Fair Value through Profit or Loss (FVPL)
price change and sale
No - Fair Value through Profit or Loss (FVPL)
Fair Value through Other Comprehensive Income:
Investment categorised at FVOCI are accounted on initially accounted accrual basis where the income from asset is accrued through effective interest rate (EIR) method. Any processing costs or fee incurred to acquire the asset is adjusted in the value of asset and considered for computation of income under EIR method. Later, the asset is evaluated for its fair value. Book value of the asset post income from EIR method is adjusted for fair value and any difference is accounted in other comprehensive income.
Book value = Nominal value + Unamortised Premium/ Transaction cost - Unamortised Discount + MTM Gain A/c - MTM Loss A/c.
Difference in Fair value and Book value is accounted as adjustment in Other comprehensive income.
Exception to this is in case of financial asset under fair value hedge where the changes in fair value due to hedged risk is transferred from other comprehensive income to Profit or Loss A/c.
Accounting Entries:
Purchase of Financial Asset categorised under FVOCI:
Financial Assets (FVOCI) A/c DR
Premium on purchase A/c DR
Discount on purchase A/c CR
Cash/Bank A/c CR
Amount: Amount paid to acquire asset. In case the asset is acquired at a price above par, difference between nominal value and par is premium. In case the asset is acquired at a price below par, difference between nominal value and par is discount.
Cum-interest paid on acquisition of financial asset:
Interest income on AC Asset A/c DR
Cash/Bank A/c CR
Amount: Accrued interest on asset from last coupon date till purchase settlement date.
Transaction costs incurred to acquire the asset:
Transaction costs on FVOCI Asset A/c DR
Cash/Bank A/c CR
Amount: Processing Fees, Brokerage etc incurred on acquisition.
Recognition of income (in case of coupon paying investment):
Coupon Receivable A/c DR
Interest income on FVOCI Asset A/c CR
Amount: Coupon accrued based on nominal value, coupon rate and period from last coupon date till reporting date.
Amortisation of premium and fee on reporting date:
Interest income on FVOCI Asset A/c DR
Premium on purchase A/c CR
Transaction costs on AC Asset A/c CR
Amount: Amortisation computed based on straight line basis or EIR method.
Accretion of discount on reporting date:
Discount on purchase A/c DR
Interest income on FVOCI Asset A/c CR
Amount: Amortisation computed based on straight line basis or EIR method.
Fair value change as at reporting date:
In case of fair value unrealised gain,
Investment FVOCI - MTM Gain A/c DR
FVOCI MTM Gain (OCI) A/c CR
Amount: In case fair value > book value of the FVOCI asset.
In case of fair value unrealised loss,
FVOCI MTM Loss (OCI) A/c DR
Investment FVOCI - MTM Loss A/c CR
Amount: In case fair value < book value of the FVOCI asset.
Receipt of coupon on coupon payment date:
Cash/Bank A/c DR
Coupon Receivable A/c CR
Amount: Coupon computed based on nominal value, coupon rate and coupon period or frequency.
Maturity of Asset:
Cash/Bank A/c DR
Financial Asset (AC) A/c CR
Coupon Receivable A/c CR
Amount: Payment received towards principal and interest on maturity date.
Sale / Disposal of asset:
Cash/Bank A/c DR
Discount on purchase A/c DR
Investment FVOCI - MTM Loss A/c DR
Loss on Sale A/c DR
Premium on purchase A/c CR
Transaction costs on AC Asset A/c CR
Financial Asset (FVOCI) A/c CR
Coupon Receivable A/c CR
Investment FVOCI - MTM Gain A/c CR
Gain on Sale A/c CR
Amount: At time of sale, sale price is compared with book value, in case sale price > book value, then gain or if sale price < book value, then loss.
Book value = Nominal value + Unamortised Premium/ Transaction cost - Unamortised Discount + MTM Gain A/c - MTM Loss A/c.
Reversal of unrealised OCI reserve booked against investment:
In case of fair value unrealised gain remaining in books,
FVOCI MTM Gain (OCI) A/c DR
Gain/Loss on Sale CR
Amount: Balance OCI credit adjusted against MTM change booked.
In case of fair value unrealised loss remaining in books,
Gain/Loss on Sale A/c DR
FVOCI MTM Loss (OCI) A/c CR
Amount: Balance OCI debit adjusted against MTM change booked.