Home > Accounting Entries > Assets > Financial Assets > Investments > Fair Value through profit and loss (FVPL)
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 Profit or Loss:
Investment categorised at FVPL are accounted on fair value basis where the income from asset is accrued in income statement. Any processing costs or fee incurred to acquire the asset is immediately recognised in Profit or Loss A/c. The asset is evaluated for its fair value. Any changes in fair value is accounted in Profit or Loss A/c.
Accounting Entries:
Purchase of Financial Asset categorised under FVPL:
Financial Assets (FVPL) A/c DR
Cash/Bank A/c CR
Amount: Amount paid to acquire asset (including any premium or discount). 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 FVPL 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 A/c (P&L) 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 FVPL 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:
No amortisation or accretion of premium, discount or transaction costs
Fair value change as at reporting date:
In case of fair value unrealised gain,
Investment FVPL - MTM Gain A/c DR
FVPL MTM Gain (P&:) A/c CR
Amount: In case fair value > book value of the FVPL asset.
In case of fair value unrealised loss,
FVPL MTM Loss (P&L) A/c DR
Investment FVPL - MTM Loss A/c CR
Amount: In case fair value < book value of the FVPL 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 (FVPL) 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
Loss on Sale A/c DR
Investment FVPL - MTM Loss A/c DR
Financial Asset (FVPL) A/c CR
Coupon Receivable A/c CR
Investment FVPL - MTM Gain 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.