CA Final · Financial Reporting

Classification and Measurement of Financial Assets and Financial Liabilities: formula sheet

Full chapter guide

Key formulas

Amortised cost category: Business model = hold to collect contractual cash flows AND SPPI test met → Amortised cost; Both conditions must be met. Neither is enough alone. The asset must not have been designated at FVTPL. If the fair value option is elected to remove an accounting mismatch, the asset is at FVTPL instead.
FVOCI category (debt): Business model = hold to collect AND sell AND SPPI test met → FVOCI; Interest, impairment and FX go to P&L. Other fair value changes go to OCI and are recycled on derecognition.
FVTPL category: Not amortised cost and not FVOCI → FVTPL; Residual category. Includes held for trading, failed SPPI, and other business models.
Equity instruments: Default = FVTPL; irrevocable FVOCI election at initial recognition if not held for trading; No recycling of OCI gains or losses. Dividends go to P&L. No impairment on FVOCI equity.
Fair value option: Designate at FVTPL at initial recognition if it eliminates or significantly reduces an accounting mismatch; Irrevocable. Available for an asset that would otherwise be at amortised cost or FVOCI.
Reclassification: Reclassify debt assets only when the business model changes; apply prospectively from the reclassification date; Changes are expected to be very infrequent. Equity FVOCI elections and fair value option designations are not reclassified.
FVO condition: Financial asset: designate at FVTPL only if it eliminates or significantly reduces an accounting mismatch. Financial liability: mismatch, OR group managed and evaluated at fair value, OR hybrid with embedded derivative (whole hybrid designated); Made at initial recognition and irrevocable. Check the condition before applying.
FVOCI equity election: Equity instrument, not held for trading, not acquirer's contingent consideration → elect FVOCI at initial recognition (irrevocable); Applied instrument by instrument.
Equity FVOCI accounting: Fair value change → OCI (no recycling); Dividend → P&L; No impairment; Cumulative gain or loss can be moved within equity on derecognition.
Own credit on FVO liability: Change due to own credit risk → OCI; remainder → P&L; If OCI treatment creates or enlarges a P&L mismatch, all of the change goes to P&L.
Initial measurement: FVTPL: fair value, transaction costs expensed. FVOCI equity: fair value plus transaction costs; Transaction costs of an FVOCI equity investment are added to the initial carrying amount and never go to P&L.
General rule: Financial liability → amortised cost (effective interest method); Applies unless one of the exceptions below applies.
FVTPL liabilities: Held for trading + derivative liabilities + designated at FVTPL → FVTPL; Held for trading includes short-sale obligations and derivatives that are not designated hedging instruments.
Fair value option condition: Designate at FVTPL only if it removes or reduces an accounting mismatch, or the group is managed and evaluated on a fair value basis, or the contract has embedded derivatives meeting the Standard's conditions; Designation is made at initial recognition and is irrevocable.
Amortised cost: Opening carrying amount + interest at EIR − cash paid = closing carrying amount; Interest expense = opening carrying amount × effective interest rate.
Fair value changes on designated liabilities: Change attributable to own credit risk → OCI; remaining change → P&L; If this creates or enlarges an accounting mismatch in P&L, the whole change goes to P&L. Amounts in OCI are not recycled to P&L, but may be transferred within equity. This does not apply to held for trading liabilities or derivative liabilities.
Reclassification: Financial liabilities: no reclassification after initial recognition; Only financial assets are reclassified, and only on a change in business model.
Amortised cost roll-forward (liability): Closing carrying amount = Opening carrying amount + Interest at EIR − Cash paid (interest and principal); Interest (finance cost) = Opening carrying amount × EIR. Closing balance in the final year equals the amount repaid, if cash flows are as expected.
Effective interest rate: Net initial carrying amount = Σ [Cash flow ÷ (1 + EIR)^t]; Net initial carrying amount is fair value less directly attributable transaction costs. Find EIR by trial or interpolation, or use the rate given.
Revision of estimated cash flows: New carrying amount = PV of revised remaining cash flows at the original EIR; difference goes to profit or loss; Applies to fixed-rate instruments. Floating-rate instruments are re-estimated, which changes the EIR.
Designated FVTPL liability: split of change: Total fair value change = Change due to own credit risk (OCI) + Remaining change (P&L); If it would create or enlarge an accounting mismatch in P&L, show the entire change in P&L.
Held-for-trading liability: Entire fair value change → profit or loss; No OCI split for own credit risk.
OCI own-credit amount on settlement: Not reclassified to profit or loss; transfer within equity is allowed; Do not show it again in P&L at derecognition.

Quick revision

Asset classification uses two tests: business model and SPPI.
Hold to collect plus SPPI met gives amortised cost.
Hold to collect and sell plus SPPI met gives FVOCI with recycling.
Any other business model (including held for trading or managed on a fair value basis), or SPPI failed, gives FVTPL.
Fair value option for an asset is allowed only to remove or reduce an accounting mismatch, and it is irrevocable.
Equity instruments not held for trading may be designated at FVOCI at initial recognition; the choice is irrevocable.
For designated equity at FVOCI, gains and losses are not recycled to profit or loss, but dividends are recognised in profit or loss.
Most financial liabilities are measured at amortised cost using the effective interest rate.
Liabilities held for trading and derivative liabilities are at FVTPL.
For liabilities designated at FVTPL, own credit risk changes go to OCI unless that creates or enlarges an accounting mismatch. Amounts in OCI are never recycled to profit or loss, though the cumulative amount may be transferred within equity.
Effective interest rate is the rate that discounts estimated future cash flows to the amortised cost at initial recognition.

Common mistakes

Classifying a debt asset as FVTPL because the entity sometimes sells it, ignoring the business model wording. Fix: Infrequent or insignificant sales, or sales close to maturity, or sales due to increased credit risk, can be consistent with hold to collect. Check frequency, value and reason for the sales.
Skipping the SPPI test when the business model is hold to collect. Fix: Always run both tests. A convertible bond held to collect still fails SPPI and goes to FVTPL.
Recycling the OCI gain to profit or loss when the equity investment is sold. Fix: Equity FVOCI is never recycled. Only a transfer within equity is allowed.
Taking dividends on FVOCI equity to OCI. Fix: Dividends go to P&L, unless they clearly recover part of the cost.
Applying the business model and SPPI tests to financial liabilities. Fix: Remember that liabilities have no business model or SPPI test. The default is amortised cost, with FVTPL only through the exceptions.
Saying a liability can be classified at FVOCI. Fix: Liabilities are only at amortised cost or FVTPL. OCI only captures own credit risk changes on designated liabilities.
Charging the coupon as the finance cost instead of interest at EIR Fix: Finance cost is always opening carrying amount × EIR. The difference from cash paid is added to the liability (or deducted, for a premium).
Treating transaction costs as an immediate expense for an amortised cost liability Fix: For liabilities not at FVTPL, deduct directly attributable costs from the initial carrying amount and spread them through the EIR. Only for FVTPL liabilities are costs expensed.

Exam tips

In case scenarios, underline the business model facts: stated objective, sales history, and how managers are rewarded. These facts decide the answer.
Always write both tests by name, even when one fails quickly. Marks are given for the reasoning.
For equity, state the default (FVTPL), then the election and its conditions. Mention no recycling.
State the accounting consequence: where interest, fair value changes and impairment are recognised.
In MCQs with no negative marking, never leave a question blank. Eliminate options that ignore the SPPI test first.
Write the condition before the answer: 'not held for trading' for FVOCI, 'accounting mismatch' for FVO. Examiners award marks for it.
In numerical questions, show initial cost with transaction costs separately for FVTPL and FVOCI.
State 'no recycling' and 'no impairment' for equity FVOCI. Add 'dividend in P&L'.