Financial Reporting · Financial instruments

IFRS 9 Financial Assets: Amortised Cost, FVOCI and FVPL

Updated 11 October 2026 · Fact-checked

IFRS 9 classifies a financial asset by two tests: the business model (collect cash flows, collect and sell, or other) and whether cash flows are solely payments of principal and interest. Result: amortised cost, FVOCI or FVPL. Equity investments are FVPL by default, or FVOCI by irrevocable election.

Understand Financial Assets: Amortised Cost, FVOCI and FVPL

A financial asset is cash, an equity instrument of another entity, or a contractual right to receive cash or another financial asset. Examples are trade receivables, loans made, bonds held and shares held in other companies. IFRS 9 says how you measure each one after you buy it.

For debt instruments, you apply two tests. The first is the business model test: why does the entity hold the asset? If it holds it to collect contractual cash flows, the model is 'hold to collect'. If it holds it both to collect cash flows and to sell, the model is 'hold to collect and sell'. Anything else is a residual model, such as trading.

The second is the cash flow test (SPPI): do the contractual cash flows consist solely of payments of principal and interest on the principal outstanding? A plain loan or ordinary bond passes. A bond whose return depends on an equity index or commodity price fails.

The result for debt instruments: pass SPPI and hold to collect gives amortised cost. Pass SPPI and hold to collect and sell gives FVOCI (with recycling). Fail SPPI, or any other business model, gives FVPL. An entity may also designate a debt asset at FVPL on initial recognition if that removes an accounting mismatch.

Equity investments have no SPPI cash flows, so they are FVPL by default. If the shares are not held for trading, the entity can make an irrevocable election at initial recognition to take gains and losses to OCI. Under that election, gains and losses are never recycled to profit or loss, and dividends are still recognised in profit or loss.

Key rules to remember

Amortised cost debt: classification: SPPI passed + hold to collect → amortised cost; Interest income uses the effective rate on the opening carrying amount. Impairment (expected credit losses) also applies.
Amortised cost closing balance: Closing = Opening + (Opening × effective rate) − cash received; Cash received is the coupon (nominal value × coupon rate). Effective rate is the rate that discounts all cash flows to the initial amount.
Debt FVOCI: classification: SPPI passed + hold to collect and sell → FVOCI; Interest at effective rate and impairment go to profit or loss. Other fair value changes go to OCI and are recycled on disposal.
FVPL: Fails SPPI, or other business model → FVPL; Fair value gains and losses go to profit or loss. Transaction costs are expensed at purchase.
Equity investment: Default = FVPL; irrevocable election (not held for trading) = FVOCI; With the election, transaction costs are added to cost, gains and losses stay in OCI with no recycling, dividends go to profit or loss.
Initial measurement: Fair value + transaction costs (amortised cost and FVOCI); fair value only (FVPL); Transaction costs for FVPL assets are charged to profit or loss.

How to solve Financial Assets: Amortised Cost, FVOCI and FVPL questions

Use this order for any question on classification and measurement of financial assets.

1Decide whether the asset is debt or equity. Equity has no SPPI test.
2For debt, identify the business model from the wording: hold to collect, collect and sell, or trading and other.
3Check the cash flow test: ordinary principal and interest passes; links to an index or equity fails.
4Pick the category. Equity: FVPL unless an irrevocable FVOCI election is stated.
5Measure initially: fair value, plus transaction costs unless FVPL (then expense them).
6Measure at year end. Amortised cost: apply the effective rate to the opening balance, deduct cash received. Fair value categories: remeasure to fair value.
7Post the entries: interest and impairment to profit or loss; fair value gain or loss to profit or loss (FVPL) or OCI (FVOCI).
8Show the closing carrying amount in the statement of financial position and state where each item goes.

Quickest way: Two-question shortcut and amortised cost table

When to use it: Use in Section A and OT case questions where you must pick a category or a carrying amount quickly.

Ask: debt or equity? Equity means FVPL, unless the question says FVOCI election.
For debt, ask: pass SPPI? If not, FVPL.
If SPPI is passed, look for 'hold to collect' (amortised cost) or 'collect and sell' (FVOCI).
For a carrying amount at amortised cost, do one line: opening × (1 + effective rate) − coupon received.
For FVPL or FVOCI, closing carrying amount is simply fair value at the year end.

Common mistakes in Financial Assets: Amortised Cost, FVOCI and FVPL

Using the coupon rate to calculate finance income on amortised cost assets.
The coupon is the cash amount, which looks like the interest figure.
Fix: Income is opening carrying amount × effective rate. The coupon is only the cash received, which reduces the balance.
Adding transaction costs to an FVPL asset.
Students remember that costs are capitalised for other categories.
Fix: Expense transaction costs in profit or loss for FVPL. Add them to cost only for amortised cost, debt FVOCI and equity FVOCI.
Recycling equity FVOCI gains to profit or loss on disposal.
Debt FVOCI does recycle, so the rules get mixed up.
Fix: Equity FVOCI gains and losses are never recycled. You may transfer them within equity only.
Treating all bonds as amortised cost.
Bonds look like loans.
Fix: Check both tests. A bond held to sell, or with non-SPPI returns, is FVOCI or FVPL.
Putting dividends from FVOCI equity shares in OCI.
Students assume everything on an FVOCI asset goes to OCI.
Fix: Dividends go to profit or loss as investment income. Only the fair value change goes to OCI.

Worked examples

Example 1

On 1 January 20X1, Karta buys a ₹10,00,000 5% bond at par, with no transaction costs. It will be repaid at par at the end of year 5. The effective rate is 5%, because the bond is issued and bought at par. Karta holds it to collect contractual cash flows, and the cash flows are solely principal and interest. Explain the classification and show the accounting for year 20X1. Then repeat the calculation assuming the bond cost ₹9,50,000 and the effective rate is 6.2% (the rate, to one decimal place, that discounts the cash flows to ₹9,50,000; round to the nearest rupee).

Show the solution

Classification: SPPI passed and hold to collect, so amortised cost.
Initial measurement at par: ₹10,00,000 (no costs).
Year 20X1 finance income = 10,00,000 × 5% = ₹50,000.
Cash received = 10,00,000 × 5% = ₹50,000. Closing carrying amount = 10,00,000 + 50,000 − 50,000 = ₹10,00,000.
Alternative: opening ₹9,50,000. The effective rate is the rate that discounts the cash flows (₹50,000 a year for 5 years plus ₹10,00,000 at the end of year 5) to ₹9,50,000. That rate is about 6.2%. Because 6.2% is a rounded rate, the figures that follow are approximate.
Finance income = 9,50,000 × 6.2% = about ₹58,900.
Coupon received = 10,00,000 × 5% = ₹50,000.
Closing = 9,50,000 + 58,900 − 50,000 = about ₹9,58,900.

Answer: At par: income ₹50,000, closing ₹10,00,000. At ₹9,50,000 cost: income about ₹58,900, closing about ₹9,58,900 (approximate, as they use the rounded rate of 6.2%). Both are amortised cost.

Example 2

Meru Ltd buys 20,000 shares in Tara Ltd on 1 October 20X1 at ₹150 per share, plus transaction costs of ₹30,000. The shares are not held for trading and Meru irrevocably elects FVOCI. At 31 March 20X2 the fair value is ₹170 per share. Meru receives a dividend of ₹4 per share in January 20X2. Show the accounting for the year ended 31 March 20X2. Then state the difference if no election had been made.

Show the solution

Initial cost with election = 20,000 × 150 + 30,000 = 30,00,000 + 30,000 = ₹30,30,000.
Fair value at year end = 20,000 × 170 = ₹34,00,000.
Gain to OCI = 34,00,000 − 30,30,000 = ₹3,70,000.
Dividend = 20,000 × 4 = ₹80,000 to profit or loss as investment income.
No election: FVPL. Initial amount = ₹30,00,000 and ₹30,000 costs are expensed.
Gain = 34,00,000 − 30,00,000 = ₹4,00,000 to profit or loss.
Dividend of ₹80,000 still goes to profit or loss.

Answer: With FVOCI election: asset ₹34,00,000, OCI gain ₹3,70,000, profit or loss dividend ₹80,000. Without election (FVPL): asset ₹34,00,000, profit or loss includes gain ₹4,00,000, cost expense ₹30,000 and dividend ₹80,000.

Exam tips

Look for the trigger words: 'hold to collect', 'collect and sell', 'trading' and 'irrevocable election'. They decide the category.
In Section C, show the initial entry, the effective interest working and the closing balance in a clear table-style list. Marks go to each step.
For amortised cost, always compute from the opening balance. Write 'opening × effective rate' so the marker sees the method even if arithmetic slips.
State where each gain or loss goes: profit or loss or OCI. Many marks are lost by omitting this.
In objective tests, no marks are given for partial answers, so check transaction costs and whether it is equity or debt before you select an option.

Practice questions from Financial instruments

Financial Assets: Amortised Cost, FVOCI and FVPL in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalRecognition and Classification of Financial Assets

Financial Assets: Amortised Cost, FVOCI and FVPL: frequently asked questions

What is the difference between FVOCI and FVPL?

Both measure the asset at fair value in the statement of financial position. With FVPL, fair value changes go to profit or loss. With FVOCI, they go to OCI. Debt FVOCI gains are recycled on disposal, but equity FVOCI gains are not.

Can equity investments be held at amortised cost?

No. Equity investments do not have SPPI cash flows, so they are measured at fair value. The default is FVPL, and you can elect FVOCI if they are not held for trading.

Can the FVOCI election for equity be reversed later?

No. The election is made on initial recognition, for each investment, and it is irrevocable. Gains and losses recognised in OCI are never recycled to profit or loss.

What is the SPPI test?

It checks whether the contractual cash flows are solely payments of principal and interest on the principal outstanding. Interest here means consideration for the time value of money and credit risk. A return linked to an equity index or commodity price fails the test.