Financial Reporting · Classification and Measurement of Financial Assets and Financial Liabilities

Fair Value Option and Equity Instrument Designation under Ind AS 109

Updated 5 October 2026 · Fact-checked

Ind AS 109 lets you make two irrevocable designations at initial recognition. The fair value option puts an asset or liability at FVTPL if that removes or reduces an accounting mismatch. The FVOCI election covers equity investments not held for trading: fair value changes go to OCI and are never recycled to profit or loss. Dividends still go to profit or loss.

Understand Fair Value Option and Equity Instrument Designation

Ind AS 109 sorts financial assets and liabilities into default categories. Debt assets go by business model and cash flow test. Equity investments default to FVTPL. Most liabilities default to amortised cost. Two designations let you override these defaults.

Fair value option (FVO). At initial recognition, you may designate a financial asset, a financial liability, or a group of them at FVTPL. For a financial asset, the option is available only to eliminate or significantly reduce an accounting mismatch. A mismatch arises when assets and liabilities, or gains and losses on them, are measured on different bases. Example: a liability's cost is linked to an asset's return, but one is at amortised cost and the other at fair value.

For a financial liability, the same mismatch condition applies. Two further routes are mainly relevant to liabilities. First, a group of financial liabilities, or of assets and liabilities, that is managed and evaluated on a fair value basis, per a documented risk management or investment strategy. Second, a hybrid contract with an embedded derivative that would otherwise need separation, where the whole hybrid can be designated at FVTPL. A group of assets managed on a fair value basis is already at FVTPL through the business model, so it is not a separate designation route for assets.

The designation is irrevocable. For an asset that would otherwise be at amortised cost or FVOCI (debt), it is allowed only to remove a mismatch. You cannot use it just because you prefer fair value.

FVOCI election for equity. For an investment in an equity instrument that is not held for trading and is not contingent consideration recognised by an acquirer in a business combination, you may irrevocably elect at initial recognition to present fair value changes in OCI. The choice is made instrument by instrument, not for the whole portfolio.

Under this election, fair value gains and losses go to OCI and are never reclassified to profit or loss, even on sale. You may transfer the cumulative amount within equity, for example to retained earnings. No impairment loss is recognised for these equity investments. Dividends are recognised in profit or loss when the right to receive them is established, the inflow is probable and the amount is reliably measurable, unless they clearly represent a recovery of part of the investment's cost.

For liabilities designated at FVTPL, the fair value change due to the entity's own credit risk goes to OCI, unless that creates or enlarges an accounting mismatch in profit or loss. If so, the whole change goes to profit or loss. Amounts in OCI from own credit are not recycled, but may be transferred within equity.

Key rules to remember

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.

How to solve Fair Value Option and Equity Instrument Designation questions

Use this order for any question on designation or election.

1Identify the instrument: debt asset, equity investment or liability.
2Check whether it is held for trading or is an acquirer's contingent consideration. If yes, the FVOCI election is not available.
3For FVO, test the condition. For an asset, only a mismatch qualifies. For a liability, a mismatch, a fair value managed group or an embedded derivative qualifies. State the mismatch in one line.
4Confirm timing: both choices are made at initial recognition and cannot be reversed later.
5Measure initially: FVTPL at fair value with costs expensed; FVOCI equity at fair value plus costs.
6Measure subsequently at each reporting date: apply the fair value change to P&L or OCI as per the designation.
7Treat dividends in P&L. On sale, take the gain or loss to OCI only, with no recycling, and mention any transfer within equity.
8Conclude with the effect on profit, OCI and total equity.

Quickest way: Three-question shortcut

When to use it: Use in MCQs and short-note questions with limited time.

Equity, not held for trading? FVOCI is possible. Otherwise it is FVTPL.
Liability or debt asset? FVTPL is possible for a mismatch. Only liabilities also have the fair value managed group and hybrid routes.
Where does it go? Gain or loss in OCI means no recycling and no impairment. Dividend always goes to P&L.

Common mistakes in Fair Value Option and Equity Instrument Designation

Recycling the OCI gain to profit or loss when the equity investment is sold.
Students carry over the rule for FVOCI debt instruments.
Fix: Equity FVOCI is never recycled. Only a transfer within equity is allowed.
Taking dividends on FVOCI equity to OCI.
Students assume all returns follow the fair value change.
Fix: Dividends go to P&L, unless they clearly recover part of the cost.
Applying the FVOCI election to shares held for trading.
Students ignore the 'not held for trading' condition.
Fix: Check the purpose of holding first. Held for trading means FVTPL.
Treating the designation as reversible at the next reporting date.
Students confuse it with reclassification of debt assets after a business model change.
Fix: Both choices are irrevocable. Equity investments are never reclassified.
Expensing transaction costs on an FVOCI equity investment.
Students copy the FVTPL rule.
Fix: Add costs to the initial fair value for FVOCI. Expense them only for FVTPL.
Sending the whole fair value change on an FVO liability to P&L.
Students overlook the own credit rule.
Fix: Split the change: own credit part to OCI, the rest to P&L, unless a mismatch arises.

Worked examples

Example 1

On 1 April 2026, Alpha Ltd bought 10,000 shares of Beta Ltd at ₹200 each, paying brokerage of ₹20,000. The shares are held for long-term strategic purposes, not for trading. Alpha irrevocably elected FVOCI. At 31 March 2027, the fair value is ₹230 per share. Beta paid a dividend of ₹5 per share in February 2027. On 30 September 2027, Alpha sold all the shares at ₹250 per share. Show the accounting.

Show the solution

Eligibility: the shares are not held for trading, so the FVOCI election is allowed.
Initial cost: 10,000 × ₹200 = ₹20,00,000, plus brokerage ₹20,000 = ₹20,20,000.
At 31 March 2027: fair value = 10,000 × ₹230 = ₹23,00,000. Gain = ₹23,00,000 − ₹20,20,000 = ₹2,80,000, recognised in OCI.
Dividend: 10,000 × ₹5 = ₹50,000, recognised in P&L.
On sale: proceeds = 10,000 × ₹250 = ₹25,00,000. Gain from the last fair value = ₹25,00,000 − ₹23,00,000 = ₹2,00,000, recognised in OCI.
Cumulative OCI = ₹2,80,000 + ₹2,00,000 = ₹4,80,000. This equals ₹25,00,000 − ₹20,20,000. It is not recycled to P&L. It may be transferred within equity to retained earnings.

Answer: OCI gain is ₹2,80,000 in 2026-27 and ₹2,00,000 in 2027-28, a cumulative ₹4,80,000 that is never recycled to P&L. Dividend of ₹50,000 goes to P&L in 2026-27. Brokerage of ₹20,000 is part of cost.

Example 2

Gamma Ltd issues a ₹10,00,000 loan whose repayment is linked to the fair value of a portfolio of quoted bonds it holds. The bonds are classified at FVTPL. Without designation, the loan would be at amortised cost, so profit would swing with the bonds alone. At year-end the bonds' fair value rises by ₹60,000. The loan's fair value rises by ₹55,000, of which ₹5,000 is due to an improvement in Gamma's own credit risk. Advise on the designation and the treatment.

Show the solution

Mismatch: the bonds are at FVTPL, while the loan at amortised cost would not show the matching movement. This is an accounting mismatch.
Designating the loan at FVTPL removes the mismatch. This is allowed at initial recognition and is irrevocable.
Bonds: gain of ₹60,000 goes to P&L.
Loan: the fair value change is a rise of ₹55,000, which is a loss for a liability. Gamma's own credit risk improved, which raises the fair value of the liability, so ₹5,000 is the own credit part. The rest, linked to the bond return, is ₹55,000 − ₹5,000 = ₹50,000.
Mismatch test: compare P&L with the ₹5,000 in OCI against P&L with it in P&L. If it were in P&L, the loan loss would be ₹55,000 against a bond gain of ₹60,000, a net gain of ₹5,000. The bonds do not move with Gamma's own credit risk, so putting ₹5,000 in P&L would add a movement with no matching item and would create a mismatch. Putting it in OCI does not create or enlarge a mismatch. The ₹10,000 gap between the bond gain and the bond-linked loan loss exists whichever way the ₹5,000 is shown. So ₹5,000 goes to OCI.
P&L: ₹60,000 bond gain − ₹50,000 loan loss = ₹10,000 net gain. OCI: ₹5,000 own credit loss. Total equity effect = ₹10,000 − ₹5,000 = ₹5,000 net gain, which equals ₹60,000 − ₹55,000.

Answer: Designating the loan at FVTPL is valid. P&L shows a bond gain of ₹60,000 and a loan loss of ₹50,000, a net gain of ₹10,000. OCI shows a ₹5,000 own credit loss from improved credit risk, with no recycling. Showing it in OCI does not create or enlarge a P&L mismatch, because the bonds do not move with Gamma's own credit risk and the ₹10,000 residual arises either way. If OCI presentation did create or enlarge a mismatch, the full ₹55,000 would go to P&L.

Exam tips

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'.
Mention irrevocability and the timing at initial recognition in every theory answer.

Practice questions from Classification and Measurement of Financial Assets and Financial Liabilities

Fair Value Option and Equity Instrument Designation in other exams

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

Fair Value Option and Equity Instrument Designation: frequently asked questions

Can I designate an equity investment at FVOCI after initial recognition?

No. The election is made at initial recognition and is irrevocable. It applies instrument by instrument.

Is the gain on sale of FVOCI equity shares taken to profit or loss?

No. Fair value changes stay in OCI, including at sale. You may transfer the cumulative amount within equity, for example to retained earnings.

When can I use the fair value option?

You can use it at initial recognition. For a financial asset, it is allowed only when it removes or significantly reduces an accounting mismatch. For a financial liability, it also fits groups managed on a fair value basis and hybrid contracts with embedded derivatives. Once chosen, it cannot be revoked.

Do FVOCI equity investments get impairment?

No. Impairment requirements do not apply to equity investments, since fair value changes already flow through OCI.