Transition Provisions for Classification and Measurement under Ind AS 109

Understand Transition Provisions for Classification and Measurement

Key rules to remember

Date of initial application

Date of initial application = beginning of the reporting period in which the entity first applies Ind AS 109 classification and measurement

All transition assessments are anchored to this date. The rules sit in Section 7.2 of Ind AS 109. A first-time adopter follows Ind AS 101 and its date of transition.

Basis of classification at transition

Classification = f(business model at date of initial application, SPPI test on contractual terms)

Use facts and circumstances at that date. Past business model behaviour does not decide classification. Apply the result retrospectively.

Designation at FVTPL

Under para 7.2.8, designate a financial asset or liability at FVTPL if it eliminates or significantly reduces an accounting mismatch, judged on facts at the date of initial application

Applies to both financial assets and financial liabilities, and only on mismatch grounds. The designation is made on facts at the date of initial application.

Designation at FVOCI (equity)

Under para 7.2.9, an equity investment not held for trading may be designated at FVOCI on facts and circumstances at the date of initial application, and the classification is applied retrospectively. New carrying amount = fair value at that date; difference from previous carrying amount goes to the opening FVOCI reserve (other components of equity)

For an entity already applying Ind AS that newly applies Ind AS 109, not a first-time adopter under Ind AS 101. With comparatives not restated, the difference sits in opening equity. The designation is irrevocable once made. Ind AS 109 does not permit cost as a measurement basis for equity. Where a question says the investment was carried at cost under the prior framework the entity applied, state that as the assumption; that previous carrying amount is replaced by fair value at the date of initial application. Later fair value changes go to OCI and are not recycled to profit or loss. Dividends that are not a return of investment go to profit or loss. Without a designation, the investment is at FVTPL and the difference goes to opening retained earnings.

Revocation of earlier FVTPL designation

Must revoke a previous FVTPL designation if the accounting mismatch that led to it no longer exists. May revoke it if the mismatch still exists

Applies to financial assets and financial liabilities. Assessed on facts at the date of initial application. Revocation is compulsory when the mismatch has gone and optional when it remains.

Restatement and opening equity adjustment

Difference = new carrying amount − previous carrying amount, recognised in opening retained earnings (or other equity component) at the date of initial application

Applies where prior periods are not restated. Show tax effect separately if tax applies.

Asset previously at fair value, now at amortised cost

Apply amortised cost retrospectively from initial recognition, using the original cost and the original effective interest rate. Use fair value at the date of initial application as the new gross carrying amount only if retrospective application is impracticable

Face value is never the carrying amount. Any earlier FVTPL designation is revoked where applicable. A financial liability moving the same way follows the same logic: retrospective amortised cost, and fair value at that date as the new amortised cost only if retrospective application is impracticable.

Impracticable retrospective effective interest method

If impracticable, fair value at the date of initial application = new gross carrying amount (asset) or new amortised cost (liability)

Use only when retrospective application is impracticable. If the question does not say so, apply the effective interest method retrospectively or state your assumption.

How to solve Transition Provisions for Classification and Measurement questions

1. 1Fix the date of initial application from the facts: the start of the reporting period in which Ind AS 109 is first applied. Check whether the entity is a first-time adopter, in which case Ind AS 101 applies.
2. 2List each instrument and note its previous carrying amount and how it was previously measured.
3. 3Assess each financial asset's business model using facts at the date of initial application, then apply the SPPI test to its contractual terms.
4. 4Decide the Ind AS 109 category: amortised cost, FVOCI or FVTPL. Check for available designations, such as FVTPL for an accounting mismatch or FVOCI for an equity investment, and any revocations.
5. 5Measure each item at the date of initial application. Apply the new measurement retrospectively. For a move from fair value to amortised cost, use the original cost and effective interest rate. Use fair value as the new carrying amount only if retrospective application is impracticable, and say so.
6. 6Compute the difference between previous and new carrying amounts and take it to opening retained earnings or the relevant reserve. Do not restate comparatives unless the question says so.
7. 7State the conclusion in provision-facts-conclusion form, naming the date, the test applied, the category and the equity adjustment.
8. 8Add tax and disclosure points only if the question asks for them.

Quickest way: Date, test, designate, adjust

Common mistakes in Transition Provisions for Classification and Measurement

• Classifying a financial asset by the business model followed in earlier years.

  Students assume retrospective application means judging past behaviour.

  Fix: Assess the business model on facts at the date of initial application. Then apply the resulting classification retrospectively.

• Restating comparative figures in every case.

  The word retrospective suggests full restatement.

  Fix: State that prior periods need not be restated. If they are not, the difference goes to opening retained earnings or another equity component at the date of initial application.

• Treating the FVOCI equity designation as recyclable or reversible.

  It is confused with debt instruments held at FVOCI.

  Fix: Say the equity designation is irrevocable and gains or losses in OCI are never recycled to profit or loss.

• Treating revocation of an earlier FVTPL designation as always optional, or as allowed only when the mismatch has gone.

  Students remember only one half of the rule and read it as either fully voluntary or fully mandatory.

  Fix: State that the entity must revoke a previous FVTPL designation if the accounting mismatch that led to it no longer exists, and may revoke it if the mismatch still exists. Assess it on facts at the date of initial application.

• Mixing up the date of initial application with the date of transition under Ind AS 101.

  Both dates appear in the same chapter group.

  Fix: Use the date of initial application for the Ind AS 109 transition paragraphs. First-time adopters use Ind AS 101 and the date of transition.

• Applying the classification rules to items already derecognised before the date of initial application.

  Students forget the scope limit of the transition rules.

  Fix: State that the requirements are not applied to items derecognised before that date.

Worked examples