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CFA Level II Exam · Intercorporate Investments

Investments in Financial Assets: IFRS 9 vs US GAAP

Updated 7 October 2026 · Fact-checked

Under IFRS 9, a passive investment is measured at amortized cost, FVOCI or FVTPL, depending on the business model and cash flow test for debt, or on an election for equity. Find the category in the vignette, then apply its rule for where gains, interest and impairment go.

Understand Investments in Financial Assets (IFRS 9 and US GAAP)

A financial asset investment is a passive holding. You have no significant influence or control, so you do not use the equity method or consolidate. You only report the investment's value and its income. The key question is where changes in value go: the income statement or other comprehensive income (OCI).

Under IFRS 9, debt securities are classified using two tests. First, the business model: hold to collect contractual cash flows, hold to collect and sell, or other. Second, the cash flow test: the cash flows must be solely payments of principal and interest (SPPI). Hold-to-collect plus SPPI gives amortized cost. Hold-to-collect-and-sell plus SPPI gives FVOCI. Anything else is FVTPL. An entity may irrevocably designate a debt asset as FVTPL at initial recognition if this removes an accounting mismatch.

Equity investments are FVTPL by default. For equity not held for trading, the entity may make an irrevocable election at initial recognition to use FVOCI. Under that election, fair value changes go to OCI and are never recycled to profit or loss. Dividends still go to profit or loss, unless they clearly repay part of the cost.

How each category flows through the statements: amortized cost carries the asset at cost adjusted for amortization of premium or discount, with interest income by the effective interest method. FVTPL puts unrealized gains and losses in profit or loss. Debt at FVOCI puts interest income, impairment and foreign exchange effects in profit or loss, and the remaining fair value change in OCI. On sale or derecognition, the accumulated OCI on FVOCI debt is recycled to profit or loss.

US GAAP differs. Debt securities are held-to-maturity (amortized cost), trading (fair value through net income) or available-for-sale (fair value through OCI for unrealized gains and losses). Equity securities with readily determinable fair values are measured at fair value through net income. Equity securities without readily determinable fair values may use a measurement alternative: cost, adjusted for impairment and for observable price changes. The available-for-sale category now applies to debt only.

Reclassification under IFRS 9 happens only when the business model changes, which is rare, and it applies prospectively. It is measured at fair value at the reclassification date. When you move between amortized cost and FVOCI, the effective interest rate is unchanged. When FVOCI moves to amortized cost, the cumulative OCI is removed against the asset's fair value, so the asset is carried as if it had always been at amortized cost. Reclassification is not allowed for equity FVOCI elections or for fair value option designations.

Key formulas to remember

IFRS 9 debt classification
Hold to collect + SPPI → amortized cost; Hold to collect and sell + SPPI → FVOCI; otherwise → FVTPL
The fair value option can override amortized cost or FVOCI to FVTPL at initial recognition to remove an accounting mismatch.
Interest income, amortized cost
Interest income = beginning carrying value × effective rate at purchase
Carrying value moves toward face value. Cash coupon = face value × coupon rate. Amortization = interest income − cash coupon.
Equity under IFRS 9
Default → FVTPL; irrevocable election (not held for trading) → FVOCI, with no recycling
Dividends go to profit or loss. Fair value changes go to OCI under the election.
US GAAP debt categories
HTM → amortized cost; Trading → fair value, gains in net income; AFS → fair value, unrealized gains in OCI
US GAAP equity securities with readily determinable fair values go through net income.
Reclassification of IFRS 9 debt
Allowed only on a change in business model; applied prospectively from the reclassification date, measured at fair value on that date
Prior gains or losses are not restated. Between amortized cost and FVOCI, the effective interest rate is unchanged. From FVOCI to amortized cost, cumulative OCI is removed against the asset's fair value.

How to solve Investments in Financial Assets (IFRS 9 and US GAAP) questions

Use this order for any item set on financial asset investments. Most mistakes come from skipping the classification step.

  1. 1Identify whether the investment is debt or equity, and the standard in use (IFRS 9 unless the vignette says US GAAP).
  2. 2For IFRS debt, read the business model and check SPPI. For equity, check for an FVOCI election. For US GAAP, read the intent: HTM, trading or AFS.
  3. 3Assign the category: amortized cost, FVOCI or FVTPL.
  4. 4Compute interest income as opening carrying value × effective rate, and the coupon as face × coupon rate.
  5. 5Work out the fair value change: closing fair value minus the carrying value, after any amortization.
  6. 6Place each item: interest and dividends, unrealized gains, impairment, and realized gains on sale. Decide profit or loss versus OCI.
  7. 7Check for reclassification or sale, and apply the rule for the date and amount.
  8. 8Answer the exact question: net income, total comprehensive income, equity, or an asset value. Check which one is asked.

Quickest way: Category-first shortcut

When to use it: Use when the question asks which line item or statement is affected, or how earnings differ across categories.

  1. Name the category first. Do not calculate yet.
  2. Ask: does the fair value change go to profit or loss? Only FVTPL (including assets designated under the fair value option) and US GAAP trading say yes.
  3. Interest income and dividends always go to profit or loss, except dividends that repay cost.
  4. Total comprehensive income is the same under FVTPL and FVOCI for the same fair value change. Only net income differs.
  5. Amortized cost ignores fair value changes entirely, apart from impairment.

Common mistakes in Investments in Financial Assets (IFRS 9 and US GAAP)

  • Putting unrealized FVOCI gains into net income.

    Students remember FVTPL and apply it to every fair value category.

    Fix: Fair value change on FVOCI goes to OCI. Only interest, impairment and foreign exchange effects on debt go to profit or loss.

  • Calculating interest income as face value × coupon rate.

    The coupon is the visible number in the vignette.

    Fix: Interest income is carrying value × effective rate for amortized cost and FVOCI debt. The coupon is only the cash received.

  • Recycling OCI gains on equity FVOCI to profit or loss on sale.

    Debt FVOCI recycles, and the two get mixed up.

    Fix: Equity FVOCI is never recycled. Debt FVOCI is recycled on derecognition.

  • Applying AFS to equities under US GAAP.

    Older material put equity in AFS.

    Fix: Under current US GAAP, equities with readily determinable fair values go through net income. AFS is debt only.

  • Treating reclassification as a free choice.

    Students think management can switch categories to manage earnings.

    Fix: Under IFRS 9, reclassification of debt needs a business model change and is prospective, at fair value on the reclassification date. The fair value option and equity FVOCI election are irrevocable.

  • Forgetting that premium or discount amortization changes carrying value.

    Students jump straight to fair value.

    Fix: Compute amortized cost for the year first. Then compare fair value to that carrying value to get the unrealized change.

Worked examples

Example 1

On 1 January, Delta Corp buys a bond with a face value of 1,000,000 and a 5% annual coupon for 1,000,000, so the effective rate is 5%. The business model is hold to collect and sell, and cash flows are SPPI. At year-end the fair value is 1,030,000. (1) What is the category? (2) What is interest income? (3) What is the amount in OCI?

Show the solution
  1. Hold to collect and sell with SPPI means the category is FVOCI.
  2. Interest income = 1,000,000 × 5% = 50,000, recognized in profit or loss. The coupon equals interest income, so there is no amortization.
  3. Carrying value before the fair value adjustment is 1,000,000. Fair value is 1,030,000.
  4. Unrealized gain = 1,030,000 − 1,000,000 = 30,000, recognized in OCI.

Answer: (1) FVOCI. (2) Interest income of 50,000 in profit or loss. (3) Unrealized gain of 30,000 in OCI.

Example 2

Echo Ltd holds an equity stake of 400,000 cost in a listed company, not held for trading. At year-end its fair value is 460,000, and Echo received dividends of 12,000. Compare net income and OCI under (a) the default IFRS 9 treatment and (b) an FVOCI election made at purchase. Ignore tax.

Show the solution
  1. (a) Default is FVTPL. The fair value gain is 460,000 − 400,000 = 60,000, in profit or loss.
  2. Under (a), net income effect = 60,000 + 12,000 dividends = 72,000. OCI effect = 0.
  3. (b) With the FVOCI election, the 60,000 gain goes to OCI and is never recycled.
  4. Under (b), dividends of 12,000 still go to profit or loss as income. Net income effect = 12,000. OCI = 60,000.
  5. Total comprehensive income is 72,000 under both.

Answer: (a) Net income up 72,000, OCI nil. (b) Net income up 12,000, OCI up 60,000. Total comprehensive income is 72,000 either way.

Exam tips

  • Read the vignette for the business model words: hold to collect, collect and sell, or trading. They decide the category.
  • Check the standard named. IFRS 9 and US GAAP give different treatment for equity and for AFS.
  • When asked about net income versus total comprehensive income, remember the FVTPL and FVOCI difference is only in net income.
  • Use the effective rate on carrying value for interest income. Watch for questions where the coupon is a distractor.
  • Look for reclassification clues: a change in business model, and the date. Measure the asset at fair value on that date, and remember the effective interest rate does not change between amortized cost and FVOCI.

Investments in Financial Assets (IFRS 9 and US GAAP): frequently asked questions

What is the difference between FVTPL and FVOCI under IFRS 9?

With FVTPL, all fair value changes go to profit or loss. With FVOCI, the fair value change goes to OCI, while debt interest income and impairment still go to profit or loss. Total comprehensive income is the same under both.

How do held-to-maturity and available-for-sale securities compare with IFRS 9?

Held-to-maturity under US GAAP is similar to IFRS 9 amortized cost. US GAAP available-for-sale debt is similar to IFRS 9 FVOCI debt. US GAAP trading is similar to FVTPL.

What is the difference between trading and available-for-sale securities?

Trading securities report unrealized gains and losses in net income. Available-for-sale debt securities report them in OCI. Both are carried at fair value on the balance sheet.

Can a company reclassify its investments freely?

No. Under IFRS 9, debt can be reclassified only when the business model changes, and it is applied prospectively at fair value on the reclassification date. Equity FVOCI elections and fair value option designations are irrevocable.