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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank holds a bond portfolio classified as fair value through other comprehensive income (FVOCI). Market yields rise sharply, producing a USD 40 million unrealised loss on the portfolio. Which statement best describes the effect on the bank's reported figures?

Under FVOCI, the bonds are carried at fair value and the USD 40 million unrealised loss is recorded in other comprehensive income. This reduces equity immediately but does not hit profit or loss until the bonds are sold, aside from any expected credit loss provisions.

  1. AThe loss is recognised in other comprehensive income, reducing equity but not profit or loss at that pointCorrect
  2. BThe loss is ignored until the bonds are sold, so equity is unchanged
  3. CThe loss reduces net income immediately and has no effect on OCI
  4. DThe loss is recorded only as a footnote because FVOCI bonds are carried at cost

Explanation

FVOCI assets are carried at fair value on the balance sheet, and unrealised changes in fair value go to OCI, which reduces equity. Profit or loss is unaffected until sale (recycling for debt instruments), apart from credit loss allowances and interest income. Therefore the net income option is wrong.

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