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

A bank holds USD 200 million of securities in a fair value through other comprehensive income (FVOCI) category. Market yields rise and the portfolio's fair value falls by USD 8 million. Ignoring taxes, what is the immediate effect of this decline?

Net income is unchanged and equity falls by USD 8 million. Under FVOCI, unrealized fair value changes go to other comprehensive income, which is part of equity, bypassing the income statement until realization. Only fair value through profit or loss accounting would reduce net income immediately.

  1. ANet income falls by USD 8 million and equity is unchanged
  2. BNet income is unchanged and equity falls by USD 8 million through OCICorrect
  3. CNeither net income nor equity changes until the securities are sold
  4. DNet income and equity both fall by USD 8 million

Explanation

Under FVOCI, fair value changes are recorded in other comprehensive income, which is part of equity, not in net income. So equity falls by USD 8 million while net income is unchanged. Option D would apply to fair value through profit or loss. Option A has the wrong location, and option C describes amortized cost.

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