Skip to content

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

A bank's treasurer is deciding how to classify a new purchase of government bonds. The bank intends to hold the bonds to collect contractual cash flows until maturity, and the cash flows are solely payments of principal and interest. Under IFRS 9, which measurement category is most appropriate, and what is the main consequence for reported earnings?

Bonds held to collect principal and interest, with solely-payments-of-principal-and-interest cash flows, are measured at amortised cost under IFRS 9. Market value fluctuations are not recognised in profit or loss or equity while held, which reduces earnings volatility but conceals unrealised losses.

  1. AAmortised cost; changes in market value do not affect profit or loss or equity while the bonds are heldCorrect
  2. BFair value through profit or loss; all market value changes go through income each period
  3. CFair value through other comprehensive income; unrealised gains are recognised in profit or loss
  4. DHeld for trading; the bonds must be marked to market daily with gains in regulatory capital

Explanation

A hold-to-collect business model with solely-payments-of-principal-and-interest cash flows leads to amortised cost under IFRS 9. Interim market price movements are not recognised in profit or loss or in equity. Fair value through profit or loss would apply to trading or non-qualifying instruments, and FVOCI places unrealised gains in OCI, not profit or loss.

Did you get it right without looking?

One question tells you little. A timed set on The Investment Function in Financial Services Management shows your real accuracy, how long you take and where you lose marks.

Practise The Investment Function in Financial Services ManagementFree diagnostic mock

More The Investment Function in Financial Services Management questions