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CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity

Under IFRS 9, a company elects the fair value option for a bond it issued. During the year the company's own credit risk worsens, and the fair value of the liability falls as a result. The portion of the fair value change attributable to the company's own credit risk is most likely recognised in:

The own-credit-risk portion goes to other comprehensive income. IFRS 9 requires this for liabilities designated at fair value, so a company does not report profit simply because its creditworthiness declined; only the remaining fair value change flows through profit or loss.

  1. Aprofit or loss as a gain
  2. Bother comprehensive incomeCorrect
  3. Cretained earnings through a prior-period restatement

Explanation

For liabilities designated at fair value, IFRS 9 requires the change due to own credit risk to go to other comprehensive income, unless this creates an accounting mismatch in profit or loss. The remaining fair value change goes to profit or loss. Showing a gain in profit because of deteriorating credit is avoided.

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