Lesson 3 of 6 · 14 min
Financial instruments: classification and measurement
A financial asset is carried at amortised cost or at fair value, and when it is at fair value the unrealised gains go either to profit or loss or to other comprehensive income; the classification decides which.
In short
- A financial instrument is a contract that creates a financial asset for one party and a financial liability or equity instrument for another. Derivatives derive their value from an underlying and need little or no initial investment.
- Amortised cost = initial amount − principal repaid ± amortised discount or premium − impairment. Fair value = exit price in an orderly transaction.
- IFRS amortised cost: cash flows are solely principal and interest on set dates and the business model is to hold to collect. US GAAP equivalent: held-to-maturity.
- IFRS FVOCI: debt held to collect *and* sell (US GAAP: available-for-sale debt), plus equities under an irrevocable election (IFRS only). Unrealised gains → OCI → AOCI in equity.
- FVPL: everything else under IFRS (or by election); under US GAAP all equity investments without significant influence and trading debt securities. Unrealised gains → income → retained earnings.
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