Under the previous standard (IAS 39), any movement in the fair value of financial liabilities designated at FVTPL, is always recognized in profit and loss.
IFRS 9 modifies this requirement to specify that the portion of the change attributable to changes in the entity’s own credit risk (i.e. the risk of default on the debt) is recognized in OCI, unless it creates or enlarges an accounting mismatch, in which case it is recognized in profit or loss.
This applies only to financial instruments that have been designated optionally by the entity at FVTPL, not to those which are required to be carried at FVTPL (e.g. derivatives).
ABC Ltd provides loans to customers and funds the loans by selling bonds in the market. The liability is designated as at fair value through profit or loss.
The bonds have a fair value decrease of $60 million in the year to 31 December 2018 of which $7 million relates to the reduction in ABC’s creditworthiness.
Under IFRS 9, the gain or loss in a period must be classified into:
- Gain or loss resulting from credit risk; and
- Other gain or loss.
IFRS 9 requires the gain or loss as a result of credit risk to be recognized in OCI, unless it creates or enlarges an accounting mismatch, in which case it is recognized in profit or loss.
The other gain or loss (not the result of credit risk) is recognized in profit or loss.
On derecognition any gains or losses recognized in OCI are not transferred to P/L, although the cumulative gain or loss may be transferred within equity.
The journal entry is as follows:
DR Financial Liability $60m
CR OCI $7m*
CR P/L $53m (b)
*FV change attributable to credit risk.