Page 12 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

READING 14: INTERCORPORATE INVESTMENTS
Analysis of Investments in
Financial Assets
MODULE 14.3: FINANCIAL ASSETS, PART 2—IMPAIRMENTS, RECLASSIFICATIONS

1. Separate operating results from its investment results (e.g., interest, dividends, and gains and losses).

2. Remove nonoperating assets when calculating the return on operating assets ratio.

3. Use market values rather than book values for comparison purposes.

4. Investment results may be misleading because of inconsistent treatment of unrealized gains and losses.
• When security prices are increasing, Earnings under HFT > Earnings AFS
(unrealized gains are recognized in the income statement for a HFT but reported in stockholders’ equity for an AFS).

IFRS 9 New Standards for 2018
These new standards became effective for periods starting January 1, 2018.

Key changes: HFT, AFS and HTM no longer used; new terminology: amortized cost, fair value through profit or loss (FVPL), fair value through
other comprehensive income (FVOCI).
Reclassification Under IFRS 9
Amortized Cost Criteria (Debt Securities Only) Reclassification of equity securities under the new standards is not
1. Business model test: Debt securities are being held to collect permitted as the initial designation (FVPL or FVOCI) is irrevocable.
contractual cash flows.
2. Cash flow characteristic test: The contractual cash flows are either Reclassification of debt securities is permitted only if the business model
principal, or interest on principal, only. has changed. For example, unrecognized gains/losses on debt securities
carried at amortized cost and reclassified as FVPL are recognized in the
Fair Value Through Profit or Loss (for Debt and Equity Securities) income statement. Debt securities that are reclassified out of FVPL as
1. Debt securities may FVPL if held for trading, or if treatment at amortized measured at amortized cost are transferred at FV on the transfer date, and
cost results in an accounting mismatch. that fair value will become the carrying amount.
2. Equity HFT classified as FVPL. Others as either FV through profit or loss,
or FV through OCI. Once classified, the choice is irrevocable. Loan Impairment Under IFRS 9
3. Derivatives not used for hedging at FVPL. If an asset with embedded A key feature of IFRS 9 was that the incurred loss model for loan
derivative (e.g., convertible bonds), the whole asset is valued at FVPL. impairment was replaced by the expected credit loss model. This requires
companies to not only evaluate current and historical information about loan
Fair Value Through OCI (for Debt and Equity Securities) (including loan commitments and lease receivables) performance, but to
The accounting treatment under fair value through OCI is the same as also use forward-looking information. The new criteria results in an earlier
under the previously used available-for-sale classification.
recognition of impairment (12-month expected losses for performing loans
and lifetime expected losses for nonperforming loans).