IFRS

Journal Entries for Financial Assets and Financial Liabilities held at Fair Value Through Profit or Loss (FVTPL) under IFRS 9

IFRS 9 requires changes in fair value on financial liabilities designated as at FVTPL to be split into:

  • the amount of change in fair value attributable to changes in credit risk of the liability, (presented in OCI) and
  • the remaining amount (presented in P&L).

The new guidance allows the recognition of the full amount of change in the fair value in profit or loss only if the presentation of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in the P&L. That determination is made at initial recognition and is not reassessed.

For the purposes of this illustration, we’ll pretend none of the change in value is due to a change in credit risk.

Journal entries

Increase in value of asset/decrease in liability

The journal entry to recognise an increase in the fair value of a financial asset, or the decrease in fair value of a financial liability is:

DR Financial Asset/Financial Financial Liability (SOFP) XX
CR    Increase in Fair Value (Income Statement) XX

Next, we’ll recognise the deferred tax implications of the fair value gain.

DR Income Tax Expense (Income Statement) XX
CR    Deferred Tax Liability (SOFP) XX
 

Decrease in value of asset/increase in liability

The journal entry to recognise an decrease in the fair value of a financial asset, or the increase in fair value of a financial liability is:

DR Decrease in Fair Value (Income Statement) XX
CR    Financial Asset/Financial Financial Liability (SOFP) XX

Finally we must recognise the tax effect of the fair value loss on the financial instruments:

DR Deferred Tax Liability (SOFP) XX
CR    Income Tax Expense (Income Statement) XX