#18 RECLASSIFICATION OF FINANCIAL ASSETS

FINANCIAL ACCOUNTING AND REPORTING                                                  

RECLASSIFICATION OF FINANCIAL ASSETS

Conditions for Reclassification of Financial Assets

Under PFRS 9, reclassification of financial assets is required if, and only if, the objective of the entity’s business model for manages those financial assets changes.

Timing of Reclassification of Financial Assets

If the entity determines that its business model has changed in a way that is significant to its operations, then it reclassifies all affected assets prospectively from the first day of the next reporting period (the reclassification date). Prior periods are not restated.

Original Category	New Category	Accounting Impact
Amortized cost	FVPL	Fair value is measured at reclassification date. Difference from carrying amount should be recognized in profit or loss.
FVPL	Amortized Cost	Fair value at the reclassification date becomes its new gross carrying amount
Amortized cost	FVOCI	Fair value is measured at reclassification date. Difference from amortized cost should be recognized in OCI. Effective interest rate is not adjusted as a result of the reclassification.
FVOCI	Amortized cost	Fair value at the reclassification date becomes its new amortized cost carrying amount. Cumulative gain or loss in OCI is adjusted against the fair value of the financial asset at reclassification date.
FVPL	FVOCI	Fair value at reclassification date becomes its new carrying amount.
FVOCI	FVPL	Fair value at reclassification date becomes carrying amount. Cumulative gain or loss on OCI is reclassified to profit or loss at reclassification date

Let us assume the following amounts for cost, fair value and amortization from 2016 to 2018.  All amounts have no basis for computation and have been simplified for expediency.  The original cost of the financial asset is 4,600,000 with a face value of 5,000,000 and the following information has been gathered at the end of the year on December 31, 2016, 2017 and 2018.

	12/31/16	12/31/17	12/31/18
Fair Value	5,200,000	5,400,000	5,500,000
Amortization on original cost	50,0000	70,000	90,000
Amortization on 12/31/2016 FV		40,000	60,000
Amortization on 12/31/2017 FV			70,000

KEY OBSERVATIONS

Ø  The financial asset was acquired at a 400,000 discount (5,000,000 – 4,600,000) therefore the amortization of 50,000, 70,000 and 90,000 shall be added to the carrying amount of the asset if AC or FVOCI shall be the classification.

Ø  If the fair value on 12/31/2016 and 12/31/17 shall be used in the examples, the amortization of 40,000 and 60,000 for 2017 and 2018, respectively and 70,000 for 2018 shall be deducted from the carrying amount because the fair value represents a premium.

Ø  Let us assume that the business model changes in 2017, therefore the financial asset shall be accounted for using the rules for the original classification until 12/31/2017 because the reclassification date shall be 1/1/2018.

Ø  We will also forego the entry for the nominal interest and the entire effective interest and journalized the amortization only in the succeeding examples.

AMORTIZED COST TO FVPL					FVPL TO AMORTIZED COST
12/31/2016					12/31/2016
FA at AC		50,000			FA at FVPL	600,000
Interest Income		50,000			Unrealized gain	600,000
12/31/2017					12/31/2017
FA at AC		70,000			FA at FVPL	200,000
Interest Income		70,000			Unrealized gain	200,000
1/1/2018					1/1/2018
FA at FVPL		5,400,000			FA at AC	5,400,000
FA at AC		4,720,000			FA at FVPL	5,400,000
Unrealized Gain (P/L)		680,000
					12/31/2018
					Interest Income	70,000
					FA at AC	70,000
AMORTIZED COST TO FVOCI					FVOCI TO AMORTIZED COST
12/31/2016					12/31/2016
FA at AC		50,000			FA at FVOCI		50,000
Interest Income		50,000			Interest Income		50,000
					FA at FVOCI		550,000
					Unrealized gain – OCI		550,000
12/31/2017					12/31/2017
FA at AC		70,000			FA at FVOCI		70,000
Interest Income		70,000			Interest Income		70,000
					FA at FVOCI		130,000
					Unrealized gain – OCI		130,000
1/1/2018					1/1/2018
FA at FVOCI		5,400,000			FA at AC		5,400,000
FA at AC		4,720,000			FA at FVOCI		5,400,000
Unrealized Gain - OCI		680,000
					Unrealized gain - OCI		680,000
12/31/2018					FA at AC		680,000
Interest Income		70,000
FA at FVOCI		70,000			12/31/2018
FA at FVOCI		170,000			FA at AC		90,000
Unrealized gain - OCI		170,000			Interest Income		90,000
(5,500,000 – (5,400,000 – 70,000) = 170,000
FVPL TO FVOCI					FVOCI TO FVPL
12/31/2016					12/31/2016
FA at FVPL		600,000			FA at FVOCI		50,000
Unrealized gain		600,000			Interest Income		50,000
					FA at FVOCI		550,000
					Unrealized gain – OCI		550,000
12/31/2017					12/31/2017
FA at FVPL		200,000			FA at FVOCI		70,000
Unrealized gain		200,000			Interest Income		70,000
					FA at FVOCI		130,000
					Unrealized gain – OCI		130,000
1/1/2018					1/1/2018
FA at FVOCI		5,400,000			FA at FVPL		5,400,000
FA at FVPL		5,400,000			FA at FVPL		5,400,000
12/31/2018					Unrealized gain - OCI		680,000
Interest Income		70,000			Gain on FVPL		680,000
FA at AC		70,000
					12/31/2018
FA at FVOCI		170,000
Unrealized gain - OCI		170,000			FA at FVPL		100,000
					Unrealized gain (P/L)		100,000
(5,500,000 – (5,400,000 – 70,000) = 170,000

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