Question

We have shares (equity instruments) purchased for CU 100. We classified them as at fair value through other comprehensive income (FVOCI), because we collect dividends from them, but occasionally we make profits from trading of these shares.

One year after purchase, the fair value of shares increased to CU 110. Then we sold these shares 2 months later for CU 115.

How shall we account for these transactions?
 

Answer

When you classify the investment in equity instruments at FVOCI, then all subsequent gains or losses resulting from the increase or decrease of fair value of these shares are presented in other comprehensive income (see IFRS 9 par. 5.7.5).

As a result, the difference of 10 (110 – 100) is presented in other comprehensive income.

When you sell an FVOCI asset, then the paragraph 3.2.12 applies. It means you need to recognize the difference between asset’s carrying amount measured at the date of derecognition and the consideration received in profit or loss.

Now the question is: did you sell the shares at their fair value or at the price different than their fair value?

Right before derecognition, you should remeasure your shares to their fair value because paragraph 3.2.12 of IFRS 9 requires calculating gain or loss based on carrying amount at the date of derecognition.

Any difference between the previous carrying amount and the fair value at the derecognition should be recognized in other comprehensive income.

Any remaining difference, that is between the fair value at the derecognition date and the sale price is recognized in profit or loss.

Please see IFRS 9 par. 5.7.5 and 3.2.12 for your reference.

Example

On 1 October 20X1, ABC purchased shares in DEF for CU 1 000. At 31 December 20X1, the fair value of these shares was CU 1 050. On 31 March 20X2, ABC sold these shares for CU 1 120. The fair value of shares on 31 March 20X2 was CU 1 130. ABC classified the shares at FVOCI.

Journal entries are:

  1. On 1 October 20X1 when the shares were acquired:

    • Debit Other financial assets: CU 1 000

    • Credit Cash: CU 1 000

  2. On 31 December 20X1 – the reporting date:

    • Debit Other financial assets: CU 50 (CU 1 050 – CU 1 000)

    • Credit Other comprehensive income: CU 50

  3. On 31 March 20X2 – to recognize the change in fair value:

    • Debit Other financial assets: CU 80 (CU 1 130 – CU 1 050)

    • Credit Other comprehensive income: CU 80

  4. On 31 March 20X2 – to recognize the derecognition of shares:

    • Debit Cash: CU 1 120

    • Debit Loss on derecognition of financial investments (in profit or loss): CU 10 (CU 1 120 – CU 1 130)

    • Credit Other financial assets: CU 1 130

You also need to transfer the other comprehensive income related to derecognized shares within equity to retained earnings. The amount will be equal to cumulative changes in fair value of these shares:

  • Debit Other comprehensive income: CU 130 (CU 50+CU 80)

  • Credit Retained earnings: CU 130

This entry is performed to transfer all gains or losses related to derecognized investments in distributable reserves (since not in every country the other comprehensive income is distributable) and also, not to show any components in equity related to items not shown in the balance sheet anymore.