ACCA SBR Tips - Fair Value Option per IFRS 9 Financial Instrument by Steve Chen, FCCA

If you studied/are studying ACCA FR/SBR, you may have heard of 'fair value option on financial asset/liabilities' - to avoid accounting mismatch. If you are not familiar with this concept, please let me explain.

Suppose a company issues debt (gets funds and financial liability) and then lends funds to customers (funds become financial assets). The fair value of the issued debt is affected by the changes in its credit ratings. If the business originally aims to collect interest and redemption payments from customers, the financial asset would be measured on an amortised cost basis.

In this case, credit rating changes affect fair value of issued debt(liability) but not financial asset value(as it is measured at amortised cost). To put it simply, the fair value of issued debt may decrease by $1 million resulting in $1 million expense in the P/L with no corresponding increase in P/L gain from financial asset if the financial asset is still measured at amortised cost. Profits are therefore significantly fluctuated and investors decisions are severely affected.

To solve this problem, the company may designate both financial liability and asset at fair value through P/L (FVTPL) so that both changes in fair value of financial assets and liabilities can be taken to P/L to avoid accounting mismatch (the impact of accounting for one element on the accounts is different from the other).

This was the photo taken when I taught students at Guangdong University of Foreign Studies in 2020

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