LECTURE 3

FINANCIAL ASSETS VALUED ‘AT FAIR

VALUE THROUGH PROFIT OR LOSS’
• Lecture 3 will outline the following:
• Classification of financial assets valued ‘at fair value through
profit or loss’
• Initial measurement and subsequent measurement
• Example 1
• Example 2
• Question: Varsity Limited
Classification

• A financial asset will be classified as ‘at fair value through

profit or loss’ when it does not meet the criteria for
classification as amortised cost or fair value through other
comprehensive income.

IFRS 9.4.1.4
 IFRS
Classification 9.4.1.2A

Financial asset measured at ‘fair value through profit or loss’

will be held for trading if:
• It is acquired for the purpose of selling or repurchasing in the
near future;
• It is managed for short term profit making.
Example of held for trading financial assets:

Shares held for speculative purposes.

Initial and subsequent measurement

• Initial measurement:At fair value,excluding transaction costs.

• Subsequent measurement: At Fair value.
• Gains and losses on remeasurement are recognize in profit or
loss.

Paragraph 12.3.3 of the

prescribed textbook
 Example 1:Financial assets at fair value through profit or
loss
A financial asset classified as ‘at fair value through profit or loss’ is
acquired for R2 000. A purchase commission of R50 is paid in
respect of this transaction. Initially, the financial asset is recorded
at R2 000 and the R50 commission (transaction costs) is
expensed immediately since this is the prescribed treatment for
this type of financial asset in terms of IFRS 9.
At the next reporting date, the quoted market price of the asset is
R2 400. The asset will then be restated to the value R2 400 which
will result in a fair value adjustment of R400 (R2 400 – R2 000)
recognized in profit or loss. (e.g. debit the value of the Investment
in the SFP with R400 and credit the ‘Fair value adjustment
account’ in the SPL)
Example 2: Financial assets at fair value through
profit or loss
• On 1 January 20.19 a company purchased 5 000 shares in
Wurtenburg Ltd at R13,50 per share. Brokerage fees of R1 000
is incurred.
• The fair value on 31December 20.19,the end of the reporting
period, was R14 per share.
Comments:

On 1 January 20.19, the date of initial recognition, the investment in the shares is recognised
at the fair value of R13,5 per share.
According to IFRS 9, transaction costs is not included in the cost of an investment measured
at ‘ fair value through profit or loss’ and is therefore included as an expenses in the statement
of profit or loss.
Comments:

The subsequent measurement of a financial asset valued ‘at fair value through profit or loss’ is
at fair value. The fair value at the end of the reporting period is R14 per share. The value of the
investment in the accounting records must be R70 000 (R14 x 5 000 shares) on the reporting
year end 31 December 20.19.
The investment account in the Statement of Financial Position must be increased with R2 500
by debiting the latter account and crediting Fair Value adjustment account in the Statement of
Profit or Loss account. (Gains and losses are recognised in profit or loss.)
The amount of R2 500 is calculated as follows: [(R14-R13,50)] x 5 000
REQUIRED:
Journal entries for the following dates:
(a) 1 July 20.17
(b) 30 June 20.18
(c) 30 June 20.19
Answers are to comply with IFRS. Round all amounts to the nearest Rand. Show all calculations
clearly. Assume that all items and amounts are material except where the information clearly
indicates otherwise.
Clearly indicate which component, part, and/or item of the financial statements will be affected by
any journal entry.
Statement of Profit or loss: SPL;Other Comprehensive Income: OCI;
Statement of Changes in Equity: SCE; Statement of Financial Position: SFP