The impact of AASB 9 on financial investments

AASB 9 Financial Instruments has been a project completed in sections over the past decade. Now that it is finally complete and applicable for reporting periods beginning on or after 1 January 2018[1], how will it affect you?

This article highlights the likely impact of one particular change resulting from the introduction of AASB 9, in relation to investments in equity instruments (which are not classified as a subsidiary, joint venture or associate).  Many not-for-profit, medium sized and private entities invest spare cash into the equity instruments of other entities.

Previously there were four categories under AASB 139:

  • Fair value through profit or loss

  • Held-to- maturity

  • Loans & receivables

  • Available-for-sale financial assets

AASB 9 has the following two categories for financial assets:

  • Amortised cost

  • Fair value.

For investments in equity instruments amortised cost will not be applicable and the fair value category must be applied.  Under this category, fair value gains or losses are recognised in profit or loss unless:

  • It is part of hedging relationship, or

  • It is an investment in an equity instrument (that is not held for trading) and the entity has made irrevocable election to present gains and losses on that investment in other comprehensive income.

Unless an entity makes the irrevocable election (outlined above) regarding the purchase of equity instruments, gains and losses will be recognised in profit or loss. Since the election to present gains and losses in other comprehensive income must be made on acquisition date, it is important for management to consider accounting policies and choices in advance of any purchase. Whilst the election is made on an item by item basis many entities choose to make a blanket policy choice that gains and losses on all investments in equity instruments will be presented in other comprehensive income. Others will need to document their choice on a case by case basis on acquisition.  It should be noted that this election is irrevocable and cannot be changed for the life of the item.
As AASB 9 permits entities to make an irrevocable election to present gains and losses on investments in equity instruments in other comprehensive income it reduces volatility within net profit for many and eliminates the perceived inconsistencies in accounting for available-for-sale financial assets under AASB 139.

Example 1


Stenson Ltd has acquired $150,000 worth of shares in Willett Ltd on 1 July 2015. At 30 June 2016 these shares were valued at $170,000. Stenson Ltd sold these shares on 1 November 2016 for $200,000.

Current AASB 139 treatment    
  2016 2017
  $ $
Other income 0 50,000
Net Profit 0 50,000
     
Other comprehensive income 20,000 (20,000)
Total Comprehensive income 20,000 30,000

 
The accounting implications under AASB 9 if Stenson Ltd has made the irrevocable election to present gains and losses on that investment in other comprehensive income are as follows.

AASB 9 OCI treatment    
  2016 2017
  $ $
Other income 0 0
Net Profit 0 0
     
Other comprehensive income 20,000 30,000
Total Comprehensive income 20,000 30,000

 
The accounting implications under AASB 9 if Stenson Ltd has made no election are as follows.

AASB 9 P&L treatment    
  2016 2017
  $ $
Other income 20,000 30,000
Net Profit 20,000 30,000
     
Other comprehensive income 0 0
Total Comprehensive income[2] 20,000 30,000

 

Example 2


Stenson Ltd has acquired $150,000 worth of shares in Town Ltd on 1 July 2015. At 30 June 2016 these shares were valued at $90,000. Stenson Ltd assessed these shares were impaired. Stenson Ltd sold these shares on 1 November 2016 for $100,000.

Current AASB 139 treatment    
  2016 2017
  $ $
Other expenses/income (60,000) 10,000
Net Profit (60,000) 10,000
     
Other comprehensive income 0 0
Total Comprehensive income (60,000) 10,000

 
The accounting implications under AASB 9 if Stenson Ltd has made the irrevocable election to present gains and losses on that investment in other comprehensive income are as follows.

AASB 9 OCI treatment    
  2016 2017
  $ $
Other income 0 0
Net Profit 0 0
     
Other comprehensive income[3] (60,000) 10,000
Total Comprehensive income (60,000) 10,000

 
The accounting implications under AASB 9 if Stenson Ltd has made no election are as follows.

AASB 9 P&L treatment    
  2016 2017
  $ $
Other expenses/income (60,000) 10,000
Net Profit (60,000) 10,000
     
Other comprehensive income 0 0
Total Comprehensive income (60,000) 10,000

 
 


[1] Early adoption is permitted for reporting periods beginning after 24 July 2014.

[2] Total Comprehensive income is the same under each scenario

[3] Where an irrevocable election to present gains and losses on an investment in an equity instrument in other comprehensive income has been made, all movements in fair value of that instrument go through other comprehensive income regardless of whether the investment was impaired or not.