Accounting for gain or loss on sale of shares classified at FVOCI
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:
- On 1 October 20X1 when the shares were acquired:
-
Debit Other financial assets: CU 1 000
-
Credit Cash: CU 1 000
-
- 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
-
- 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
-
- 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.
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Dear Silvia,
our company had disposed shares to other company
what is the journal entries
Shanti,
some entries are above. If you want to have them with the specific numbers, you need to share them here.
Hello silvia
If a company buys equity shares in an unlisted company in foreigncurrency and decides to designate at fvoci. Will these share need to be revalued at the year end exch rate even though management do not have fair value at year end ie use level 3.
Please check BC4.153 (a)
Realized gain or loss on financial assets at FVOCI is never recognized in profit or loss but in OCI
Dear Hamad,
you are quoting Basis for Conclusion here, which is not a part of the standard itself, it is the reasoning process behind the final decision made. Please check relevant paragraph of approved standard, IFRS 9, 3.2.12. You will find the final decision and final rules there. Thanks.
As per 4.1.4 of ifrs 9 choice of FVTOCI specifically for equity instrument (it is mentioned in the standard itself) is a irrevocable choice but what you are saying that in 5.7.10 it is permitted to reclassify but which is only for debt instruments (as in 5.7.10 there is no specific mention for equity instruments). If this is not the interpretation the standard itself will be a double standard.
Dear Rayhan,
you are right is saying that par. 5.7.10 applies to debt instruments. However, let me bring up the paragraph 3.2.12, that applies to all financial assets regardless their classification: “On derecognition of a financial asset in its entirety, the difference between: (a) the carrying amount (measured at the date of derecognition) and
(b) the consideration received (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss.”
Having that said, it is true that all subsequent revaluations to FV shall be recognized in OCI and can be transferred to retained earnings at derecognition; however, profit or loss on the derecognition is recognized in profit or loss anyway.
Dear Silvia,
The paragraph 3.2.12 is a blanket paragraph that deals with all sorts of financial assets. However, an exception to that rule is 5.7.1(b) which reads as follows:
“A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss unless:
(b) it is an investment in an equity instrument and the entity has elected to present gains and losses on that investment in other comprehensive income in accordance with paragraph 5.7.5;”
I believe that for the equity instruments, an gain or losses subsequently will end up in OCI if they have initially been classified as FVOCI.
Hisham,
I believe you are speaking about two different items here:
1) Profit or loss on derecognition – which is covered by the paragraph 3.2.12; and
2) Subsequent measurement to the fair value – which is covered by the paragraph 5.7.1.
Having that said – if you happen to sell the FVOCI share at derecognition BELOW its fair value (which is the case in the above article), then yes, you do the remeasurement to its fair value on the derecognition date via FVOCI – that is par. 5.7.1 as you quoted, and then any difference between the carrying amount (equal to FV) and the sales price goes in profit or loss in line with the derecognition paragraph 3.2.12.
If you however sell the FVOCI at fair value, then sure, all FV remeasurement will just be in OCI.
And, in my humble opinion, it is quite logical to present pure FV changes in FVOCI (as the name says, FAIR VALUE THROUGH OCI), and any difference from the realized sales price and FV in profit or loss as required by the derecognition rules, because, believe it or not, companies sell assets below or above fair value quite often.
Please note that 5.7.1 does NOT override 3.2.12.
I need to add that this example is quite hypothetical and many would argue that the sales price at derecognition is necessarily fair value. But it is not the case in this example.