Why “listed” does not determine the accounting
A common misconception is that if a bond is traded on an exchange, it must be valued at fair value through profit or loss (FVTPL). However, IFRS
9 does not support this conclusion.
Listed bonds are common investments held by universities, investment entities, public entities, and corporates. The accounting for a listed bond is determined using the same principles that apply to any other debt instrument, namely:
- Do the contractual cash flows meet the SPPI test?
- What is the entity's business model for managing the asset?
The listing of a bond indicates that it can be traded in an active market, but it does not dictate its classification or measurement.
IFRS 9 Classification
Step 1: Assess the SPPI Test
A debt instrument meets the SPPI test when its contractual cash flows represent solely payments of principal and interest on the outstanding principal amount, consistent with a basic lending arrangement.
Typical listed bonds often satisfy the SPPI test because they provide:
- repayment of principal at maturity; and
- periodic interest
However, a debt instrument will fail the SPPI test if it contains contractual features that introduce exposure to risks or volatility unrelated to a basic lending arrangement, such as:
- equity-linked returns;
- commodity-linked returns;
- leveraged returns;
- inverse floating rates; or
- other features inconsistent with a basic lending
Where the SPPI test is failed, the instrument must be measured at
FVTPL, irrespective of the entity’s business model.
Step 2: Assess the Business Model
If the bond passes the SPPI test, classification depends on how the portfolio is managed.
Hold to Collect
Where the objective is to collect contractual cash flows over the life of the bond, the bond is measured at amortised cost.
Examples:
- Treasury investments held to
- Cash management portfolios focused on earning interest
Hold to Collect and Sell
Where both collecting contractual cash flows and selling assets are integral to achieving the objective, the bond is measured at FVOCI.
Examples:
- Liquidity
- Investment portfolios requiring periodic
Other Business Models (Including Trading)
Where the bond is managed on a fair value basis or held for trading purposes, it is measured at FVTPL.
Examples:
- Active trading
- Portfolios evaluated primarily on fair value
Does Your Reporting Support Your Classification?
Preparers should carefully consider whether its presentation is consistent with the stated business model.
- Return on investments: for FVPL instruments, interest is not always a separate investment return, but the total movement is a fair value gain.
- When investments are held for trading purposes, they are typically classified as current assets, irrespective of the maturity date of the investment.
