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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Accounting for corporate finance: International Financial Reporting Standards: IAS 39: classification of financial assets and financial liabilities: fair value through profit and loss: accounting periods since 1 January 2006

FVTPL designation

Under IAS 39, an entity may, on initial recognition, designate a financial asset or financial liability as FVTPL when doing so results in more relevant information. A designation of a financial instrument as FVTPL will result in more relevant information when either:

  • it eliminates or significantly reduces a measurement or recognition inconsistency (an accounting mismatch) that would otherwise arise; or
  • a group of financial instruments is managed and its performance evaluated on a fair value basis, in accordance with a documented risk management strategy and information about the group of financial instruments is provided internally on that basis to the entity’s key management personnel.

Examples of situations in which either an accounting mismatch may arise, or a group of financial instruments can be viewed as being managed and evaluated on a fair value basis, are included in the IAS 39 application guidance.

In addition to the above situations, an entity may designate a contract that contains one or more embedded derivatives as a financial asset or financial liability at fair value through profit and loss unless:

  • the embedded derivative does not significantly modify the cash-flows required by the contract; or
  • it is clear that separation of the embedded derivative is prohibited (for example, a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost).

There are in addition various disclosure requirements and complex transition rules.