AFS financial assets

Question

the entity hold AFS financial assets. Although the AFS assets are quoted in a local stock exchange, cause of luck of transactions in market  the AFS financial assets are measured at cost (as it was difficult to asses fair value through periods after acquisition).

In the reporting period non-stock exchange  transaction has occurred, that was indicator of impairment of AFS asset.

How to account the AFS assets?  Am i required to change accounting policy (cause my AFS in previous period was measured at cost, now i know the fair value) where have  to I  recognize changes in cost/fair value?

Comments

First tell me the nature of AFS assets.

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it is 1.7% in other entity's shares.

Answer 1

I would try to explain you again

A financial instrument should be measured initially at its fair value. This is usually 
the fair value of the consideration given or received (In your case the amount paid to acquire equity would be considered as fair value of that equity).

Transaction costs (for example, a dealer’s fee) might be incurred on initial recognition of a financial instrument. The accounting treatment of these fees depends on the subsequent accounting treatment applied to the financial asset or financial liability in question.

Transaction costs are expensed immediately in the statement of profit or loss if the financial asset or financial liability is subsequently measured at fair value with gains and losses recognised in the statement of profit or loss. Otherwise the transaction cost is capitalised as part of the carrying amount of the 
financial asset or financial liability on initial recognition. (Its upto you to decide weather you have incurred any cost or not).

After initial recognition financial assets (financial liabilities) are measured either 
at: 
  fair value; or 
  amortised cost. 

As per my understanding  You held AFS for Trading purpose, then for subsequent measurement, you can choose to treat AFS as ‘at fairvalue through profit or loss.

For these purpose following are entries...

Initial recognition                       Dr (Rs.)                 Cr (Rs.)

AFS financial asset                   XXXX
Cash                                                                     XXXX

Subsequent measurement         Dr (Rs.)                 Cr (Rs.)

AFS financial asset                     XXXX 
Other comprehensive income       XXXX                    XXXX

Disposal                                    Dr (Rs.)                 Cr (Rs.)

Cash                                          XXXX
AFS financial asset                                                  XXXX 
Statement of profit or loss            XXXX                    XXXX

(Other comprehensive income        XXXX 
Statement of profit or loss                                          XXXX

Being: Reclassification adjustment arising on disposal of an AFS 
financial asset. )

Answer 2

Here is yours answer

First we need to know how to classify this Financial Asset. Following is the guideline available for classification of financial assets.

A financial asset shall be measured at amortised cost if both of the

following conditions are met:(a) the financial asset is held within a business model whose objective

is to hold financial assets in order to collect contractual cash flows and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met: (a) the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

After deciding where our asset would fall in any of above mentioned conditions, now we would decide how to measure financial assets at Initial stage

Initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss,transaction coststhat are directly attributable to the acquisition or issue of the financial asset or financial liability.

For subsequent Measurement, an entity shall measure a financial asset at:

1. amortised cost; (b) fair value through other comprehensive income; or (c) fair value through profit or loss.

Now at initial stage if we measured asset at Cost, then we have to concept of change in policy.

Comments

If i change policy, it means to do restatement of prior years figure, but previous year it was difficult to determine fair value of AFS assets.