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Chapter 1
The Theoretical Framework – Recognition of Financial Instruments
1.5 THE FAIR VALUE OPTION
ОглавлениеThe fair value option is an option to designate financial assets or financial liabilities at FVTPL. The election is available only on initial recognition and is irrevocable. In the case of financial assets, the FVO is available for instruments that would otherwise be mandatorily recognised at amortised cost or at FVOCI, being permitted only if:
• it eliminates or significantly reduces a measurement or recognition inconsistency (an accounting mismatch).
In the case of financial liabilities, the FVO is available for instruments that would otherwise be mandatorily recognised at amortised cost, being permitted only if:
• it eliminates or significantly reduces an accounting mismatch; or
• a group of financial liabilities (or financial assets and financial liabilities) is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and the information about the group is provided internally on that basis to the entity's key management personnel; or
• a contract contains one or more embedded derivatives and the host is not a financial asset, in which case an entity may designate the entire hybrid contract at FVTPL unless the embedded derivative is insignificant or it is obvious that separation of the embedded derivative would be prohibited.
The FVO is only available on initial recognition of the financial asset or liability. This requirement may create a problem if the entity enters into offsetting contracts on different dates. A first financial instrument may be acquired in the anticipation that it will provide a natural offset to another instrument that has yet to be acquired. If the natural hedge is not in place at the outset, IFRS 9 would not allow the first financial instrument to be recorded at FVTPL, as it would not eliminate or significantly reduce a measurement or recognition inconsistency. Additionally, to impose discipline, an entity is precluded from reclassifying financial instruments in or out of the fair value category, unless (in the case of financial assets) the business model for those assets changes.
Accounting Mismatch
Sometimes a particular market risk that affects a financial asset or a financial liability is hedged with another financial instrument that behaves in an opposite way to movements in such market risk (i.e., an increase in the market variable would increase the fair value of one of the two items while decreasing that of the other item). In this case, the entity would be interested in measuring the financial asset or financial liability at FVTPL to benefit from their natural offsetting. The entity could apply the FVO because it will eliminate or significantly reduce the measurement or recognition inconsistency that would otherwise arise from measuring these assets or liabilities, or recognising the gains and losses on them, on different bases.