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  • Accounting Alert May 2021

Measurement of Financial Assets Under PBE IPSAS 41

In the February 2021 edition of Accounting Alert we noted that public benefit entities face substantial changes to accounting for financial instruments, due to PBE IPSAS 41 Financial Instruments (“PBE IPSAS 41”) replacing PBE IPSAS 29 Financial Instruments: Recognition and Measurement (“PBE IPSAS 29”) for financial reporting periods beginning on or after 1 January 2022.

Classification of financial assets

In the March 2021 edition of Accounting Alert we examined the classification of financial assets under PBE IPSAS 41.  In that article, we noted that, under PBE IPSAS 41, where a financial asset is a non-equity instrument such as a debt instrument, the default measurement approach is fair value through surplus or deficit, but measurement at amortised cost or at fair value through other comprehensive revenue and expense will occur if specified criteria are met:

If the instrument is: It may be measured at: If:
A non-equity instrument (for example, a debt instrument) Amortised cost It meets both (1) the contractual cash flow characteristics test and (2) the hold to collect management model test
  Fair value through other comprehensive revenue and expense It meets both (1) the contractual cash flow characteristics test and (2) the hold to collect and sell management model test

In the April 2021 edition of Accounting Alert we discussed the contractual cash flow characteristics test and the management model tests.

In the March 2021 edition of Accounting Alert we also noted that, where a financial asset is an equity instrument, the default measurement approach is fair value through surplus or deficit, with measurement at fair value through other comprehensive revenue and expense only permitted if specified criteria are met: 

If the instrument is: It may be measured at: If:
An equity instrument Fair value through other comprehensive revenue and expense It (1) is not held for trading and (2) an irrevocable election is made at initial acquisition

Those articles cover all aspects of the classification of financial assets under PBE IPSAS 41, with the categories of financial assets being:

If the instrument is: It may be measured at:
A non-equity instrument (for example, a debt instrument) Amortised cost
  Fair value through other comprehensive revenue and expense
  Fair value through surplus or deficit
An equity instrument Fair value through other comprehensive revenue and expense
  Fair value through surplus or deficit


Measurement of financial assets

The names of the financial asset classifications provide a great deal of information about the way in which each classification of financial assets is accounted for subsequent to initial recognition.  The table below summarises that information and information on the initial recognition of financial assets:

Financial asset Measurement at initial recognitio Measurement subsequent to initial recognition
A non-equity instrument carried at amortised cost Fair value plus transaction costs (with the exception of short-term receivables, which may be measured at the original invoice amount if the effect of discounting is immaterial) Amortised cost less impairment, with movements in value recognised in surplus or deficit
A non-equity instrument carried at fair value through other comprehensive revenue and expense Fair value plus transaction costs
  • Carried at fair value
  • Interest income is recognised in surplus or deficit using the effective interest method
  • Foreign exchange gains or losses are recognised in surplus or deficit
  • Credit impairment losses and reversals are recognised in surplus or deficit
  • Other changes in the carrying amount on remeasurement to fair value are recognised in other comprehensive revenue and expense 
  • The cumulative fair value gain or loss recognised in other comprehensive revenue and expense is recycled to surplus or deficit when the financial asset is derecognised
A non-equity instrument carried at fair value through surplus or deficit Fair value Fair value, with movements in value recognised in surplus or deficit
An equity instrument carried at fair value through other comprehensive revenue and expense Fair value plus transaction costs
  • Carried at fair value
  • Dividends are recognised in surplus or deficit
  • All fair value changes are recognised in other comprehensive revenue and expense
  • When the financial asset is derecognised, cumulative fair value changes are not recycled to surplus or deficit (but they may be transferred within equity)
An equity instrument carried at fair value through surplus or deficit Fair value Fair value, with movements in value recognised in surplus or deficit


Concluding thoughts

Under PBE IPSAS 41, there are complexities to the manner in which financial assets are classified and measured.  As public benefit entities prepare for their adoption of PBE IPSAS 41, they will need to ensure that their systems correctly account for all movements in the value of their financial assets, which may be complex for financial assets carried at fair value through other comprehensive revenue and expense, as some movements are captured in surplus or deficit, while others are captured in other comprehensive revenue and expense.

 

For more information on the above, please contact your local BDO representative.

 


This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in New Zealand to discuss these matters in the context of your particular circumstances.
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