Question

You are the Investment Manager at King Midas Corporation. You and your Securities Traders are planning to buy Debt Investments. In addition, due to inflation and the political climate, the prices of these investments fluctuate a lot from day-to-day.

You are wondering, given the volatility of the Debt Investments values, what is the best classification for these Debt Investments when they are purchased by the corporation.

Your Securities Traders strongly believe that they should be classified as Trading.

1. Post an original response to the scenario above as to whether you agree or disagree with the position of the Securities Traders to classify the Debt Investments as Trading. You need to explain in detail, give examples if needed, to justify your agreement or disagreement. Once you post your response, you will be able to see your classmates’ responses.    (12 Points)

Answer 1

For Financial instruments such as debt instruments, IFRS 9 states the below two conditions should be satisified for it to be measured at amortised cost basis:

a) Business Model test: If the objective of the entity/corporation is to hold the financial asset (debt instruments) to collect the contractual cash flows rather than to sell the financial asset before its contractual maturity.

b) Cash flow characterisitc test:The contractual terms of the finanical asset (debt instruments) should specify the dates of cash flows that are solely related to payment of interest and principal amount.

If any of the above test are failed then it would be valued on fair value basis.

Given the above description, If King Midas Corporation intent is to get the contractual cash flows from the debt investment which includes principal and interest payments and would be holding the instruments till the maturity it would be passing the above tests and can account for this debt investments at amortised cost.

However, if the intent is to trade this debt investments in the market, then it would fail the business model test and would need to be accounted as fair value basis. Under Fair value basis, there are two options, one is FVOCI (Fair value through other comphrensive income) and the other is FVTPL (Fair Value through P&L). If the cash flow test is passed and the intent is to sell the asset then FVOCI option would be elected unless FVTPL option is choosed for. If any of the test is not passed, then it would be accounted as FVTPL.