FVOCI

Definition

Fair Value through Other Comprehensive Income (FVOCI) is one of the three classification categories for financial assets under IFRS 9 that is applicable to particular simple debt instruments^[1]

Amortised Cost;
fair value through other comprehensive income; or
fair value through profit or loss (FVPL).

IFRS 9 Classification

A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met:

the financial asset is held within a Business Model whose objective is achieved by both collecting Contractual Cash Flows and selling financial assets and
the contractual terms of the financial asset give rise on specified dates to cash flows that are Solely Payments of Principal and Interest (the SPPI condition) on the principal amount outstanding.

Measurement

The FVOCI measurement category recognises information in Profit and Loss as if the financial asset were measured at amortised cost (the amounts that are recognised in profit or loss are the same as the amounts that would have been recognised in profit or loss if the financial asset had been measured at amortised cost).

A gain or loss on a financial asset measured at fair value through other comprehensive income shall be recognised in other comprehensive income, except for

impairment gains or losses (Section 5.5 of IFRS 9) and
foreign exchange gains and losses (paragraphs B5.7.2–B5.7.2A of IFRS 9),

FX gains or losses

For the purpose of recognising foreign exchange gains and losses under IAS 21, a FVOCI asset is treated as a monetary item. Accordingly, it is treated as an asset measured at amortised cost in the foreign currency. Exchange differences on the amortised cost are recognised in profit or loss and other changes in the carrying amount are recognised in accordance with paragraph 5.7.10 of IFRS 9.

Derecognition of Reclassification of FVOCI Instruments

When a FVOCI asset is derecognised the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment (see IAS 1). If the financial asset is reclassified out of the fair value through other comprehensive income measurement category, the entity shall account for the cumulative gain or loss that was previously recognised in other comprehensive income in accordance with paragraphs 5.6.5 and 5.6.7. Interest calculated using the effective interest method is recognised in profit or loss.

Stress Testing Scope

Market Risk

Fair value positions (FVOCI and FVPL) are subject to the market risk approach for the assessment of PnL under regulatory stress testing^[2]. The scope of the market risk stress methodology covers all positions under full or partial fair value measurement – i.e. positions in FVPL, FVOCI, and amortised cost positions being part of a hedge accounting relationship. This includes for example sovereign and securitisation exposures.

FVOCI items held for

collecting contractual cash flows & selling financial assets or
holding or selling equity position are all items measured at FVOCI that are not part of any hedge accounting relationship.

Counterparty Risk

For items that are measured at FVOCI and that would be subject to the impairment model of IFRS 9, all impacts from changes in the credit risk of counterparties should be measured at fair value and reported in OCI

Net Interest Income

All interest-earning or interest-paying positions across all accounting categories, including not only instruments subject to amortised cost measurement but also those subject to fair value measurement (such as FVOCI positions and FVPL positions, and hedge accounting instruments), are in the scope of this section

Impact on Capital

For items booked at fair value through other comprehensive income (“FVOCI”), fair value changes translate directly into capital (meaning that, e.g., a fair value loss would lead to a decrease in capital) but are recognised in the P&L account on the basis of the “staging” rules dictated by IFRS 9. Accordingly, it could be that no losses are recorded if a security experiences a drop in its fair value, but does not suffer a significant increase in credit risk^[3]

References

↑ IFRS Standard 9, Financial Instruments
↑ 2018 EU-wide Stress Test - Methodological Note
↑ How demanding and consistent is the 2018 stress test design in comparison to previous exercises? A.Resti

[1] IFRS Standard 9, Financial Instruments

[2] 2018 EU-wide Stress Test - Methodological Note

[3] How demanding and consistent is the 2018 stress test design in comparison to previous exercises? A.Resti

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