How to approach it
- Run the amortised cost schedule at the effective rate: opening + interest − coupon.
- Pick the right ECL each year: 12-month unless credit risk has increased significantly, then lifetime.
- P&L: interest income (EIR) and the change in the loss allowance.
- SOFP: the asset at fair value. OCI/reserve: fair value minus gross amortised cost, plus the loss allowance.
Key rules to apply
- IFRS 9: FVOCI debt uses amortised-cost accounting for P&L (interest, ECL); fair value changes go to OCI.
- The loss allowance for FVOCI assets is recognised in OCI and does not reduce the carrying amount in the SOFP.
- Charge only the movement in the allowance each year.
- On derecognition, the cumulative OCI amount is reclassified to P&L.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Charging the full lifetime ECL instead of the increase (examiners' point).
- Not showing the fair value movement in OCI or the reserve in equity.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q6 without copying it.
Original practice question
FVOCI bond with a credit downgrade
On 1 January 2024 a company bought a 5-year bond: face Rs 100m, coupon 8% paid annually, total cost Rs 92.418m including transaction costs; EIR 10%. FVOCI. ECL: 31 December 2024 12-month Rs 1.0m; 31 December 2025 credit risk has risen significantly and lifetime ECL is Rs 3.5m. Fair value: Rs 95m (2024), Rs 90m (2025).
Required: Prepare the 2025 extracts with comparatives.
Worked solution
| Rs m | 2025 | 2024 |
|---|---|---|
| Interest income (EIR) | 9.366 | 9.242 |
| Impairment loss | (2.500) | (1.000) |
| OCI: fair value and ECL movement | (3.866) | 2.340 |
| SOFP: investment at fair value | 90.000 | 95.000 |
| Equity: fair value reserve | (1.526) | 2.340 |
Gross amortised cost: 92.418 → 93.660 (2024) → 95.026 (2025). Reserve = FV − amortised cost + allowance: 2024: 95 − 93.660 + 1.0 = 2.340; 2025: 90 − 95.026 + 3.5 = −1.526.
Answer: 2025: interest Rs 9.366m, impairment Rs 2.5m, OCI loss Rs 3.866m; asset Rs 90m.