The Situation
Inconsistent classification, insufficient documentation
The client faced inconsistencies in the classification of investments between fair value through profit or loss (FVTPL) and fair value through other comprehensive income (FVOCI). In addition, supporting documentation for business model assessments and classification rationale was not sufficiently robust, creating potential audit and reporting challenges.
Our Approach
IFRS 9 review, SPPI testing and a standardised framework
We reviewed the classification of financial assets in accordance with IFRS 9 Financial Instruments, evaluated the business model and performed the SPPI (solely payments of principal and interest) test, reviewed the accounting treatment for disposals. We provided feedback to management which helped them in enhancing documentation to support classification decisions and ensure consistency across the portfolio.
The client standardised classification framework for all investment categories (equities, funds, and private investments).They documented business model assessments aligned with IFRS 9 requirements. We provided feedback on the accounting policies for FVTPL and FVOCI, including clear guidance on disposal treatment.
Outcome
Consistent, compliant and clearly documented
The client achieved consistent and compliant classification of financial assets across the portfolio and established a clear and supportable audit trail for investment classification and accounting treatment. We provided feedback to the client on presentation and disclosure which improved the presentation and transparency of OCI and profit or loss movements. Our audit strengthened overall financial reporting, providing greater clarity and confidence for stakeholders.
Key takeaway
RAA Perspective
Simply recording investments in the books of accounts is not sufficient. It is critical for management to assess the business model of the investments and classify them accordingly and any changes to the business model needs to be reflected in the financial statements accordingly.