What is the difference between fair value through profit or loss and amortized cost classifications for financial instruments under IFRS 9, and when would each apply in real estate audits?

• A. FVTPL recognizes changes in fair value in profit or loss; amortized cost uses a contractual cash flow model with impairment; classification depends on business model and cash flow characteristics.
• B. FVTPL uses historical cost; amortized cost uses fair value changes in other comprehensive income.
• C. FVTPL and amortized cost are interchangeable based on company size.
• D. FVTPL only applies to equity instruments; amortized cost only to cash and bank balances.

Answer: (A)

Under IFRS 9, the way a financial asset is measured hinges on two things: the business model for managing the asset and the asset’s contractual cash flow characteristics (SPPI – solely payments of principal and interest). If the asset is held to collect contractual cash flows and those cash flows meet SPPI, it is measured at amortized cost. The accounting then uses the effective interest method to recognize interest revenue and a separate impairment process (expected credit losses) to reflect credit risk. If the asset is managed for trading or if it fails SPPI, or if the entity designates it at fair value through profit or loss to address accounting mismatches, it is measured at fair value through profit or loss, with changes in fair value flowing directly to the income statement.

In real estate audits, you assess each financial asset against these criteria. A loan or receivable that the entity intends to hold to collect cash flows and that meets SPPI would be carried at amortized cost, with the expectation of recognizing interest income and impairment losses under ECL. A security or instrument held for trading, or one that does not meet SPPI, would be carried at FVTPL, with fair value changes going through profit or loss. Equity investments are typically FVTPL unless there is an irrevocable election to present changes in fair value in a separate category (FVOCI) with different recycling rules. This framework explains why changes in fair value appear in profit or loss for FVTPL assets, while amortized cost assets reflect cash flows and impairment rather than periodic fair value movements.