ACCA Financial Reporting (F7) Practice Exam

What are the three classification categories for financial instruments under IFRS 9?

1. Cash, Receivables, Payables

2. Amortized Cost, Fair Value Through Profit or Loss (FVTPL), and Fair Value Through Other Comprehensive Income (FVOCI)

3. Assets, Liabilities, Equity

4. Current, Non-current, Contingent

The correct answer is: Amortized Cost, Fair Value Through Profit or Loss (FVTPL), and Fair Value Through Other Comprehensive Income (FVOCI)

The classification categories for financial instruments under IFRS 9 are fundamental to how these instruments are measured and reported in financial statements. When assessing financial instruments, IFRS 9 establishes three primary categories based on the entity's business model for holding the assets and the contractual cash flow characteristics of the financial instruments. The first category, Amortized Cost, is applicable to financial assets that are held to collect contractual cash flows and where those cash flows comprise solely payments of principal and interest on the principal amount outstanding. This measurement is used when an entity’s business model is to hold the asset and receive cash flows rather than sell it. The second category, Fair Value Through Profit or Loss (FVTPL), includes financial assets that are held primarily for trading, or those whose performance is evaluated on a fair value basis. This is where changes in fair value are recognized in profit or loss, reflecting the fluctuations of the asset's market value throughout the reporting period. The third category, Fair Value Through Other Comprehensive Income (FVOCI), encompasses financial assets that meet specific criteria centered on the entity's intent to both collect the cash flows and sell the asset. Here, realized gains and losses are recognized in other comprehensive income until the asset is derecognized, at which