What is Fair Value Through Profit or Loss (FVTPL)?

Fair Value Through Profit or Loss, or FVTPL, is an accounting classification under International Financial Reporting Standards (IFRS) for financial assets and liabilities. It is a method where the value of an asset or liability on a company’s books is continuously updated to its current market price. Any resulting change in that value, whether an increase or a decrease, is recorded directly on the company’s income statement for the period. This approach provides a current valuation of certain financial instruments, reflecting their immediate market performance within the company’s earnings.

Criteria for FVTPL Classification

A financial instrument can be classified as FVTPL in two ways. The first is a mandatory classification. Under IFRS 9, this is the default category for financial assets that do not qualify for other treatments like amortized cost or Fair Value Through Other Comprehensive Income (FVTOCI). This path primarily captures financial assets that are “held for trading,” meaning instruments acquired with the intention of selling them in the near future to profit from short-term price fluctuations.

Derivatives are also typically required to be measured at FVTPL. A derivative is a financial contract whose value is derived from an underlying asset, like an interest rate or a commodity price. Unless a derivative is designated as part of a formal hedging relationship to offset a specific risk, its value changes must be reported through profit or loss. This ensures that the speculative nature of such instruments is reflected in the period’s earnings.

The second path is the optional “fair value option,” where a company can designate a financial asset or liability as FVTPL when it is first acquired or issued. This choice is irrevocable. A company would elect this option to eliminate or significantly reduce an “accounting mismatch.”

An accounting mismatch occurs when related assets and liabilities are measured on different bases, which can distort financial performance. For instance, a company may hold a financial asset to manage risk from a liability whose value changes with the market. If that asset were accounted for at its original cost, the company would report losses on the liability without showing the corresponding gains on the asset. By designating the asset as FVTPL, both items are measured at fair value, and their gains and losses are recognized in the same period.

Accounting Measurement and Recognition

At initial recognition, a financial asset or liability is recorded at its fair value, which is the price paid to acquire it. A distinct rule for FVTPL instruments is the treatment of transaction costs. Costs directly tied to the acquisition, such as broker fees, are not added to the initial value of the asset but are immediately recognized as an expense in the profit or loss statement.

Following its initial recording, the instrument is re-valued to its current fair value at the end of each reporting period. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. For many financial instruments, like publicly traded stocks, this value is easily determined from stock exchange prices.

The difference between the fair value at the end of the period and the value recorded at the beginning is reported as a gain or loss. This gain or loss flows directly into the income statement. For example, if a company buys a share for $1,000 and at the end of the year its market value is $1,150, a gain of $150 is recognized in that year’s profit or loss.

Any income generated by the instrument, such as interest from a bond or dividends from a stock, is also recognized in the profit or loss statement. This income is recognized in the period in which it is earned, ensuring all economic returns from the instrument are captured in reported earnings.

Financial Statement Presentation

On the balance sheet, financial assets and liabilities measured at FVTPL are shown at their fair value as of the report’s date. These instruments are frequently categorized as current assets or liabilities, reflecting the “held for trading” nature and an intent to sell within the next year. This presentation helps investors assess the company’s liquidity, and the line item might be described as “Financial assets at fair value through profit or loss.”

On the income statement, the net gains or losses from re-measuring the instruments to fair value are reported within the non-operating or investment section. Companies may present this as a single line item, for example, “Net gain on financial instruments at FVTPL,” or group it with other similar items. Any interest or dividend income is presented in revenue or other income lines, depending on the nature of the company’s business.