When do I use amortized cost versus FVOCI for debt investments?

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AcadiFi · Accepted Answer

IFRS 9 classifies debt investments using two tests: the business model test and the SPPI test (solely payments of principal and interest). Amortized Cost — Both conditions must be met: (1) the business model is to collect contractual cash flows (hold to collect), and (2) contractual cash flows are solely principal and interest. FVOCI (fair value through OCI) — SPPI test passes, but the business model is 'hold to collect AND sell' (dual objective). FVPL — Everything else, including held-for-trading, or instruments failing SPPI. ```mermaid flowchart TD A[Debt Investment] --> B{SPPI
Pass?} B -->|No| C[FVPL] B -->|Yes| D{Business
Model?} D -->|Hold to Collect| E[Amortized Cost] D -->|Collect and Sell| F[FVOCI] D -->|Trading| C ``` Example — Marquise Asset Management holds three portfolios of Nordfjord Corp bonds: - Portfolio A is hold-to-maturity for an insurance matching program → Amortized Cost. The balance sheet shows unchanged carrying value as rates move. - Portfolio B serves a liquidity buffer that regularly sells when spreads tighten → FVOCI. Fair value gains and losses bypass the income statement and flow into OCI, but interest income and impairment still hit P&L. - Portfolio C is a proprietary trading book → FVPL. Every mark-to-market gain or loss hits the income statement. Key exam hook: Under FVOCI, on derecognition the cumulative OCI balance is recycled into net income (this is different from equity investments at FVOCI election, where OCI is never recycled). US GAAP's ASC 320 has parallel categories (held-to-maturity, available-for-sale, trading) but without the SPPI overlay.

When do I use amortized cost versus FVOCI for debt investments?

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