Key Points
- FVTPL is the default for any financial asset that fails the SPPI test or is held in a trading business model.
- Designation at FVTPL is irrevocable and only permitted when it eliminates or significantly reduces an accounting mismatch.
- Fair value changes flow directly through profit or loss each period, creating income statement volatility that amortised cost avoids.
- For liabilities designated at FVTPL, own credit risk changes go to OCI (not profit or loss) under IFRS 9.5.7.7 to prevent counterintuitive gains when creditworthiness deteriorates.
What is Fair Value Through Profit or Loss (FVTPL)?
IFRS 9 channels financial instruments into FVTPL through two routes. The mandatory route catches everything that does not qualify for amortised cost or FVOCI. If a financial asset fails the SPPI test (because the contractual cash flows include leverage features, equity conversion options, performance-contingent coupons, or non-recourse structures tied to specific assets), it cannot be measured at amortised cost. IFRS 9.4.1.4 sends it to FVTPL regardless of the business model.
The voluntary route is designation. IFRS 9.4.1.5 allows an entity to irrevocably designate a financial asset at FVTPL on initial recognition if doing so eliminates or significantly reduces an accounting mismatch. The same option exists for financial liabilities under IFRS 9.4.2.2. Irrevocable means permanent. The entity cannot redesignate the instrument later when market conditions change.
After initial recognition, IFRS 9.5.7.1 requires the entity to recognise gains and losses from fair value remeasurement in profit or loss. One exception applies to designated liabilities: IFRS 9.5.7.7 requires that changes in fair value attributable to the liability's own credit risk go to other comprehensive income, not profit or loss. Without this carve-out, an entity whose credit quality deteriorated would recognise a gain on its own liabilities. The IASB considered that result misleading.
Worked example: Vanderbroeck Vastgoed N.V.
Client: Belgian real estate holding company, FY2024, revenue €28M, IFRS reporter.
Step 1 — Identify the instrument
Vanderbroeck holds a €3M structured note issued by a European bank. The note pays a coupon linked to the performance of a basket of equity indices. If the basket rises above 110% of the initial level, the coupon doubles. Below 90%, the coupon is zero.
Step 2 — Apply the SPPI test
The coupon is not solely payments of principal and interest. It is contingent on equity index performance, which introduces a return profile inconsistent with a basic lending arrangement. IFRS 9.B4.1.15 is clear: cash flows linked to equity returns fail the SPPI test.
Step 3 — Initial recognition
Vanderbroeck purchased the note at par (€3M). Transaction costs of €18K cannot be capitalised into the carrying amount (unlike amortised cost instruments). IFRS 9.5.1.1 requires transaction costs on FVTPL instruments to be expensed immediately. Day-one carrying amount: €3M. Day-one expense: €18K.
Step 4 — Remeasurement at year-end
At 31 December 2024, the structured note has a fair value of €3.14M based on the bank's valuation report (Level 2 input under IFRS 13, using observable index prices and a credit-adjusted discount rate). The €140K gain is recognised in profit or loss.
Conclusion: The structured note is measured at FVTPL because the equity-linked coupon fails the SPPI test. Carrying amount at year-end is €3.14M, with a €140K gain in profit or loss and €18K transaction cost expense recognised at inception. The classification is defensible because the SPPI failure is documented with reference to the specific contractual feature and the governing paragraph.
Why it matters in practice
Teams frequently apply FVTPL designation without documenting the accounting mismatch that justifies it. IFRS 9.4.1.5 permits designation only when it eliminates or significantly reduces a measurement or recognition inconsistency. A file that records "designated at FVTPL" without explaining what mismatch exists and how the designation reduces it does not meet the standard's condition.
For liabilities designated at FVTPL, the IFRS 9.5.7.7 own-credit-risk split is missed more often than it is applied correctly. The entity must determine the portion of the fair value change attributable to changes in its own credit risk and route that portion to OCI. Files that record the entire fair value change in profit or loss overstate earnings volatility and misstate OCI.
FVTPL vs amortised cost
FVTPL remeasures the instrument to current fair value at every reporting date. Amortised cost carries the instrument at its calculated amount using the effective interest method, ignoring market value movements entirely. The income statement effect is the core difference. FVTPL produces gains and losses that move with the market. Amortised cost produces a steady effective interest return.
On an engagement, the classification question matters most when the entity holds instruments with borderline features. A loan with a prepayment penalty equal to the present value of remaining interest passes the SPPI test and stays at amortised cost. Add a prepayment penalty linked to the borrower's share price and the SPPI test fails, pushing the loan to FVTPL. Small contractual differences create large measurement consequences.