A financial asset or financial liability at fair value through profit or loss is a financial asset or financial liability that meets

either of the following conditions.

(a) It is classified as held for trading. A financial asset or financial liability is classified as held for trading if:
(i) it is acquired or incurred principally for the purpose of selling or repurchasing it in
the near term;
(ii) on initial recognition it is part of a portfolio of identified financial instruments
that are managed together and for which there is evidence of a recent actual
pattern of short-term profit-taking; or
(iii) it is a derivative (except for a derivative that is a financial guarantee contract or
a designated and effective hedging instrument).
(b) Upon initial recognition it is designated by the entity as at fair value through profit or loss. An entity may use this
designation only when permitted by paragraph 11A, or when doing so results in more relevant information, because
either:
(i) it eliminates or significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an accounting mismatch) that would otherwise arise
from measuring assets or liabilities or recognising the gains and losses on them on
different bases; or
(ii) a group of financial assets, financial liabilities or both is managed and its
performance is evaluated on a fair value basis, in accordance with a documented
risk management or investment strategy, and information about the group is
provided internally on that basis to the entity's key management personnel (as
defined in IAS 24 Related party disclosures (as revised in 2003)), for example the
entity's board of directors and chief executive officer.
In IFRS 7, paragraphs 9-11 and B4 require the entity to provide disclosures about financial assets and financial liabilities it
has designated as at fair value through profit or loss, including how it has satisfied these conditions. For instruments
qualifying in accordance with (ii) above, that disclosure includes a narrative description of how designation as at fair value
through profit or loss is consistent with the entity's documented risk management or investment strategy.
Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value
cannot be reliably measured (see paragraph 46(c) andAppendix A paragraphs AG80 and AG81), shall not be designated as
at fair value through profit or loss.
It should be noted that paragraphs 48, 48A, 49 and Appendix A paragraphs AG69-AG82, which set out requirements for
determining a reliable measure of the fair value of a financial asset or financial liability, apply equally to all items that are
measured at fair value, whether by designation or otherwise, or whose fair value is disclosed.

Source: IAS 39 Financial instruments: recognition and measurement 9 Definitions

References
 Accounting for Investments
The accounting for investments occurs when funds are paid for an investment instrument. The exact type of accounting
depends on the intent of the investor and the proportional size of the investment. Depending on these factors, the
following types of accounting may apply:

Held to maturity investment. If the investor intends to hold an investment to its maturity date (which effectively
limits this accounting method to debt instruments) and has the ability to do so, the investment is classified as held to
maturity. This investment is initially recorded at cost, with amortization adjustments thereafter to reflect any premium or
discount at which it was purchased. The investment may also be written down to reflect any permanent impairments.
There is no ongoing adjustment to market value for this type of investment. This approach cannot be applied to equity
instruments, since they have no maturity date.

Trading security. If the investor intends to sell its investment in the short-term for a profit, the investment is
classified as a trading security. This investment is initially recorded at cost. At the end of each subsequent accounting
period, adjust the recorded investment to its fair value as of the end of the period. Any unrealized holding gains and
losses are to be recorded in operating income. This investment can be either a debt or equity instrument.

Available for sale. This is an investment that cannot be categorized as a held to maturity or trading security. This
investment is initially recorded at cost. At the end of each subsequent accounting period, adjust the recorded investment
to its fair value as of the end of the period. Any unrealized holding gains and losses are to be recorded in other
comprehensive income until they have been sold.
 Equity method. If the investor has significant operating or financial control over the investee (generally considered
to be at least a 20% interest), the equity method should be used. This investment is initially recorded at cost. In
subsequent periods, the investor recognizes its share of the profits and losses of the investee, after intra-entity profits
and losses have been deducted. Also, if the investee issues dividends to the investor, the dividends are deducted from the
investor's investment in the investee.

An important concept in the accounting for investments is whether a gain or loss has been realized. A realized gain is
achieved by the sale of an investment, as is a realized loss. Conversely, an unrealized gain or loss is associated with a
change in the fair value of an investment that is still owned by the investor.

There are other circumstances than the outright sale of an investment that are considered realized losses. When this
happens, a realized loss is recognized in the income statement and the carrying amount of the investment is written
down by a corresponding amount. For example, when there is a permanent loss on a held security, the entire amount of
the loss is considered a realized loss, and is written off. A permanent loss is typically related to the bankruptcy or liquidity
problems of an investee.

An unrealized gain or loss is not subject to immediate taxation. This gain or loss is only recognized for tax purposes when
it is realized through the sale of the underlying security. This means that there may be a difference between the tax basis
of securities and their carrying amount in the accounting records of the investor, which is considered a temporary
difference.
CLASSIFICATION OF FINANCIAL ASSETS

1 Financial assets at fair value through profit or loss (FVTPL) This is the normal default classification for financial
assets and will apply to all financial assets unless they are designated to be measured and accounted for in any
other way. This classification includes any financial assets held for trading purposes and also derivatives, unless they
are part of a properly designated hedging arrangement. Debt instruments will be classified to be measured and
accounted for at FVTPL unless they have been correctly designated to be measured at amortised cost (see later).
Initial recognition at fair value is normally cost incurred and this will exclude transactions costs, which are charged to
profit or loss as incurred. Remeasurement to fair value takes place at each reporting date, with any movement in fair
value taken to profit or loss for the year, which effectively incorporates an annual impairment review.

2 Financial assets at fair value through other comprehensive income (FVTOCI) This classification applies to equity
instruments only and must be designated upon initial recognition. It will typically be applicable for equity interests
that an entity intends to retain ownership of on a continuing basis. Initial recognition at fair value would normally
include the associated transaction costs of purchase. The accounting treatment automatically incorporates an
impairment review, with any change in fair value taken to other comprehensive income in the year. Upon
derecognition, any gain or loss is based upon the carrying value at the date of disposal. One important point is that
there is no recycling of any amounts previously taken to equity in earlier accounting periods. Instead, at
derecognition, an entity may choose to make an equity transfer from other components of equity to retained
earnings as any amounts previously taken to equity can now be regarded as having been realised

Financial assets held at fair value through profit and loss

Financial assets held at fair value through profit or loss comprise assets held for trading and
those financial assets designated as being held at fair value through profit or loss.

For certain loans and advances and debt securities with fixed rates of interest, interest rate
swaps have been acquired with the intention of significantly reducing interest rate risk.
Derivatives are recorded at fair value whereas loans and advances are usually recorded at
amortised cost. To significantly reduce the accounting mismatch between fair value and
amortised cost, these loans and advances and debt securities have been designated at fair
value through profit or loss. The Group ensures the criteria under IAS 39 are met by matching
the principal terms of interest rate swaps to the corresponding loans and debt securities.

The changes in fair value of both the underlying loans and advances, debt securities, and
interest rate swaps are monitored in a similar manner to trading book portfolios.

Loans and advances held at fair value through profit and loss

The maximum exposure to credit risk for loans designated at fair value through profit or loss
was $239 million (2008: $243 million).

The net fair value loss on loans and advances to customers designated at fair value through
profit or loss was $5.9 million (2008: $0.1 million). Of this, $nil million (2008: $3 million) relates
to changes in credit risk. The cumulative fair value movement relating to changes in credit risk
was $3.4 million (2008: $3.4 million). The changes in fair value attributable to credit risk has
been determined by comparing fair value movements in risk-free bonds with similar maturities
to the changes in fair value of loans designated at fair value through profit or loss.

For certain loans and advances designated at fair value through profit or loss, the difference
arising between the fair value at initial recognition and the amount that would have arisen had
the valuation techniques used for subsequent measurement been used at initial recognition, is
amortised to the income statement until the inputs become observable or the transaction
matures or is terminated. The table below sets out a reconciliation of amounts deferred:
 2009 2008
$million $million

At 1 January 8 9

Additional amount deferred 2

Recognised in income (4) (3)

At 31 December 4 8

Changing one or more of the assumptions to reasonably possible alternatives would not
significantly change the fair value.

Investment securities held at fair value through profit or loss

2009

Equity
Debt shares Treasur
securiti y Total
es $millio bills $millio
$million n $million n

Issued by public bodies:

Government securities 5,568

 2009

Other public sector securities 18

5,586

Issued by banks:

Certificates of deposit 628

Other debt securities 968

1,596

Issued by corporate entities and other

issuers:

Other debt securities 2,929

Total debt securities 10,111

Of which:

Listed on a recognised UK exchange 440 440

 2009

Listed elsewhere 1,51 6,95

4,835 604 6 5

Unlisted 4,04 9,49

4,836 613 3 2

10,111 1,217 5,559 16,887

Market value of listed securities 5,275 604 1,516 7,395

2008

Debt Equity Treasury

securitie shares
s $millio bills Total
$million n $million $million

Issued by public bodies:

Government securities 4,346

Other public sector securities 17

4,363
 2008

Issued by banks:

Certificates of deposit 33

Other debt securities 798

831

Issued by corporate entities and other

issuers:

Other debt securities 1,202

Total debt securities 6,396

Of which:

Listed on a recognised UK exchange 14 14

Listed elsewhere 2,216 197 1,085 3,498

Unlisted 4,166 428 1,622 6,216

6,396 625 2,707 9,728

 2008

Market value of listed securities 2,230 197 1,085 3,512

Key Things to Know

Investors make investments for three primary reasons:

1) appreciation in market value
2) income from interest and dividends
3) significant influence and control

Investments are made in bonds (debt) and equities (stocks)

The journal entry to record all types of investments is:

Investment $$cost, including commissions

Cash $$cost, including commissions

There are two methods used to report investments that are related to the purpose of
making the investment: Fair Market Value Method and Equity Method
Fair Market Value Method: (FASB 115) Records investments made for appreciation and income
Use this method when:

1) You have no significant influence or control (usually owning < 20% indicates) 2) The market price is reliable there is a bid ask
quote, traded on an exchange
There are 3 categories of investments under this method:

1) Held to Maturity : Intend to hold investments in bonds to maturity

2) Trading Securities: Intend to hold for less than one year
3) Available For Sale: Intend to hold for one year or more

Held to maturity:

Do not adjust to fair market value.

Adjust the cost of the bond investment each period for interest using
the amortization schedule, as interest is earned and received

Trading Securities:

Adjust the investment to fair market value at the end of each period
if fair market value is reliable there is a bid ask quote
The change in fair market value is reported on the income statement
under other revenues and expenses unrealized gain/loss account
Record dividends received as dividend income

Available for Sale:

Adjust the investment to fair market value at the end of the period
if fair market value is reliable there is a bid ask quote
The change in fair market value is reported on the balance sheet as
part of owners equity accumulated gain/loss an owners equity account
Record dividends received as dividend income

Journal entries: Record 2 things each period

1) adjust to fair market value trading unrealized gain/loss

- available for sale accumulated gain/loss
 2) record dividends received

Trading Available for sale

Investment Adjust to FMV Investment

Unrealized Gain/Loss at end of period Accumulated Gain/Loss
(use investment T account)

The investment account will be a debit when the investment goes up

The investment account will be a credit when the investment goes down
The other account is the opposite, debit or credit, for the same amount

Cash Receive Dividends Cash

Dividend Income Dividend Income

Important to notice: The only difference in trading and available for sale is the account that is used to adjust to fair market value. Trading
uses unrealized gain/loss which is reported on the income statement. Available for sale uses accumulated gain/loss which is reported on
the balance sheet in owners equity.

Equity Method:

Use when you own an equity investment in a company and have significant influence
Significant influence exists when you own > 20%, and you have
- Access to financial information
- Seat(s) on the board of directors
- Influence company policies and procedures

The objective of the equity method is to show the investment as if it represents the owners equity in the company you purchased. When
the companys owners equity increases (earn income), your investment balance should increase. When the companys owners equity
decreases (losses and dividends paid), your investment balance should decrease.
 The companys owners equity changes with income and loss and dividends paid.
These are the things that also change your investment balance.

Journal entries are:

Profit Losses

Profit/Loss Investment in X Investment Expense

Investment Income Investment in X

Dividends Cash
Received Investment in X

When you sell your investment, under both FMV and Equity methods:

1) Record the cash you get as a debit

2) Take the investment off your books at the current balance in your
Investment T account times the % you are selling (credit investment)

3) Plug to realized gain (credit) or realized loss (debit) to balance the entry

Cash (db)
Realized loss (db) or realized gain (cr)
Investment (cr)

Accounts that are reported on the income statement current year only:

Unrealized Gain/Loss
Realized Gain/Loss
Dividend Income

Accounts that are reported on the balance sheet cumulative balance:

 Investment
Accumulated Gain/Loss (Owners Equity)

ASSUME THAT WEBSTER COMPANY'S MANAGEMENT WAS SEEING A PICKUP IN THEIR BUSINESS
ACTIVITY AND BELIEVED THAT A SIMILAR UPTICK WAS OCCURRING FOR ITS COMPETITORS AS
WELL. ONE OF ITS COMPETITORS, MERRIAM CORPORATION, WAS A PUBLIC COMPANY, AND ITS
STOCK WAS TRADING AT $10 PER SHARE. WEBSTER HAD EXCESS CASH EARNING VERY LOW RATES
OF INTEREST AND DECIDED TO INVEST IN MERRIAM WITH THE INTENT OF SELLING THE
INVESTMENT IN THE VERY NEAR FUTURE FOR A QUICK PROFIT