Financial arrangements subject to this method
If an election to apply the fair value method is made, it will apply to financial arrangements that meet both the following requirements:
- The entity starts to have the financial arrangement in the income year in which it makes the election, and in later income years.
- The financial arrangement is either an asset or liability is required (whether or not as a result of a choice made) to be classified or designated or (in whole or in part) otherwise treated in the entity's financial reports as at fair value through profit or loss.
Under AASB 139, the following are generally recognised at fair value through profit or loss:
- a financial asset or financial liability held for trading
- a derivative.
AASB 139 states that trading generally reflects active and frequent buying and selling, and that financial instruments held for trading are generally used with the objective of generating a profit from short-term fluctuations in price or dealer's margin.
The fair value can apply to financial arrangements that are equity interests under Division 974, as well as certain rights to receive and obligations to provide equity interests (section 230-50 financial arrangements), subject to the satisfaction of the fair value tax-timing requirements.
However, an entity that has issued its own equity interests cannot fair value those equity interests. This rule is directed at ensuring, for example, that an entity does not obtain a tax deduction for dividends paid.
Splitting financial arrangements into two
Under section 230-235, where only part of a financial arrangement is classified or designated at fair value through profit or loss, that part of the arrangement is treated as a financial arrangement subject to the fair value method. The remaining part of the financial arrangement will be treated as a separate financial arrangement and will be subject to another tax-timing method.