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Financial assets held for trading, and fair value

Shares a company holds IN another company (not its own shares) are financial assets. Every year at least one paper adjusts their fair value, or reports a dividend received from them.

The fair value rule for shares held for trading

  • Financial assets held for trading are revalued to FAIR VALUE at balance date — the current market value, not the original cost.
  • A fair value INCREASE is other income, increasing profit for the year. A fair value DECREASE is an expense, decreasing profit for the year.
  • This is different from a land or buildings revaluation: a fair value change on shares held for trading goes through PROFIT (realised-style treatment for this asset class), while a property revaluation goes through OCI. Do not treat them the same way.
  • A dividend RECEIVED from shares held in another company is a separate event from the fair value change — both can appear in the same question, and both are other income, but the dividend received depends on the company that pays it declaring one, not on market price movement.
Real paper — 2022 A fair value decrease on shares held for trading Shares in RLS Limited fall in value from $84 000 to $80 000 during the year. Explain the impact on the financial statements. The shares are a current asset (financial assets), so the $4 000 decrease reduces that line in the Statement of Financial Position: $84 000 → $80 000. A decrease in fair value is an EXPENSE — it decreases profit for the year by $4 000. That $4 000 fall in profit flows through to retained earnings in equity, so equity also falls by $4 000. ✓ Current assets fall $4 000, profit for the year falls $4 000, retained earnings (and total equity) fall $4 000 — the same $4 000, seen from three angles. ✕

A fair value change on shares held for trading is NOT the same as a property revaluation

Both are "revaluations" in everyday language, but they are recognised completely differently. Land and buildings revaluation gains go to OTHER COMPREHENSIVE INCOME and a revaluation surplus — never profit. A fair value change on financial assets held for trading goes straight through PROFIT for the year as other income (increase) or an expense (decrease). Mixing these two up is one of the most common errors on this standard.

A fast check before classifying a fair value change

  • Is the asset shares held for trading (through profit) or land/buildings (through OCI)?
  • Have I stated the effect on profit, the Statement of Financial Position line, AND equity, not just one of the three?

Practise just this