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Also, the company buys and sells equity shares of companies for earning short term profits from the stock
market.
The CFO of the company classified all the non-current investments as Fair Value Through Other

Comprehensive Income (FVTOCI) and all the current investment as Fair value Through Profit and Loss
(FVTPL).
Croton Limited raised the following queries:
(a) Can the Company classify the equity shares previously held under current investment as FVTOCI if the
company decides to hold them for more than one-year (i.e. classify it as non-current)?

(b) The Company had classified NCDs with a maturity period of less than twelve months from the reporting
period as current. This has been classified as FVTPL by the CFO of the company. The Company wants to
know whether these NCDs can be recognized as FVTOCI?
SOLUTION

(a) It seems that the equity shares are acquired for the purpose of selling it in the near term and therefore
are held for trading. Such investments have been appropriately classified as subsequently measured at fair
value through profit or loss. Such investments in equity shares cannot be classified as subsequently measured
at fair value through other comprehensive income. The option to measure investment in equity shares at fair

value through other comprehensive income has to be made at initial recognition. Therefore, equity shares that
were held for trading previously cannot be reclassified to fair value through other comprehensive income due to
change in business model to not held for trading.

(b) In absence of contractual terms of NCDs, it is assumed that the contractual terms give rise on specified
dates to cash flows that are solely payment of principal and interest on the principal outstanding. The
business model also includes sales of these instruments on a regular basis. Hence, these instruments will be
classified as FVTOCI. Therefore, such NCD investments shall be classified as subsequently measured at Fair
Value through Other Comprehensive Income. The classification does not change based on whether the
investment is current or non-current as the end of the reporting period. It seems the company has previously

classified these investments at fair value through profit or loss. The company must rectify this by reclassifying
as FVTOCI.

Q18 (MTP October 19 & MTP October 21 – 12 Marks)

ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as on 1 April 20X1
@ Rs 150 each. The rate of dividend is 10% payable every year. The preference shares are convertible into
5,000 equity shares of the company at the end of 5th year from the date of allotment. When the CCCPS are

issued, the prevailing market interest rate for similar debt without conversion options is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the proceeds.
Key terms:
Date of Allotment 01-Apr-20X1
Date of Conversion 01-Apr-20X6
Number of Preference Shares 10,000
Face Value of Preference Shares 150
Total Proceeds 15,00,000
Rate of dividend 10%

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