What is the treatment of transaction costs under Fvoci?

Treatment of Transaction Costs under Fair Value through Other Comprehensive Income (FVOCI)

Financial instruments classified as Fair Value through Other Comprehensive Income (FVOCI) undergo specific accounting treatment to account for transaction costs incurred during their acquisition or disposal. Under FVOCI, transaction costs are not expensed immediately, but rather treated as an integral part of the investment’s initial carrying amount. This approach effectively increases the investment’s book value.

The rationale behind this treatment is that transaction costs represent an inherent component of acquiring or disposing of the investment. As such, they are considered an investment-related expense that should be capitalized and amortized over the life of the investment. By capitalizing transaction costs, the impact of these expenses is spread out over the investment’s holding period, providing a more accurate reflection of its performance.

Under FVOCI, transaction costs include direct costs incurred in acquiring or disposing of the investment, such as brokerage fees, transfer taxes, and legal expenses. These costs are directly attributable to the investment and increase its initial carrying amount.

It’s important to note that transaction costs are only capitalized under FVOCI for investments that are held for trading purposes. For investments held for other purposes, such as available-for-sale or held-to-maturity, transaction costs are expensed immediately.

The treatment of transaction costs under FVOCI aligns with the principle of matching expenses with revenues. By capitalizing transaction costs, the accounting treatment recognizes that these expenses are incurred in conjunction with the acquisition or disposal of the investment and should be charged against the investment’s returns over its holding period.

In summary, Fair Value through Other Comprehensive Income (FVOCI) mandates that transaction costs be capitalized and amortized over the life of the investment, effectively increasing its book value. This treatment ensures that transaction costs are matched with the revenues generated by the investment, providing a more accurate reflection of its performance.