Final answer:
The question is about the three IFRS classifications of passive investments: Amortized cost, FVTOCI, and FVTPL. It details how each type of investment is accounted for in financial reporting, which is crucial for accurate reflection of financial statements and investment valuation.
Step-by-step explanation:
The question pertains to the classification of passive investments under International Financial Reporting Standards (IFRS), which is a set of accounting principles for financial reporting. Passive investments are investments in equity and debt securities not actively managed on a day-to-day basis. Under IFRS, passive investments can be classified in three main categories:
- Amortized cost: Used for debt investments that the entity intends to hold to maturity and that meet certain criteria. This type of investment is measured at the initial cost minus principal repayments, and adjusted for any impairment losses.
- FVTOCI (Fair Value Through Other Comprehensive Income): This category includes debt or equity investments which are not held for trading purposes, and for which the investor has elected to recognize the fair value changes in other comprehensive income rather than through profit or loss.
- FVTPL (Fair Value Through Profit or Loss): This category is used for investments held for trading purposes, or that are designated at FVTPL by management. These investments are carried at fair value, with all changes recognized in the profit or loss.
An understanding of how passive investments are classified affects how gains and losses on these investments are recorded and reported in the financial statements, which has significant implications for investors and other stakeholders.