Bid-ask spread – initial measurement
As in Example 48.8 above, Company A acquires an equity security which will be classified as available-for-sale. In this case A purchases the asset in an active market where no explicit transaction costs are charged, but separate bid and offer prices are quoted. On acquisition the security has an asking price of 102, which is the amount A is required to pay, and a bid price of 97, which is what A would receive were it to sell the asset.
The fair value of a quoted asset is deemed to be its bid price (see Chapter 49 for further fair value discussion) and this suggests that A should initially measure the asset at 97. This would result in an immediate loss of 5, the difference between the initial fair value of the asset and the cash paid. What is more, this loss would be recognised in profit or loss as it does not arise on remeasurement of the asset.
However, what the standard appears to be saying is that the 5 ‘loss’ (i.e. the bid-ask spread) is deemed to be a transaction cost and, therefore, should be included in the initial measurement of the asset. The asset would then be initially measured at 102 (which happens to be what was paid for it) with no immediate loss recognised in profit or loss. If A had a reporting date immediately after the purchase of this security it would measure the security at 97 and recognise a loss of 5 in other comprehensive income.
If, instead, the security had been classified at fair value through profit or loss, the accounting treatment on initial recognition would have been significantly different. For such assets, transaction costs are recognised in profit or loss and A would have recorded a 5 loss in profit or loss.