Debt instrument reclassified as held-to-maturity
Company Y acquires a debt instrument that it classifies as available-for-sale. The purchase price equals the fair value of the instrument, 110. Its terms are such that it pays a fixed coupon for ten years and a principal payment of 100. Subsequently, when the fair value of the instrument is 120, a gain of 12 has been recognised in other comprehensive income, and 2 of the initial cost has been amortised to profit or loss, Y reclassifies the debt instrument as held-to-maturity.
The 120 fair value carrying amount becomes the new amortised cost of the instrument thereby giving rise to an effective premium of 20 that is amortised over the remaining term to maturity using the effective interest method. In addition, the 12 gain within equity is also amortised to profit or loss over the remaining period to maturity.
In effect, profit or loss should be broadly the same as if the instrument had not been reclassified (or had always been classified as held-to-maturity).