Own credit risk on financial liabilities designated at FVTPL

Without this rule, a bank whose own credit rating deteriorates would record a profit-or-loss gain on its FVTPL liabilities simply because the market now discounts them at a wider credit spread, an outcome most users of financial statements find counter-intuitive, since a weaker bank should not appear more profitable purely because it looks riskier to its own creditors; IFRS 9 redirects that specific component to OCI so profit or loss reflects only genuine performance-related and market-rate-driven fair value changes.

Has the liability been designated at FVTPL under the fair value option because it eliminates or significantly reduces an accounting mismatch, rather than simply being held for trading? Is the portion of the fair value change attributable to the bank's own credit risk being isolated from the portion attributable to benchmark rates or other market factors, using a documented and consistently applied methodology? Has it been tested whether presenting the own-credit element in OCI would create or enlarge an accounting mismatch elsewhere, and is the cumulative OCI amount transferred within equity (not through profit or loss) on derecognition?

1. Confirm the liability has been designated at FVTPL under the fair value option (not simply held for trading), and that the designation eliminates or significantly reduces an accounting mismatch, or is part of a group managed on a fair value basis.
2. At each reporting date, compute the total fair value change on the liability.
3. Isolate the portion of that change attributable to changes in the bank's own credit risk from the portion attributable to other factors (benchmark interest rates, liquidity, other market factors).
4. Present the own-credit-risk portion in OCI (never subsequently reclassified to profit or loss), and the remaining portion in profit or loss.
5. Before finalizing this split, test whether presenting the own-credit element in OCI would create or enlarge an accounting mismatch in profit or loss elsewhere, if so, present the entire fair value change in profit or loss instead.
6. On derecognition of the liability, transfer the cumulative own-credit OCI amount within equity (not through profit or loss).

Isolate own-credit risk using a defensible technique, commonly comparing the fair value computed using a discount rate that holds the liability's credit spread constant at inception versus one that reflects the current spread, or using an observed change in the entity's own bond or credit-default-swap spread as a proxy where reliable market data exists. Document the methodology consistently, since the standard does not prescribe a single required technique, only the objective (isolating the credit component).

Disclose: (1) the cumulative amount recognized in OCI relating to own credit risk on FVTPL liabilities; (2) the methodology used to determine that amount; (3) any transfer within equity on derecognition of the liability during the period; (4) an explanation where the accounting-mismatch exception applies, meaning the full fair value change (including the own-credit portion) is instead presented in profit or loss for a specific liability or group of liabilities; (5) the total fair value change on FVTPL liabilities split between the OCI and P&L components for the period.

• Presenting the entire fair value change on FVTPL liabilities in profit or loss without separating the own-credit component, letting a credit deterioration masquerade as an operating gain
• using an unreliable or undocumented methodology to estimate the own-credit spread change, especially where the bank'
• s debt is thinly traded
• reclassifying the cumulative own-credit OCI amount to profit or loss on derecognition of the liability instead of transferring it within equity, which is not permitted under IFRS 9
• failing to test for and apply the accounting-mismatch exception where it genuinely applies, resulting in an inappropriate OCI presentation that itself creates volatility elsewhere in profit or loss.