Two measurement categories exist for FL: FVTPL and amortized cost. Could you please give me some specific examples when and how to use those measurement categories?
Financial liabilities are measured at amortised cost if they fulfill the cash flow and business model characteristics and these are:
FVTPL is measured when the liability is not a simple loan and is more inclined to equity instruments such as shares. Shares are usually marketed at Fair Value with any gain or loss made on them accounted for in the Profit and loss account.
The basic premise of Amortized Cost method is based on two tests- Business Model(Kept till maturity rather than sold in the middle to make gains) and Cash Flow Test( Specific/fixed amounts received at periodic intervals).
So, in effect it applies mostly to financial assets that are debt instruments like investment in bonds. But, still Fair Value Option can be used if it is held mainly for trading purpose and election is made for accounting through FVTOCI. Fair Value approach is applicable for Equity Instruments.
Amortized cost is used if market price changes are not be reflected and election is made for using the FVTPL approach. However, if they are equity in nature no re measurement as gain is experienced by investor.
The ACCA Technical article is awesome with numerical examples though!