If this security is classified as available for sale under US Gap, or as a debt security classified as fair value through OCI under IFRS, then this is how the accounting treatment will work.

Initially, cash is down by 100 and the investment up by 100 on the purchase date at the end of the first year because the financial asset is potentially going to be sold before maturity, it seems right that we should adjust the fair value up by 20.

So it's carrying value on the balance sheet becomes one 20.

The current market value, the intention here is that when we do sell the asset, the carrying value is near to the price that we'll sell at.

So the increase in market value to one 20 needs to be reflected on the balance sheet, but we don't want these carrying amount adjustments to hit our profit and loss account because we're not actually trading the assets.

We only want to recognize these changes in value in our income statement when we realize the gain or loss IE when we actually sell the assets.

So what is the other side of this gain in the financial statements? Well, it's actually included within other comprehensive income in the comprehensive income statement.

Within the equity section of the balance sheet, it goes into a separate account or reserve, often referred to as the revaluation reserve, or simply as we have it here, other reserves.

Crucially, it doesn't go into retained earnings yet.

In addition, since the interest income will be paid or five 5% of the par value, this will lead to an increase in cash of five, and this can be shown in the income statement.

Within interest income, when the security is subsequently sold for one 20, cash will increase by one 20.

While the investment value is reduced by one 20 down to zero within the equity section, the 20 unrealized gain can now be shown within the income statement as a gain on investments, and this results in the gain from other reserves being recycled into retained earnings.

This treatment would be exactly the same under US gap if this were an equity investment.

However, under IFRS, the treatment would be slightly different.

If this were an equity investment, if we assume all of the same values as before, but just that it's a dividend received of five rather than a coupon payment, everything looks the same until the sale under IRS for equity investments.

The unrealized gain in other reserves is not recycled through the income statement into retained earnings on disposal, but it is just transferred there directly in the balance sheet, meaning any gains or losses on fair value through OCI equity investments will never show up in the company's income Statement.

It's just a direct equity transfer.

The option to use fair value through OCI for equity investments is irrevocable and typically only used for long-term strategic investments, meaning the bank is not making the investment with the hope of making a gain on disposal, meaning it would be inappropriate for any gains or losses to be shown in the income statement.