INTERMEDIATE ACCOUNTING 1
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CHAPTER
15
KEY TERMS
FINANCIAL ASSETS AT FAIR VALUE
NOTES / DRAWINGS
Investments
-
Assets held for the accretion of wealth through distribution (interest,
royalties, dividends, rentals, and capital appreciation.
Examples of
investments
a.
b.
c.
d.
e.
f.
g.
h.
i.
Trading Securities – FA-FVPL
FA-FVOCI
Nontrading equity securities
Bonds or FA-Amortized Cost
Investment in Associate
Investment in Subsidiary
Investment Property
Investment in Fund
Investment in Joint Venture
Statement
Classification
-
CURRENT INVESTMENTS – readily realizable and not held for more than 1 year
NONCURRENT/ LONG-TERM INVESTMENTS – investments other than Current Investments
Financial Assets
a. Cash
b. Contractual right to receive cash or another financial asset from another
c. Contractual right to exchange financial instrument under conditions that are
potentially favorable
d. Equity instrument of another entity
Examples:
1. Cash or currency
2. Deposit of cash with a bank
3. Trade accounts receivable, notes receivable, and loans receivable
4. Investment in shares or other equity instruments
Items NOT considered
at financial assets





Classification of
financial assets
1. FVPL (Equity and Debt securities)
2. FVOCI (equity and debt securities)
3. Amortized Cost (debt securities)
GOLD BULLION – NOT a financial asset
Intangible assets
Inventory and PPE
Prepaid expenses
Leased assets
* classification depends on the business model for managing financial assets:
a. To realize FV changes
b. To collect contractual cash flows
Equity Securities
-
-
Any instruments representing:
o ownership shares and right
 ordinary shares
 preference shares
 right or options to acquire ownership shares
DO NOT INCLUDE “redeemable preference shares, treasury shares, and convertible
debts”
INTERMEDIATE ACCOUNTING 1
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Chapter 15 FVFA
Share
Right of shareholders
Debt Securities
1.
2.
3.
4.
Ownership interest or right of a shareholder in an entity.
Evidenced by a “Share Certificate”
Share in earnings
Election of directors
Subscription for additional shares
Share in net assets upon liquidation
-
Represents a creditor relationship with an entity
Has a maturity date and maturity value
cont.
Examples:
1. Corporate bonds
2. BSP Treasury bill
3. Government securities
4. Commercial papers
5. Preference shares with MANDATORY redemption date or are REDEEMABLE at the
option of the holder
INITIAL MEASUREMENT
of financial assets
-
At Fair Value (FV)
o If FVLP = direct costs are expensed
o If FVOCI= directs are capitalized
Transaction costs are:
a. Fees and commissions paid to agents, advisers, brokers and dealers
b. Levies by regulatory agencies and securities exchanges
c. Transfer taxes and duties
DO NOT
A.
B.
C.
SUBSEQUENT
MEASUREMENT
INCLUDE:
Debt premiums or discounts
Financing costs
Internal administrative or holding costs
1. FVPL - for purpose of selling or repurchasing in the near term (Current Asset)
2. FVOCI – for purposes of both selling and to collect contractual cash flows
(Noncurrent asset)
3. Amortized Cost – for purpose of collecting contractual cash flows
Gain and Loss – Financial Assets at Fair Value
-
Presented in profit or loss
FV > CA = Unrealized Gain
FV < CA = Unrealized Loss
Gain(Loss) from selling of investment = Realized Gain(Loss)
Gain and Loss – Financial Assets at Amortized Cost
-
NOT RECOGNIZED because such investments are not reported at Fair Value
Only RECOGNIZED in profit or loss when asset is derecognized, sold, impaired or
reclassified, and through amortization process
Gain and Loss – Financial Assets at FVOCI
-
RECOGNIZED in the the Statement of Other Comprehensive Income
Cumulative gain (Original cost minus Current MV) will be reported in the
Statement of Changes in Equity
Gain(loss) on Sale will be recognized as an addition(deduction) to Retained
Earnings
Cumulative gain or loss previously recognized in OCI is also transferred to
Retained Earnings
INTERMEDIATE ACCOUNTING 1
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Chapter 15 FVFA
Impairment – Equity
Investments at Fair
Value
Impairment – Debt
investments
Credit loss
Impairment loss
-
cont.
It is not necessary to assess financial assets measured at FVPL and FVOCI for
impairment
Entity shall recognize expected credit loss on:
a. Debt investment measured at amortized cost
b. Debt investment measured at FVOCI
-
Entity shall measure the loss allowance for a financial instrument at an amount
equal to the lifetime expected credit loss if the credit risk has increased
significantly since initial recognition
-
Present value of all cash shortfalls
Expected credit loss is an estimate of credit loss over the life of the
financial instrument
= CA – PV discounted at original effective rate
INTERMEDIATE ACCOUNTING 1
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CHAPTER
EQUITY INVESTMENTS
16
KEY TERMS
Acquisition of equity
investments
(Dividends, Share Split and Share right)
NOTES / DRAWINGS
-
PFRS 9 provides that when a financial asset is recognized initially, an entity
shall measure it at Fair Value plus transaction costs that are directly
attributable to the acquisition except for FA-FVPL wherein transaction costs
are expensed.
Acquisition by Exchange
- Acquisition cost is determined in the order of priority:
1. Fair value of assets given
2. Fair value of asset received
3. Carrying amount of asset given
Lump Sum Acquisition
- When 2 or more equity securities are acquired at a single cost, the single cost
is allocated to the securities on basis of their Fair Value.
- If only 1 security has known market value, the amount is allocated to its
market value and the remainder is their allocated to the other security.
Investment Categories
Sale of Equity Shares
a.
Trading Securities – FA-FVPL
b.
FA-FVOCI
c.
Investment in Associate
d.
Investment in Subsidiary
e.
Investment in unquoted equity instruments – measured at cost if FV cannot be
measure reliably
-
-
-
Cash Dividends
On derecognition of a financial asset at FVPL, the difference between the
consideration received and the carrying amount of the asset shall be recognized
in profit or loss.
When equity shares are of the same class acquired on different dates at
different costs, a problem will arise as to the determination of cost of shares
sold when only a portion is subsequently sold
In such case, the entity shall determine the cost of the shares sold using
either the FIFO or average cost approach
- considered as income
- do not affect the investment account
a. Cash Dividends are earned but not received
Dividends receivable
xxx
Dividend Income
xxx
b. Cash dividends are subsequently received
Cash
xxx
Dividends receivable
xxx
Dividend-on
-
Between date of declaration and date of record
The dividends accrued is included in the sale price credited to “dividend
income”
Ex-dividend
-
Between date of record and date of payment
Original shareholder is entitled to the right to receive dividends
INTERMEDIATE ACCOUNTING 1
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Chapter 16 EQUITY INVESTMENTS
cont.
* dividends shall be recognized as revenue when the shareholder’s right to receive
payment is established (on date of declaration)
Property Dividends/
Dividends in kind
-
Dividends in the form of property or noncash assets
Also considered as income and recorded at fair value
Noncash assets
xxx
Dividends income
xxx
Liquidating Dividends
-
Return of invested capital
NOT income
May be in form of cash or noncash assets
Normally paid when the corporation is dissolve and liquidated
Wasting asset corporation or mining entity
- Liquidating dividends maybe paid even before dissolution and liquidation
- Partly income and partly return of capital
If liquidating dividends > cost of investment = credited to gain on investment
- when liquidating is completed and carrying amount of the investment is not fully
recovered, the balance is written off as a loss
Share Dividends/Stock
Dividends
-
“bonus issue” – entity’s own shares
NOT income
Assets of the entity are the same before and after the issuance of the share
dividends because the shareholder may receive additional shares but still has
the same proportionate equity interest in the entity. “More shares but at
reduced market value”
- do not affect total cost of the investment but reduce the cost of investment
per share
* shares of another entity declared as dividends are not share dividends but property
dividends
Kinds of Share dividends:
1.Share dividends of SAME class
- recorded only by means of memorandum entry
2. Share dividends of DIFFERENT class
- original cost of investment is apportioned between the original shares and
the share dividends on the basis of market value of each at the date of receipt
Shares received in
lieu of cash
dividends
-
considered as INCOME at Fair Value of the shares received (property dividends)
in ABSENCE OF FV, income is equal to the cash dividends that would have been
received
Cash received in lieu
of cash dividends
-
Share dividends are assumed to be received and subsequently sold at the cash
received. Therefore, a gain(loss) may be recognized (as if approach)
Share Split
Special assessments
- change in the number of shares without capitalizing retained earnings or changing
the amount of its legal capital
- only a memorandum entry is made to record the receipt of new shares by virtue of
share split
a. Split up
- larger number of shares at reduced par or stated value
b. Split down
- smaller number of shares at increased par or stated value
-
Additional capital contribution of the shareholders
Additional cost of the investment
INTERMEDIATE ACCOUNTING 1
FAR
Chapter 16 EQUITY INVESTMENTS
Redemption of share
Share right/ Stock
right/ Preemptive
right/ Right issue
cont.
- particularly preference shares, may be called in for redemption and cancelation
- the redemption of share is recorded in the same manner as a sale of share. The
redemption price is treated as the sale price
-
-
Legal right granted to shareholders to subscribe for new shares issued by the
corporation at a specified price during a definite period
Financial asset (Current asset
It is inherent in every share, 1 share = 1 right
Valuable to a shareholder because the price at which the new shares are sold is
generally below the prevailing market price for the purpose of giving the
shareholders the chance to preserve their equity interest in the corporation
Ownership of share right is evidenced by certificate called “Share Warrants”
Accounting for Share Rights
1. Accounted for Separately
Share rights must be measured at Fair Value where in a PORTION of the
carrying amount of the original investment in equity shares is ALLOCATED to the
share rights at an amount equal to the fair value of the share rights at the
time of acquisition
2. NOT accounted for separately (preferred method)
Recognized as “embedded derivative” but NOT a stand-alone derivative

Date of Record is also the date of issuing the share warrants
*Selling Right-on
- Between date of declaration and date of record; share and the rights are
inseparable and are treated as one; share cannot be sold without also selling the
rights or vice versa
*Selling ex-right
- Between date of record and date of expiration; shares and rights can now be sold
separately

Original investment account is credited when the right are received because the
share right are derived from the original investment
Exercise of Share rights
-
Cost of the new investment includes the subscription price and the cost of
share right exercised
Investment in Shares
xxx
Cash
xxx
Share rights
xxx
* When an investor is entitled only to a fraction of share, the investor may purchase
additional rights in order to acquire one full share. The cost of the investment
includes the subscription price, cost of share rights originally owned and cost of
share right purchased
Sale of Share rights
-
Share rights are financial assets separate from the original shares and can be
sold independently
Cash
xxx
Share rights
xxx
Gain on sale of share rights
xxx
INTERMEDIATE ACCOUNTING 1
FAR
Chapter 16 EQUITY INVESTMENTS
cont.
Theoretical or Parity value of share right

The assumed fair value of the right that is derived from the market value of
the share
When share is selling “right-on”
Value of 1 right = MV of share right-on – subscription price/ # of rights to
purchase 1 share + 1

When share is selling “ex-right”
Value of 1 right = MV of share ex-right – subscription price/ # of rights to
purchase 1 share
-
If share rights are not exercised but expired, only a memorandum entry is
necessary to record the expiration
INTERMEDIATE ACCOUNTING 1
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CHAPTER
17
INVESTMENT IN ASSOCIATE
KEY TERMS
NOTES / DRAWINGS
Intercorporate share
investment
- purchase of the equity shares of one entity by another entity
* an entity may purchase enough shares of another entity in order to exert
“significant influence” over the financial and operating policies of the investee
entity
Significant Influence
-
Potential Voting
Rights
-
Loss of Significant
Influence
Equity Method
Power to participate in the financial and operating policy decisions of the
investee but NOT CONTROL or joint control over those policies
If investor holds 20% or more of the voting power (presumed to have
significant influence)
Other cases where there is a significant influence other than 20% voting power:
a. Representation in the board of directors
b. Participation in policy making process
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information
Entity may own share warrants, debt or equity instruments that are convertible
to ordinary shares that have the potential to give the entity additional voting
power over the financial and operating policies of another entity
Should be current exercisable or convertible
- entity losses significant influence over an investee when it loses the power to
participate in the financial and operating policy decisions of the investee
- this can occur with or without change in the absolution or relative ownership
interest (e.g. an associate becomes a subject to control of a government, court,
administrator, or regulator, or as a result of contractual agreement)
-
Accounting method used to account for significant influence
Investor and investee are viewed as a single economic unit
ACCOUNTING PROCEDURES:
1. Investment initially recorded at cost
2. Carrying amount is increased (decreased) by investor’s share in the profit
(loss) of the investee – recognized as “investment income”
Investment in associate
xxx
Investment income
xxx
3. Distributions or dividends received from
amount of the investment because it is a
treated as an investment income if there
Cash
Investment in associate
the investee reduces the carrying
mere return of capital (while this is
is no significant influence)
xxx
xxx
4. Investment must be in ordinary shares (voting shares)
Investment in preference shares should not be accounted for using the equity
method rather it may be accounted for using the FVPL, FVOCI, or at cost
5. Investor-investee relationship, investee is called as “associate” therefore
the account used to record the investor’s investment is “Investment in
Associate”- a noncurrent asset
INTERMEDIATE ACCOUNTING 1
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Chapter 17 INVESTMENT IN ASSOCIATE
-
cont.
Accounting problem arises if the investor pays more or less for an investment
than the carrying amount of the underlying assets
Excess of cost over carrying amount:
- Attributable to the following:
a. Undervaluation of the investee’s assets, such as building, land, and
inventory
b. Goodwill – not amortized but only tested for impairment; also included in
the carrying amount of the Investment in Associate
-
If assets are FAIRLY VALUED, the excess is usually attributed to the goodwill
Excess attributable to DEPRECIABLE asset = it is amortized over the remaining
life of the depreciable asset
Excess attributable to NONDEPRECIABLE asset (LAND) & Inventory = it is NOT
amortized but the amount is expensed when the land and inventory are sold
A REDUCTION TO INVESTMENT IN ASSOCIATE AND INVESTMENT INCOME when amortized or
expensed
Investment Income
xxx
Investment in associate
xxx
* the entire investment in associate including the goodwill is tested for impairment
at the end of each reporting period
Excess of net fair value over cost:
- Included as “income” in the determination of the investor’s share of
associate’s profit or loss in the period in which the investment is acquired
Investment in associate
xxx
Investment Income
xxx
Investee with heavy losses:
- If an investor’s share of losses of an associate equals or exceeds the
carrying amount of the investment, he should DISCONTINUE recognizing his share
of further losses. The investment is reported at nil or zero value
- The carrying amount of the investment in associate is not just the balance of
Investment in associate account, it also includes other long-term interests in
an associate (e.g. long-term receivables, loans and advances, and investment in
preference shares)
- However, trade receivables and any long-term receivables for which collateral
exists (e.g. secured loans) are EXCLUDED from the carrying amount of an
investment in associate
- Additional losses are provided for or a liability is recognized, to the extent
that the investor has incurred legal or constructive obligations or made
payments on behalf of the associate.
Loss on investment
xxx
Investment in associate
xxx
- if the associate subsequently reports income, the investor RESUMES including
its share of such income after its share of the income equal the share of
losses not recognized
Investment in associate
Investment income
xxx
xxx
Impairment loss
- Shall be recognized when CA>Recoverable amount (higher between FV – cost of
disposal and Value in Use)
Value in Use
- PV of est. future cash flows expected to be generated by the investee
- PV of est. future cash flows expected to arise from dividends
* both methods give the same result
INTERMEDIATE ACCOUNTING 1
FAR
Chapter 17 INVESTMENT IN ASSOCIATE
cont.
- since goodwill is not separately recognized from the investment amount, the
impairment loss recognized is applied to the investment as a whole
- the recoverable amount of an investment in associate is assessed for each individual
associate
Investee with preference shares
- When an associate has outstanding cumulative preference shares, the investor
shall compute its share of earnings or losses after deducting the preference
dividends, whether or not they were declared
- When an associate has outstanding noncumulative preference shares, the investor
shall computer its share of earnings after deducting the preference dividends
only when declared
Other changes in equity
- Arise from revaluation of PPE, and from foreign exchange translation
differences
- The investor’s share of these changes is recognized directly in equity of the
investor
Investment in associate
xxx
Revaluation surplus – investee
xxx
INTERMEDIATE ACCOUNTING 1
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CHAPTER
INVESTMENT IN ASSOCIATE
18
KEY TERMS
Other accounting issues
NOTES / DRAWINGS
Upstream transactions
-
Sale of assets from associate to investor
The unrealized profit must be eliminated in determining he investor’s share in
the profit or loss of the associate
Downstream
transactions
-
Sale of assets from investor to associate
Must also be eliminated (same process with upstream transactions)
Discontinuance of
equity method –
change from equity
-
Investor shall discontinue the use of the equity method from the date that it
ceases to have significant influence over an associate
The investor may account for the investment as:
a. FA – FVPL
b. FA – FVOCI
c. Nonmarketable investment at cost or investment in unquoted
equity instrument
-
* significant influence must be lost before the equity method ceases to be applicable
Measurement after loss of significant influence
- The investor shall measure any retained investment in associate at FAIR VALUE
- The difference between the CA and the FV shall be included in the profit or
loss
- The difference between the net proceeds and CA is also included in the P/L
Associate Held for Sale
- Shall be measured at lower of CA and FV less cost of disposal
Investment of Less than 20%
a. Fair value method
 FVPL
 FVOCI
b. Cost method
 Unquoted/nonmarketable equity instruments
- under these methods, dividends received by the investor is accounting for as
“dividend income”
Cash
xxx
Dividend income
xxx
- there is no longer a distinction between preacquisition and postacquisition
dividends
INTERMEDIATE ACCOUNTING 1
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CHAPTER
19
KEY TERMS
Bond
FINANCIAL ASSET AT AMORTIZED COST
Bond Investment
NOTES / DRAWINGS
-
-
Formal unconditional promise to pay a specified sum of money in the future,
and make periodic interest payments at a stated rate until the principal is
paid.
Evidenced by “bond indenture”
CLASSIFICATION OF BOND INVESTMENTS (current or noncurrent)
a. Financial Asset – for trading
b. Financial Asset – amortized cost
c. Financial Asset – FVOCI
d. Financial Asset – FVPL by irrevocable designation or Fair Value Option
Initial measurement:
- At fair value + transaction costs directly attributable to acquisition
- If FA-FVPL = transaction costs are expensed
Subsequent measurement:
- FVPL
- FVOCI
- At Amortized Cost
Acquisition of bond
investments
a. On interest date – no accounting problem
b. Between interest dates –purchase price normally includes accrued interest
 Accrued interest must be accounted for separately as an asset
(either accrued interest receivable or interest income)
* when bond investment is held for “trading” or measured at FVPL, it is not
necessary to amortize any premium or discount
Investment in bonds at AMORTIZED COST: (noncurrent investments)
- to collect contractual cash flows
- contractual cash flows are solely payment of principal and interest
amortized cost = initial amount – repayments +/- amortization of discount/premium –
reduction for impairment or uncollectibility
Amortization of:
 discount (gain)
investment in bonds
interest income
 premium (loss)
interest income
investment in bonds
Callable bonds
-
-
xxx
xxx
xxx
xxx
may be called in or redeemed by the issuing entity prior to their date of –
maturity
usually the call price or redemption price is at a premium or more than the
face amount of the bonds
INTERMEDIATE ACCOUNTING 1
FAR
Chapter 19 FA-AMORTIZED COST
Convertible bonds
-
cont.
-
give the bondholders the right to exchange their bonds for share capital of the
issuing entity at any time prior to maturity
can be classified as FA-FVPL
Serial bonds
-
have series of maturity date
Term bonds
-
mature on a single date (e.g. callable & convertible bonds
Methods of
amortization
a. straight line method
b. bond outstanding – fraction is developed from bond outstanding column
c. effective interest method
CHAPTER
EFFECTIVE INTEREST METHOD
20
KEY TERMS
Amortized cost, FVOCI & FVPL
NOTES / DRAWINGS
-
Effective rate and nominal rate are the same if the cost is equal to the face
value
*Bond at a premium = effective rate is lower
*Bond at a discount= effective rate is higher
*Interest earned/interest income = carrying amount x effective rate
*Interest received = face value * nominal rate
Bond investment – FVOCI:
- Collecting contractual cash flow and by selling the financial asset
- Interest income is recognized using the effective interest method
- On derecognition, cumulative gain/loss is recognized in OCI and reclassified to
P/L
Fair Value Option
- All changes in fair value are recognized in profit or loss
- Transaction costs are expensed
- Interest income is based on nominal rate
Market price of bonds:
- Present value of principal + PV of interest payment using the effective rate
INTERMEDIATE ACCOUNTING 1
FAR
CHAPTER
21
KEY TERMS
RECLASSIFICATION OF FINANCIAL
ASSET
NOTES / DRAWINGS
REQUIREMENT FOR
RECLASSIFICATION

An entity shall reclassify financial assets only when it changes the business
model for managing the financial assets
Reclassify prospectively from the reclassification date
Entity shall not restate any previously recognized gains, losses, and interest.
All equity investments cannot be reclassified; only debt investments can be
reclassified (except debt investment measure at FVPL)
Reclassification:
From
Amortized cost
Amortized cost
FVOCI
FVPL
FVOCI
CHAPTER
Investment property
FVOCI
Amortized cost
FVOCI
FVPL
Difference beteen the previous carrying
amount and FV is recognized in P/L
Original effective rate is NOT adjusted
Original effective rate is NOT adjusted
Compute for NEW effective rate
Cumulative gain(loss) previously recognized
in OCI is reclassified to P/L
INVESTMENT PROPERTY
22
KEY TERMS
To
FVPL
Cash Surrender Value
NOTES / DRAWINGS
-
Property (land and building) under a finance lease to earn rentals or for
capital appreciation or both
An investment property is NOT held for: (these are owner-occupied properties)
a. Use in production or supply of goods or service
b. Administrative purposes
c. For sale in ordinary course of business
Examples of Investment Property:
a. Land for: long-term capital appreciation
: currently undetermined use
b. Building: owned by the entity leased out under operating lease
Vacant but is held to be leased out under an operating lease
c. Property that is being constructed or developed for future use as investment
property
Investment property held by lessee:
- Recognize “Right of Use Asset” and “Lease Liability”
Right of use asset – initially recognized at COST:
a. PV of lease payment
b. Lease payment made to lessor at or before commencement date less any lease
incentive
c. Initial direct cost (IDC)
d. Estimate of cost of dismantling and restoring the underlying asset for which
the lessee has present obligation
INTERMEDIATE ACCOUNTING 1
FAR
Chapter 22 INVESTMENT PROPERTY
cont.
Subsequent measurement:
 if a lessee applied the Fair Value model in measuring investment property. The
lessee shall also apply the Fair Value model to the right of use asset that
meets the definition of investment property
INITIAL measurement of investment property:
- transaction cost plus directly attributable expenditures (e.g. professional
fees for legal services, property transfer taxes, and other transaction costs
SUBSEQUENT measurement:
1. Fair Value Model
2. Cost Model
CASH SURRENDER VALUE
(noncurrent
investment)
* Accounting problem arises when the beneficiary is the entity itself
- Amount which the insurance firm will pay upon the surrender and cancelation of
the life insurance policy.
- This legally commences to accrue at the end of the third year
a. Policy is a life policy
b. Premium for 3 full years are paid
c. Policy is surrendered at the end of the 3 rd year or anytime thereafter
-
Dividends received on the life policy are NOT INCOME but A REDUCTION of life
insurance expenses