1A_FINANCIAL ASSET AT FAIR VALUE
Intermediate Accounting 2
 Investments
- Are assets held by an entity for the accretion
of wealth through distribution such as
interest, royalties, dividends and rentals, for
capital appreciation or for other benefits to
the investing entity such as those obtained
through trading relationships
- Not directly identified with the operating
activities of an entity
- Occupy only an auxiliary relationship to the
central revenue producing activities of the
entity
o
Can be current (held for not more than one
year) or noncurrent (held for more than one
year)
 Financial Instrument
- Any contract that gives rise to financial asset
off one entity and a financial liability or an
equity instrument to another entity
Characteristics:
 There must be a contract
 There are at least two parties to a
contract
 The contract shall give rise to a financial
asset of one party and financial liability or
equity instrument to another party
 Financial Asset
- any asset that is:
 Cash
 A contractual right to receive cash
or another financial asset from
another entity
 A contractual right to exchange
financial instrument with another
entity under conditions that are
potentially favorable
 An equity instrument of another
entity
Not considered as financial asset:
 Intangible assets
 Gold bullion deposited in
(commodity)
 Physical assets (PPE, Inventories)
 Prepaid expenses
 Leased assets
bank
Initial Measurement
 @ Fair Value
 + Transaction Costs (except FA @ FVPL)
Transaction costs include
o Fees and commissions paid to agents,
advisers, brokers/dealers
o Levies by regulatory agencies and
securities exchanges
o Transfer taxes and duties
 Transaction costs do not include debt
premiums and discounts, financing costs,
and internal administrative or holding costs
Subsequent Measurement:
a. Fair value through profit or loss (FVPL)
b. Fair value through other comprehensive
income (FVOCI)
c. Amortized cost
 Financial Liability
- a contractual obligation to
 deliver cash or other financial assets
to another entity
 exchange financial instrument with
another
entity
under
PUC
(potentially unfavorable condition)
Not considered as financial liability:
 Deferred Revenues and Warranty
Obligations (require delivery of goods
and services rather than contractual
obligation to pay cash or another
financial asset)
 Income Tax Payable (created as a result of
statutory requirements imposed by
government
 Constructive Obligations (do not arise
from contracts)
 Equity Instrument
- Any contract that evidences a residual
interest in the assets of an entity after
deducting all of its liabilities
 Ordinary share capital
 Preference share capital
 Warrants or written call options
 Equity security
- Any instrument representing ownership and
right, warrants, or options to acquire or
dispose of ownership shares at a fixed or
determinable price
- Represents an ownership interest in an
entity (include OS,PS, and rights or options to
acquire ownership shares)
Not considered equity security:
 Redeemable preference shares
 Treasury shares
 Convertible debt
 Debt security
- Represents a creditor relationship with an
entity
- Has a maturity date and a maturity value
Examples: Corporate bonds, BSP treasury bills,
Government securities, Commercial paper,
Preference
shares
with
mandatory
redemption date or is redeemable at the
holder’s option
 Summary of Measurement Rules
EQUITY INVESTMENTS
1. Held for trading
FVPL
(by requirement)
2. Not held for trading
3. Not held for trading
(irrevocable election)
4. All other investments
in quoted equity
instruments
5. Investments
in
unquoted
equity
instruments
6. Investments of 20%
to 50%
7. Investments of more
than 50%
DEBT INVESTMENTS
1. Held for trading
FVPL
FVOCI
(by option)
FVPL
(by consequence)
Cost
Equity Method
Consolidation
Method
FVPL
(by requirement)
2. Held for collection of
contractual cash flows
3. Held for collection of
contractual cash flows
(irrevocable
designation or fair
value option)
4. Held for collection of
contractual cash flows
and for sale of the
financial asset
5. Held for collection of
contractual cash flows
and for sale of the
financial
asset
(irrevocable
designation or fair
value option)
6. All debt investments
that do not satisfy the
requirements
for
measurement
at
amortized cost and
FVOCI
Amortized cost
Financial Asset Held for Trading
PFRS 9 Appendix A:
- Acquired principally for the purpose of
selling or repurchasing it in the near term
- On initial recognition, it is part of a portfolio
of identified FA evidenced by a recent actual
pattern of short-term profit taking
- It is a derivative (except for a derivative that
is a financial guarantee contact or a
designated and an effective hedging
instrument)
Equity Instrument held for Trading
- The election to present gain and loss in OCI
is not allowed
- Subsequent changes in fair value are always
included in profit or loss
Equity Investment @ FVOCI
- The amount recognized in OCI is not
reclassified to P&L
- However, on derecognition, the amount
may be transferred to equity or retained
earnings
- The unrealized gain is presented as
component of OCI in the Statement of
Comprehensive Income
- Normally classified as noncurrent asset
- Only the increase/decrease in market value
will be reported in the Statement of
Comprehensive Income
- The total cumulative amount of UG or UL
will appear in the statement of changes in
equity
- The unrealized loss is reported as a
deduction as component of OCI in the
Statement of Comprehensive Income
FVPL
(by option)
FVOCI
FVPL
(by option)
FVPL
(by default)
in acc. With PFRS
9; parag 4.1.4
Debt Investment at Amortized Cost
Both conditions must be met:
a. The business model is to hold the financial
asset in order to collect contractual cash
flows on specified date
b. The contractual cash flows are solely
payments of principal and interest
Debt Investment at FVOCI
Both conditions must be met:
a. The business model is achieved both by
collecting contractual cash flows and by
selling the financial asset
b. The contractual cash flows are solely
payments of principal and interest on the
principal outstanding
-
Interest income is recognized using the
effective interest method as in amortized
cost measurement
-
On derecognition, the cumulative gain or
loss recognized in OCI shall be reclassified to
P&L
 Fair Value
- Price that would be received to sell an asset
in an orderly transaction between market
participants at the measurement date (PFRS
13)
- Price agreed upon by a buyer and a seller in
an arm’s length or orderly transaction
Best evidence of FV (descending):
Quoted price of
1. Identical asset in an active market
2. Similar asset in an active market
3. Identical and similar asset in an inactive
market
If the quoted price pertains to:
 Share or Equity Security
- Quoted price means pesos per
share
 Bond or Debt Security
- Quoted price means % of the face
value of bond
 Gains and Losses
@ Fair Value
@ Amortized Cost
Unrealized Gains and Losses
 Unrealized gain or  Unrealized gain and
loss: reported in the
loss: not recognized
Income Statement
 This is because, such
investments are not
 In determining fair
measured at fair
value, no deduction is
value
made for transaction
costs that may be
incurred on disposal of
the
financial
statement
FA @ FVPL (Trading Sec.):
 If FV > CV
(unrealized gain)
 If FV < CV
(unrealized loss)
Realized Gains and Losses
 Realized gains and  Recognized in P&L
losses (FA @ FVPL) is
when financial assets
recognized in P&L –
are
derecognized,
this
result
from
impaired
or
actually selling the
reclassified,
and
securities
through amortization
process
 Sale of Securities
Trading Securities
- On disposal of a TS, the difference between
the consideration received and the carrying
amount is recognized as gain or loss on
disposal to be reported in the income
statement
FVOCI
- Gain or loss on disposal of equity investment
measured at FVOCI is recognized in Retained
Earnings
- The cumulative gain or loss previously
recognized in OCI is also transferred to
Retained Earnings
- The amount recognized in OCI is not
reclassified to P&L under any circumstance
- The cumulative UG or UL is always the
difference between the original cost and
current market value
 Impairment of Financial Assets
- It is not necessary to assess financial assets
measured at FVPL and equity investments
measured at FVOCI for impairment
An entity shall recognize impairment loss on:
a. Debt investment measured @AC
b. Debt investment measured @FVOCI
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡
(𝑃𝑉 𝑜𝑓 𝑒𝑠𝑡. 𝑓𝑢𝑡𝑢𝑟𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑
𝑎𝑡 𝑡ℎ𝑒 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑒)
𝐼𝑚𝑝𝑎𝑖𝑟𝑚𝑒𝑛𝑡 𝑙𝑜𝑠𝑠
 Loss Allowance
- An entity shall measure the loss allowance
for a financial instrument at an amount
equal to the lifetime expected credit loss if
the credit risk on that financial instrument
has increased significantly since initial
recognition
 Credit loss – the PV of all cash shortfalls
 Expected credit loss – an estimate of credit
loss over the life of the financial instrument
 Pro-forma Journal Entries (FA@FV)
Trading Securities
FVOCI
Acquisition
Trading securities xx
FA-FVOCI
xx
*Commission Exp. xx
Cash
xx
Cash
xx
*any transaction cost
expensed; not capitalized
is
Change in FV (gain)
Trading securities xx
If initial recog.
UG – TS
xx
FA – FVOCI
xx
UG - OCI
xx
Note: The UG is classified in the
income statement as other
income
If there was loss
previously recognized
FA-FVOCI
xx
*UL – OCI
xx
UG – OCI
xx
*close this first
Change in FV (loss)
UL – TS
xx
If initial recog.
Trading securities xx
UL - OCI
xx
FA - OCI
xx
Note: the UL is reported in the
income statement as other
expense
If there was gain
previously recognized
*UG - OCI
xx
UL – OCI
xx
FA – FVOCI
xx
*close this first
Sale (gain)
Cash
xx
Cash
xx
Trading securities
xx
*Retained Earn. xx
Gain on sale of TS
xx
FA – FVOCI
xx
To close cumulative
UG
UG – OCI
xx
*Ret. Earn.
xx
To close cumulative
UL
*Ret. Earn.
xx
UL-OCI
xx
*different amounts
Sale (loss)
Cash
xx
Cash
Loss on sale of TS
xx
*Retained
Trading securities
xx
xx
FA
–
xx
xx
Earn.
FVOCI
To close cumulative
UG
UG – OCI
xx
*Ret. Earn.
xx
To close cumulative
UL
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Notes:
 Example of Potentially Favorable Condition:
exchanges resulting to gain or additional
cash inflow to the entity (i.e. option held by
the holder to purchase shares of another
entity at less than market price)
 Financial assets at fair value may be a debt
security or an equity security
 Financial assets at amortized cost is always a
debt security; it can never be an equity
security
 Transaction costs are expensed outright if
the financial asset is measured at FVPL;
capitalized as cost if otherwise
 Transaction costs don’t result in increase in
future economic benefits to the entity
 There are no noncurrent trading securities