Chapter 15 – Intro.

to Financial Asset and Investment in Equity Securities

Chapter 15
INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES

TOPIC OVERVIEW:
This chapter discusses the introduction on financial instruments and its categories initial recognition
initial instrument, subsequent measurement, and reclassification, derecognition and financial statement
presentation for each type of financial instrument.

LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Identify and describe the type of financial instruments.
2. Identify and explain the different classifications of financial assets.
3. Describe the initial recognition, initial measurement, subsequent measurement, reclassification,
derecognition and financial statement presentation of financial asset.
4. Differentiate financial asset and investment in equity securities under full PFRS and PFRS for
SMEs.
5. Differentiate the accounting for FVTPL, FVTOCI and FAAC.

INVESTMENT
These 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.

FINANCIAL INSTRUMENT
A financial statement is any contract that gives rise to financial asset of one entity and a financial liability
or equity instrument of another entity.

FINANCIAL ASSET
A financial asset is any asset that is:
a. Cash
b. An equity instrument of another entity;
c. A contractual right:
i. To receive cash or another financial asset from another entity
ii. To exchange financial assets or financial liabilities with another entity under conditions
that are potentially favorable to the entity; or
d. A contract that will or may be settled in the entity’s own equity instruments and is:
i. A non-derivative for which the entity is or may be obliged to receive a variable number
of the entity’s own equity instruments; or
ii. A derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity’s own equity instruments.
For this purpose the entity’s own equity instruments do not include instruments that are
themselves contracts for the future receipt or delivery of the entity’s own equity
instruments.

Examples of Financial Assets

1. Cash and cash equivalents
2. Accounts receivable
3. Allowance for bad debts
4. Notes receivable
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

5. Interest receivable
6. Prepaid interest (not a valuation account to financial liability)
7. Investment in equity instruments
8. Investment in associate
9. Investment in subsidiary
10. Investment in bonds
11. Cash surrender value
12. Sinking fund

Examples of Nonfinancial Assets

1. Merchandise inventories
2. Biological assets
3. Property, plant and equipment (e.g. Building)
4. Accumulated depreciation
5. Intangible assets
6. Prepaid rent
7. Claims for tax refund
8. Deferred tax assets
9. Gold bullion deposited in banks

FINANCIAL LIABILITY
A financial liability is any liability that is:
a. A contractual obligation:
i. To deliver cash or another financial asset to another entity; or
ii. To exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavorable to the entity; or
b. A contract that will or may be settled in the entity’s own equity instruments and is:
i. A non-derivative for which the entity is or may be obliged to deliver a variable number of
the entity’s own equity instruments; or
ii. A derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity’s own equity instruments.
For this purpose the entity’s own equity instruments do not include instruments that are
themselves contracts for the future receipt or delivery of the entity’s own equity
instruments.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.

Examples of financial Liabilities

1. Accounts payable
2. Utilities payable
3. Accrued interest expense
4. Cash dividends payable
5. Finance lease liability
6. Bonds payable
7. Add Premium on bonds payable or less Discount on bonds payable
8. Security deposit
9. Issued redeemable preference shares (with mandatory redemption)
10. Stock appreciation rights payable (SARs Payable)
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Examples of Nonfinancial Liabilities

1. Advances from customers
2. Unearned rent
3. Warranty obligations
4. Unearned interest on receivables
5. Income taxes payable
6. SSS contributions payable
7. PHILHEALTH contributions payable
8. Property dividends payable
9. Deferred tax liabilities
10. Provisions for warranties

Illustration: Financial Assets and Financial Liabilities

On December 31, data for Petmalu Co. include the following:
1. Accounts receivable 200,000
2. Allowance for bad debts 20,000
3. Cash and cash equivalents 140,000
4. Interest receivable 42,000
5. Prepaid interest (not a valuation account to financial liability) 40,000
6. Investment in associate 90,000
7. Stock appreciation rights payable (SARs Payable) 240,000
8. Investment in equity instruments 250,000
9. Investment in subsidiary 140,000
10. Investment in bonds 340,000
11. Cash surrender value 120,000
12. Sinking fund 80,000
13. Share Premium 70,000
14. Unearned interest on receivables 10,000
15. Income taxes payable 18,000
16. SSS contributions payable 10,000
17. Intangible assets 60,000
18. Prepaid rent 40,000
19. Treasury shares 46,000
20. Claims for tax refund 90,000
21. Deferred tax assets 120,000
22. Accounts payable 300,000
23. Utilities payable 500,000
24. Accrued interest expense 36,000
25. Cash dividends payable 54,000
26. Finance lease liability 90,000
27. Bonds payable 240,000
28. Discount on bonds payable 30,000
29. Security deposit 60,000
30. Advances from customers 32,000
31. Unearned rent 16,000
32. Merchandise inventories 266,000
33. Biological assets 240,000
34. Accumulated depreciation 100,000
35. Warranty obligations 26,000
36. PHILHEALTH contributions payable 12,000
37. Deferred tax liabilities 38,000
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

38. Accumulated Profits-appropriated for plant expansion 1,000,000

39. Accumulated Profits-unappropriated
40. Issued redeemable preference shares (with mandatory redemption) 200,000
41. Issued Preference shares capital 700,000

Required:
Based on the above data, determine the following:
1. Financial Assets (FA)
2. Nonfinancial Assets (NFA)
3. Financial Liabilities (FL)
4. Nonfinancial Liabilities (NFL)

SOLUTION:
‘000 omitted FA NFA FL NFL SHE
Accounts receivable 200 - - - -
Allowance for Bad debts (20) - - - -
Cash and cash equivalents 140 - - - -
Interest receivable 42 - - - -
Prepaid Interest (not a valuation account
To financial liability) 40 - - - -
Investment in associate 90 - - - -
Stock appreciation rights payable
(SARs Payable) - - 240 - -
Investment in equity instruments 250 - - - -
Investment in subsidiary 140 - - - -
Investment in bonds 340 - - - -
Cash surrender value 120 - - - -
Sinking fund 80 - - - -
Share Premium - - - - 70
Unearned interest on receivables - - - 10 -
Income taxes payable - - - 18 -
SSS contributions payable - - - 10 -
Intangible assets - 60 - - -
Prepaid rent - 40 - - -
Treasury shares - - - - (46)
Claims for tax refund - 90 - - -
Deferred tax assets - 120 - - -
Accounts payable - - 300 - -
Utilities payable - - 500 - -
Accrued interest expense - - 36 - -
Cash dividends payable - - 54 - -
Finance lease liability - - 90 - -
Bonds payable - - 240 - -
Discount on bonds payable - - (30) - -
Security deposit - - 60 - -
Advances from customers - - - 32 -
Unearned rent - - - 16 -
Merchandise inventories - 266 - - -
Biological assets - 240 - - -
Accumulated depreciation - (100) - - -
Warranty obligations - - - 26 -
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

PHILHEALTH contributions payable - - - 12 -

Deferred tax liabilities - - - 38 -
Accumulated Profits-appropriated for
Plant expansion - - - - 1,000
Accumulated profits unappropriated - - - - 6,400
Issued redeemable preference shares (with
Mandatory redemption) - - 200 - -
Issued Preference shares capital - - - - -
___________________________________________
Adjusted balances 1,422 716 1,690 162 7,424

CATEGORIES OF FINANCIAL ASSETS

1. Financial assets at fair value
a. Through profit or loss (FVTPL)
b. Through other comprehensive income (FVTOCI)
2. Financial assets at amortized cost (FAAC)

BASIC OF CLASSIFICATION
An entity shall classify financial assets as subsequently measured at amortized cost, fair value through
other comprehensive income or fair value through profit or loss on the basis of both:
a. The entity’s Business Model for managing the financial assets
b. The Contractual Cash Flow Characteristics of the financial asset.

Business Model Assessment

The assessment on the entity’s business model centers around whether financial asset are held for the
collection of contractual cash flows. This is based on how the entity is run, and on the objective of the
business model as determined by key management personnel (per PAS 24 Related Party Disclosure). The
assessment therefore is not on an instrument by instrument basis – rather the overall business model of
the entity.

However, a single entity might have more than one business model, which may then result in different
categories of financial assets. Although the focus is on the collection of the contractual cash flows, it is
not necessary to hold all of the assets to their contractual maturity. This means that sales of assets can
occur without prejudicing the assertion that they are held for the collection of contractual cash flows.

Contractual Cash Flow Characteristics

The assessment of the contractual terms of cash flows is carried out on an instrument by instrument
basis. Contractual cash flows are made up of:
a. Principal – the fair value of the financial asset at initial recognition [PFRS 9.4.1.3a]
b. Interest – consist of consideration for the time value of money, for the credit risk associated with
the principal amount outstanding during a particular period of time and for other basic lending
risks and costs at well as a profit margin [PFRS 9.4.1.3b]
For instruments denominated in foreign currency, the assessment is made on the basis of the currency in
which the instrument is denominated (foreign currency movements between the foreign currency and
functional currency are not taken into account when analyzing the contractual terms).

OVERVIEW OF CATEGORIES OF FINANCIAL ASSET

1. DEBT SECURITIES – investment in debt securities may be classified as either
a. Financial assets at amortized cost (FAAC)
b. Financial assets at fair value through other comprehensive income (FVTOCI); or
c. Financial assets at fair value through profit or loss (FVTPL).
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

2. EQUITY SECURITIES – investment in equity securities within the scope of PFRS 9 may be
classified as either:
a. Financial assets at fair value through profit or loss (FVTPL); or
b. Investment in equity securities designated at FVTOCI.
3. DERIVATIVES – derivatives may be accounted as:
a. Designated as hedging instrument (cash flow hedge, fair value hedge or hedge of net
investment in foreign operation)
b. Not used as hedging instrument – FVTPL

DEBT SECURITIES
Debt securities are classified based on the following:
1. FAAC – a financial asset is held within a business model whose objective is to hold financial
assets in order to collect contractual cash flows and
a. The contractual terms of the financial asset give arise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.
2. FVTOCI – a financial asset shall be measured at fair value through other comprehensive income
if bothof the following conditions are met:
a. The financial asset is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets and
b. The contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.
3. FVTPL – a financial asset shall be measured at fair value through profit or loss under the
following conditions:
a. It is held for trading. A financial asset is classified as held for trading if it is:
i. Acquired or incurred principally for the purpose of selling or repurchasing it in the
near term;
ii. Part of a portfolio of identified financial instruments that are managed together and
for which there is evidence of a recent actual pattern of short-term profit-taking; or
iii. A derivative (except for a derivative that is a financial guarantee contract or a
designated and effective hedging instrument).
b. It is designatedat FVTPL. An entity may, at initial recognition, designate a financial asset as
measured at fair value through profit or loss. An entity may use this designation only when
doing so results in more relevant information, because either
i. It eliminates or significantly reduces a measurement or recognition inconsistency
(sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from
measuring assets or liabilities or recognizing the gains and losses on them on
different bases; or
ii. A group of financial assets is managed and its performance is evaluated on a fair
value basis, in accordance with a documented risk management or investment
strategy, and information about the group is provided internally on that basis to the
entity’s key management personnel (as defined in PAS 24 Related Party
Disclosures), for example the entity’s board of directors and chief executive officer.
c. All other debt financial asset not classified under (1) and (2).

EQUITY SECURITIES:
Equity securities within the scope of PFRS 9 are classified either as:
1. FVTPL – a financial asset shall be measured at fair value through profit or loss unless it is
measured at fair value other comprehensive income. Hence, this is the default classification of
investment in equity securities and includes held for trading equity securities.
2. Investment in equity securities designated as at FVTOCI – an entity may make an irrevocable
election at initial recognition be measured investments in equity instrumentsthat would otherwise
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

be measured at fair value through profit or loss to present subsequent changes in fair value in
other comprehensive income. Equity investments not held for trading may classified under this
category.
Summary of Classification of Financial Assets

Debt Derivative Equity

To hold financial asset

No Yes
and collect contractual
Held for
cash flows trading

No No

To collect contractual Yes Fair value through

cash flows and sell OCI option?
financial assets

Fair value option Yes Yes

(FVO) used?

Fair value through

other Comprehensive
Income (FVTOCI)
Fair value through
Amortized cost profit or loss
(FVTPL)

Applied Auditing by Asuncion, Ngina and Escola

ACCOUNTING FOR FINANCIAL ASSETS

INITIAL RECOGNITION
Financial assets are recognized in the Statement of Financial Position when and only when the entity
becomes party to the contractual provisions of the instrument.

INITIAL MEASUREMENT
All financial assets are measured initially at fair value, plus, for those financial assets not classified at fair
value through profit or loss, directly attributable transaction costs.

What is fair value?

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. [PFRS 13]

Most often, the fair value of securities is the quoted price in the securities market. For equity securities,
the quoted price is the price per share, while for debt securities; the quoted price is stated as percentage of
the face value.

Bid Price and Asking Price (aka”current offer price)

The appropriate quoted market price for an asset held or an existing asset is usually the current “bid price”
or the price which a willing buyer wants to pay.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

The appropriate quoted market price for an asset to be acquired is the “asking price” or the price which a
willing seller wants to receive.

How to determine fair value?

The following levels of input are the determinant of fair value from the most reliable to the least
reliable:
Level 1 inputes – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
 Most reliable evidence of fair value
 Used without adjustment, with limited exceptions
 Fair value – quoted price x quantity held
- Even if the market’s normal daily trading volume is not sufficient to absorb the quantity held.
- Even if placing orders to sell the position in a single transaction might affect the quoted price.
Level inputs – Observable inputs either directly (prices) or indirectly (derived from prices).
 Inputs other than quoted market prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.
 Level 2 inputs include:
- Quoted prices for similar assets or liabilities in active markets
- Quoted prices for identical or similar assets or liabilities in markets that are not active
- Inputs other than quoted prices that are observable for the asset or liability, for example
o Interest rates and yield curves observable at commonly quoted intervals
o Implied volatilities
o Credit spreads
- Inputs that are derived principally from or corroborated by observable market data by
correlation or other means (“market corroborated inputs”)
Level 3 inputs – Inputs that are not based on observable market data (unobservable inputs).
 Unobservable inputs for the asset or liability. This is usually done by management assumption
and calculations.
 Unobservable inputs are used to measure fair value to the extent that relevant observable inputs
are not available, thereby allowing for situations in which there is little, if any, market activity for
the asset or liability at the measurement date.
 An entity develops unobservable inputs using the best information available in the circumstance,
which might include the entity’s own data, taking into account all information about market
participant assumptions that is reasonably available.

What are transaction costs?

Transaction costs are defined by PFRS 9 and PFRS 13 as follows:
a. Transaction costs for financial instruments are incremental costs that are directly attributable to
the acquisition, issue or disposal of a financial asset or financial liability. An incremental cost is
one that would not have been incurred if the entity had not acquired, issued or disposed of the
financial instrument. [ PFRS 9.A]

Transaction costs include fees and commission paid to agents (including employees acting as
selling agents), advisers, brokers and dealers, levies by regulatory agencies and security
exchanges, and transfer taxes and duties. Transaction costs do not include debt, premiums or
discounts, financing costs or internal administrative or holding costs.

b. Transaction cost includes costs to sell an asset or transfer a liability in the principal (or most
advantageous) market for the asset or liability that are directly attributable to the disposal of the
asset or the transfer of the liability and meet both of the following criteria:
- They result directly from and are essential to that transaction.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

- They would not have been incurred by the entity had the decision to sell the asset or transfer
the liability not been made (similar to costs to sell, as defined in PFRS 5). [PFRS 13.A]

Fair value is not adjusted for transaction costs. This is because transaction costs are not a
Characteristic of an asset or a liability; they are a characteristic of the transaction.

While not deducted from fair value, an entity considers transaction costs in the context of
Determining the most advantageous market (in the absence of a principal market) because in this
Instance the entity’s is seeking to determine the market that would maximize the net amount that
Would be received for the asset.

SUBSEQUENT MEASUREMENT
After initial recognition, an entity shall measure a financial asset at:
a. Amortized cost;
b. Fair value through other comprehensive income; or
c. Fair value through profit or loss.
IMPAIRMENT AND REVERSAL OF IMPAIRMENT
An entity shall recognized a loss allowance for expected credit losses on a FAAC, FVTOCI (debt), a lease
receivable, a contract asset or a loan commitment and a financial guarantee contract.
Credit loss is the difference between all contractual cash flows that are due to an entity in accordance
with the contract and all the cash flows that the entity expects to receive (ie. All cash shortfalls),
discounted at the original effective interest rate (or credit-adjusted effective interest rate for purchased or
originated credit-impaired financial assets).

Expected credit loss is classified as either:

a. 12-month expected credit losses–recognized if the credit risk on a financial instrument has not
increased significantly since initial recognition
b. Lifetime expected credit losses – recognized if the credit risk on that financial instrument has
increased significantly since initial recognition

The following table summarizes financial asset subject to impairement under PFRS 9 5.5:

Categories Subject to impairement? Impairment Loss Impairement Gain (ie. Reversal)

1. FVTPL
a. Debt No N/A N/A
b. Equity No N/A N/A
c. Derivatives No N/A N/A
2. FVTOCI
a. Debt Yes P&L P&L
b. Equity No N/A N/A
3. FAAC (debt) Yes P&L P&L

DERECOGNITION
Derecognition is the removal of a previously recognized financial asset from an entity’s statement of
financial position.
Derecognition of Financial Assets
An entity shall derecognize a financial asset when, and only when:
a. The contractual rights to the cash flows from the financial asset expire, or
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

b. It transfers the financial asset and the transfer qualifies for derecognition.
An entity transfers a financial asset if, and only if, it either:
a. Transfers the contractual rights to receive the cash flows of the financial asset, or
b. Retain the contractual rights to receive the cash flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one or more recipients in an arrangement where an
entity retains the contractual rights to receive the cash flows of a financial asset, but assumes a
contractual obligation to pay those cash flows to one or more entities, three conditionsneed to be
met before an entity can consider the additional derecognition criteria:
1. The entity has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original asset
2. The entity is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as security to the eventual recipients.
3. The entity has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay. The entity is not entitled to reinvest the cash flows except
for the short period between collection and remittance to the eventual recipients. Any interest
earned thereon is remitted to the eventual recipients.
Derecognition of equity securities will be discussed shortly in this Chapter while derecognition of debt
securities will be discussed in Chapter 16.
Transfers that qualify for derecognition
If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains
the right to service the financial asset for a fee, it recognizes either a servicing asset or liability for that
servicing contract.

If, as a result of a transfer, a financial asset is dereconized, but the entity obtains a new financial asset or
assumes a new financial liability or servicing liability, the entity recognizes the new financial asset,
financial liability or servicing liability at fair value.

Servicing Liabilities
A contract to service financial assets under which the estimated future revenues from contractually
specified fees, late charges, and other ancillary revenues (benefits of servicing) are not expected to
adequately compensate the servicer for performing the servicing.

Servicing Liability at Fair Value

Fair value as of the balance sheet date of a liability representing servicing arrangements under which the
estimated future revenues from contractually specified servicing fees, late charges, and other ancillary
revenues are not expected to adequately compensate the servicer.

Gain or loss on derecognition

The gain or loss on derecognition is computed as the difference between:
a. The carrying amount (measured at the date of derecognition) and
b. The consideration received (including any new asset obtained less any new liability assumed)
shall be recognized in profit or loss.

The proforma entry for transfers qualifying derecognition would be:

Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

New asset (e.g., Cash) xxx

Servicing asset xxx
Loss on derecognition – P&L xxx
Old asset xxx
Servicing liability xxx
Gain on derecognition xxx

Transfers that do not qualify for derecognition

If a transfer does not result in derecognition because the entity has retained substantially all the risks and
rewards of ownership of the transferred asset, the entity shall continue to recognize the transferred asset in
its entirety and shall recognize a financial liability for the consideration received. In subsequent periods,
the entity shall recognize any income on the transferred asset and any expense incurred on the financial
liability.
The proforma entry for transfers that do not qualify for derecognition would be:
Cash xxx
Liability xxx

RECLASSIFICATION
For financial assets, reclassification is required if and only if the entity’s business model objective for its
financial assets changes so its previous model assessment would no longer apply. If reclassification is
appropriate, it must be done prospectively from the reclassification date. And entity does not restate
any previously recognized gains, losses, or interest.

A change in the objective of the entity’s business model must be effected before the reclassification date.

Reclassification date is defined as the first day of the first reporting period following the change in
business model that results in an entity reclassifying financial assets. The first day of the next reporting
period may mean the first day of the next quarter in which financial statement is required to be presented.

PFRS 9 does not allow reclassification of the following:

a. Where the ‘other comprehensive income’ option (FVTOCI) has been exercised for equity
securities;
b. Where the fair value option has been exercised in any circumstance for debt securities; or
c. Where there is a change in intention.

The following changes in circumstances are not reclassifications:

a. A derivative that was previously a designated and effective hedging instrument in a cash flow
hedge or net investment hedge no longer qualifies as such.
b. A derivative becomes a designated and effective hedging instrument in a cash flow hedge or net
investment hedge.
PFRS 9 allows only reclassification of among the different categories of financial assets classified as debt
securities.
In summary, the following reclassifications of debt securities are allowed:
FAAC FVTPL (debt) PFRS 9 5.6.2
FAAC FVTPL (debt) PFRS 9 5.6.3
FAAC FVTOCI (debt) PFRS 9.5.6.4
FAAC FVTOCI (debt) PFRS 9.5.6.5
FVTPL (debt) FVTOCI (debt) PFRS 9.5.6.6
FVTPL (debt) FVTOCI (debt) PFRS 9.5.6.7

STATEMENT OF FINANCIAL POSITION PRESENTATION

Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Categories Financial Statement Presentation

FVTPL Current Assets
FVTOCI a. Noncurrent - maturity date is beyond
one year after the reporting date (debt) or
expected to be sold beyond one year after
the reporting date (equity)
b. Current - maturity date is within one
year after the reporting date (debt) or
expected ti be sold within one year after
FAAC the reporting date
a. Noncurrent (equity)date is beyond
- maturity
one year after the reporting date (debt) or
expected
b. Currentto- be sold beyond
maturity date is one year
within after
one
year from the reporting date.

Note: In depth discussion and examples for initial recognition, initial measurement, subsequent
measurement, derecognition, reclassification and financial statement presentation of financial asset is
presented separately for equity securities (below) and debt securities (next chapter).
ACCOUNTING FOR EQUITY SECURITIES
EQUITY INSTRUMENT
Equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.

Examples of Equity instrument:

 Ordinary shares
 Certain preference shares
 Warrants or written call options
An investment in equity security is a financial asset since it is an equity instrument of another entity.

CLASSIFICATION OF INVESTMENT IN EQUITY SECURITIES

% of ownership Preference shares Ordinary shares
< 20% FVTPL or FVTOCI FVTPL or FVTOCI
20% to 50% FVTPL or FVTOCI Investment in Associate
>50% to 100% FVTPL or FVTOCI Investment in Subsidiary

The % of ownership is based on existing and potential ownership. However, in recording share in
dividends or income, the existing ownership must be used.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Standards Applicable for Investments in Preference Shares

Types of Investment Purpose Method Applicable Standards
Financial asset Dividend/Speculation Fair value PAS 32
PFRS 7
PFRS 9

Standards Applicable for Investments in Ordinary Shares

Types of Purpose Method Applicable
Investment Standards
Financial asset Dividend/Speculation Fair value PAS 32
PFRS 7
PFRS 9
Investment in Significant influence Equity Method PAS 28
Associate PFRS 7
Investment in joint Joint control Equity Method PAS 28
Venture PFRS 11
PFRS 7
Investment in Control a. Separate FS: PAS 27
Subsidiary Cost or Equity PAS 28
Method PFRS 10
b. Consolidated FS PFRS 7

INITIAL MEASUREMENT
Investment in equity securities under the scope of PFRS 9 is initially measured as:
1. FVTPL – fair value excluding transaction cost.
2. FVTOCI – fair value including transaction cost.
Illustration: Acquisition of Investment
The Paoay Company has the following transactions relating to its investments during the year:
January 5: Acquired 16,000 shares of Caliking Co. for P1,500,00
Paying additional P10,000 for brokerage and another P5,000 for commission.

February 14: Received dividends from Caliking CO. declared January 10m to the
Stockhoklders of record January 31, P16,000.

Required: Prepared all the necessary entries assuming the investments is

1. Financial Assets at Fair Value through Profit and Loss.
2. Financial Assets at Fair Value through Other Comprehensive Income.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Solution:
1. FVTPL journal entries are:
Jan. 5 Financial Asset at FVTPL P1,500,000
Brokerage fee 10,000
Commission Expense 5,000
Cash P1,515,000

Jan. 10 Dividend receivable 16,000

Dividend income 16,000

Feb.14 Cash 16,000

Dividend receivable 16,000

2. FVTOCI journal entries are:

Jan. 5 Investment in equity at FVTOCI P1,515,000
Cash P1,515,000

Jan. 10 Dividend receivable 16,000

Dividend income 16,000

Feb. 14 Cash 16,000

Dividend receivable 16,000

Acquisitions in between dates of declaration and record of dividends

In some instances, the company might acquire investment in between date of declaration of
dividends and date of record (also known as dividends-on). During such acquisition, the
dividends that have accrued on such investment shall be deducted from the total consideration
given to arrive at the adjusted cost of the investment. Pertinent journal entry would be:

1. To record the acquisition

Investment xx
Dividend receivable (or dividend income) xx
Cash xx

2. To record receipt of dividends

Cash xx
Dividend receivable (or dividend income) xx

Illustration: Acquisition in between Dates of Declaration and Record

Cattubo Company entered into the following transaction during the year:

January 10: Acquired the following investments:

 32,000 shares of Topdac Co. trading securities for P1,500,000 cash and paying
additional P10,000 for brokerage and another P5,000 for commission.
 10,000 shares of Poblacion Co. fair value through other comprehensive income
(FVTOCI) for P1,000,000 cash and paying additional P20,000 for brokerage and
commissions.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

February 14: Received the following dividends:

 P32,000 from Topdac Co. declared January 5, of the current year to the stockholders of
record January 31, 2016.
 P10,000 from Poblacion Co. declared January 15, of the current year to the stockholders
of record January 31, 2016.

Required: Based on the above and the result on your audit, answer the following:
1. The correct cost of the Trading Securities on January 10.
2. The correct cost of Investment in equity as FVTOCI Securities on January 10.
3. The total dividend income for the year.

SOLUTION:
Question No. 1
Acquisition excluding transaction costs P1,500,000
Less: Dividend income of the investment acquired 32,000
Correct cost of the investment P1,468,000

Question No. 2
Acquisition excluding transaction costs P1,000,000
Add: Brokerages and commission 20,000
Correct cost of the investment P1,020,000

Question No. 3
Dividend Income from Poblacion P10,000

SUBSEQUENT CLASSIFICATION AND MEASUREMENT CLASSIFICATION

Investment in equity securities with fair value may subsequently be classified as to either
financial assets at (1) FVTPL or (2) FVTOCI.

SUBSEQUENT MEASUREMENT: FVTPL FVTOCI

Measurement at reporting date Fair value Fair value
Change in Fair Value (Unrealized gains or loss) P/L OCI (Equity)

Note:
 Unrealized holding gain or loss is also called paper gain or loss.
 The unrealized gain or loss that was recognized during the year for the Fair Value
through Other Comprehensive Income is presented in the Statement of Comprehensive
Income (SCI).
 The accumulated balance of unrealized gain or loss for the Fair Value through Other
Comprehensive Income (FVTOCI) is presented in the Statement Financial Position and
Statement of Changes in Equity.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Computation of Unrealized Gains or Losses

FVTPL securities FVTOCI
Fair value (Measurement Date) XX Fair Value (Measurement date) XX
Less: Carrying Value (Fair Value Less: Carrying Value (fair value
Previous reporting date) XX previous reporting date) XX
Unrealized gains (loss) XX Unrealized gains (loss) – SCI XX
Or
Fair value (measurement date) XX
Less: Cost XX
Unrealized gains (loss) – SFP XX

Illustration: Computation of Unrealized Gains or Losses

On January 1, 2017, Ampusongan Company acquired 16,000 shares of Gambang Company for
P1,500,000. On December 31, 2017, the market value per share of Gambang’s stock P90.

On December 31, 2018 the market value per share of Gambang’s stock increasesvto P110.

Required: Prepare all the necessary entries assuming the investments are
1. FVTPL 2. FVTOCI

SOLUTION:
1. FVTPL Journal Entries
01/01/17 Financial Asset at FVTPL P1,500,000
Commission Expense 15,000
Cash P1,515,000

12/31/17 Unrealized Loss – P & L 60,000

Financial Asset at FVTPL 60,000

12/31/18 Financial Asset at FVTPL 320.000

Unrealized gain – P & L 320,000

Computation of Unrealized gain or loss:

Fair Value, 12/31/2017 (P90 x 16,000) P1,440,000
Less: Initial carrying amount 1,500,000
Unrealized loss to P & L P(60,000)

Fair Value, 12/31/2018 (P110 x 16,000) P1,760,000

Less: Initial carrying amount 1,440,000
Unrealized gain to P & L – 2018 P320,000

2] FVTOCI journal entries

01/01/17 Investment in equity at FVTOCI P1,515,000
Cash P1,515,000
12/31/17 Unrealized loss – equity 75,000
Financial Asset at FVTOCI 75,000
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

12/31/18 Investment in equity at FVTOCI 320,000

Unrealized loss – equity 75,000
Unrealized gain – equity 245,000

Computation of unrealized gain or loss:

Fair value, 12/31/2017 (P90 x 16,000) P1,440,000
Less: Initial carrying amount 1,515,000
Unrealized loss-OCI P (75,000)

Fair value, 12/31/2018 (P110 x 16,000) P1,760,000

Less: Carrying value, 12/31/2017 1,440,000
Adjustment to FA-FVTOCI P 320,000

DERECOGNITION OF EQUITY SECURITIES

When derecognized, gain or loss on investment in equity securities classified as FVTPL
or FVTOCI is computed as follows:

Formula:
Consideration received xx
Less: Dividend acquired (dividend-on) xx
Transaction cost xx
Net selling price xx
Add: New asset obtained xx
Less: New liability assumed xx
Total xx
Less: Carrying amount (@ date of derecognition) xx
Gain (loss) on derecognition xx

Note:
 The dividend income of the investment sold is deducted from consideration
received if the entity sold the investment in between date of declaration and
date of record of dividends.
 If the investment in equity is FVTPL, the gain (loss) on derecognition is
recognized in the profit or loss, while if the investment is designated as at
FVTOCI, the gain (loss) on derecognition is recognized in the OCI or directly in
the retained earnings.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Journal entries for the sale are:

FVTPL FVTOCI
To record the sale
Cash xxx Cash xxx
Loss on sale (if any) xxx Retained earnings (if any) xxx
FVTPL xxx FVTOCI xxx
Gain on sale (if
any) xxx Retained earnings (if any) xxx
To record transfer if unrealized gain to Retained earnings
Unrealized gain xxx
Retained eranings xxx
To record transfer of unrealized loss to Retained earnings
Retained earnings xxx
Unrealized loss xxx

Notes:
 The unrealized gain or loss previously recognized for FVTPL is a NOIMNAL account and thus,
closed at the end of each accounting period.
 The unrealized gain or loss previously recognized for FVTOCI is a REAL account and thus,
closed only when the financial asset is derecognized.
 PFRS9 paragraph b5.7.1 provides that any cumulative gain or loss may be transferred within
equity.

Illustration: Drecognition of Equity securities

On January 1, 2018, Dalipey Corporation owns 10,000 ordinary shares representing 10% of the shares
outstanding of Poblacion Corporation. The ordinary shares were acquired on November 2, 2017 at a cost
of P500,000 and have a fair value of P500,000 on Decmber 31, 2017. On January 2, 2019 Dalipey sold
half of its investment for P48 er share incurring a brokerage and commission expense P2,000.

CASE NO. 1: Fair Value through Profit or Loss (FVTPL)

CASE NO. 2: Fair Value through Other Comprehensive Income (FVTOCI)

Required: For each case above, answer the following:

1) Unrealized gain or loss on December 31, 2017 to be presented in the statement of financial
position.
2) Gain or loss on sale on January 2, 2018.
3) Prepare all the necessary entries in 2017 and 2018.

SOULTION:
CASE NO.1: FVTPL
Requirement No. 1
Fair Value, 12.31.2017 P550,000
Less: Initial carrying amount 500,000
Unrealized gain- P&L P 50,000

Zero. Unrealized gain is presented as component of profit or loss since this is a financial asset at FVTPL.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Requirement No. 2
Consideration received (10,000 x ½ x P48) P240,000
Less: Brokerage and commissions 2,000
Net Selling Price P238,000
Less: Carrying value (P550,000 x ½) 275,000
Realized loss on sale – P&L P (37,000)

CASE NO. 2: FVTOCI

Requirement No.1
Fair value, 12/31/2017 P550,000
Less: Initial carrying amount 500,000
Unrealized gain – OCI P 50,000

Requirement No. 2
Consideration received (10,000 x ½ x P48) P240,000
Less: Brokerage and commissions 2,000
Net Selling Price P238,000
Less: Carrying value (P550,000 x ½) 275,000
Retained earnings (Debit) P (37,000)

Journal entries for the sale are:

Financial asset through profit or loss (FVTPL)
12/31/17 Financial Asset at FVTPL P50,000
Unrealized gain – P&L P50,000
01/02/18 Cash 238,000
Loss on sale – P&L 37,000
Financial Asset at FVTPL 275,000

Financial asset through other comprehensive income (FVTOCI)

12/31/17 Investment in equity at FVTOCI 50,000
Unrealized gain – OCI 50,000
01/02/18 Cash 238,000
Retained earnings 37,000
Investment in equity at FVTOCI 275,000

Unrealized gain – OCI (50,000 x ½) 25,000

Retained earnings 25,000
To record transfer of unrealized gain to retained earnings

Computation of the Carrying Value of the Securities

Securities may br valued using First-in, First out Method or weighted average method.
Chapter 15 – Intro. to Financial Asset and Investment in Equity Securities

Illustration:
Ambuclao Co. has the following trading securities:

Investment in Luke Co. - Trading Securities

Number of shares and cost per
Date Acquired share Total Cost
Jan. 3, 2018 30,000 shares at P40 P1,200,000
Mar. 3, 2018 20,000 shares at P45 900,000
Apr. 23, 2018 50,000 sahres at P50 2,500,000

Ambuclao Co. does not have significant influence over Luke. On May 1, 2018 Ambuclao sold 60,000
sahres at P60 per share.

Required:

Determine the gain (or loss) on sale assuming

1) The company is using first-in, first-out method in valuing securities
2) The company is using weighted average method in valuing its securities

SOLUTION:
Requirement No. 1
Net Selling Price (P60 x 60,000) P3,600,000
Less: Carrying value
Jan. 3, 2018 (30,000 shares at P40) P1,200,000
Mar. 3, 2018 (20,000 shares at P45) 900,000
Apr. 3, 2018 (10,000 shares at P50) 500,000 2,600,000
Gain on sale – P&L P1,000,000

Requirement No. 2
Net selling price (P60 x 60,000) P3,600,000
Less: Carrying value (P46 x 60,000) 2,760,000
Gain on sale – P&L P 840,000

Number of share and cost Total Cost Average cost

30,000 shares at P40 P1,200,000
20,000 shares at P45 900,000
50,000 shares at P50 2,500,000
100,000 shares P4,600,000 *P46

*P4.6M/ 100,000 shares

TRANSACTIONS SUBSEQUENT TO ACQUISITIONS
DIVIDENDS
Three Different Dates Relation to Dividends
a) Date of declaration is the date when the board of directors announces the distribution of
dividends. Dividend Income may or may not be recognized on this date.
b) Date of record is the cut-off date that determines who among the shareholders is entitled to
dividend per listing as of the record date. No journal entry is required on this date.
c) Date of payment – is the date when the dividend is received.