FINANCIAL INSTRUMENTS - INTRO CLASSIFIED AS:

a. FVTPL
INTRODUCTION TO INVESTMENTS IN b. FVTOCI
EQUITY SECURITIES c. Amortized cost

PFRS 9 covers Financial Assets 3. Derivatives - derives its value from

changes in underlying.
A financial instrument is any contract that CLASSIDIED AS:
gives rise to a financial asset of one entity a. FVTPL (if speculation)
and a financial liability or equity instrumetn
of another entity >>FINANCIAL ASSET<<
INITIAL RECOGNITION: When the entity
Every classification of financial assets have becomes party to the financial contract
different accounting requirements. (because there is no physical attribute)
Generally: FV +- Transac. Costs
CLASSIFICATIONS OF FINANCIAL Except: FVTPL F.A. - FV only.
ASSETS Transac. Costs will be expensed outright.
Criteria: (Applicable to both debt and equity
1. Business model of managing cash flows securities at FVTPL)
2. Characteristics of contratual cash flow
-solely payments of principal and SUBSEQUENT MEASUREMENT: Based on
interest (SPPI test) classification of financial asset
-FAIL: FVTPL ================================
You have to consider BOTH of these CLASSIFYING FINANCIAL INSTRUMENT
ITEMS
CLASSIFICATIONS:
1. Investments in Equity Securities PAS 32 defines financial instruments are
-Look at the point of view of the any contracts that give rise to financial
issuer. It has to be the issuer's equity asset, financial liability, and equity
instrument. Example would be investments instrument of an entity.
in common/pref shares
-Reported in the shareholders' equity ASSETS of an entity can be further
section classified into financial assets and
CLASSIFIED AS: nonfinancial assets. Financial assets have a
a. FVTPL uniform accounting procedure, contrary to
b. FVTOCI nonfinancial assets that have a nonuniform
accounting procedure.
2. Investments in Debt Securities
-POV of the issuer is that it is their A FINANCIAL ASSET is any asset that is:
liability. Example would be accounts a. cash
payable, loans receivable, and investments b. equity instrument of another entity
in bonds, redeemable preference shares, e.g.: investments in common
among others of the issuer. If you are the shares, preference shares, share rights
entity's counterparty, it is their equity. c. contractual right...

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

 1. to receive cash or another 2. DATE OF RECORD - cut-off date. This is
financial asset from another entity; or the determination who will receive the
2. to exchange financial assets or dividends.
financial liabilities with another entity 3. DATE OF PAYMENT - actual distribution
under conditions that are potentially of dividends.
FAVORABLE to the entity
Shares sold within the date of declaration
A FINANCIAL LIABILITY is any liability that and the date of record are called
is a contractual obligation... "DIVIDENDS-ON." The right to receive
1. to pay cash or deliver another dividends are attached with the share sold.
financial asset to another entity; or 2. to
exchange financial assets or financial Shares sold within the date of record and
liabilities with another entity under the date of payment are called
conditions that are UNfavorable to the "EX-DIVIDENDS." The right to receive
entity dividends do not come with the sold shares.
The previous holder still has the right to
An equity instrument is any contract that receive dividends.
evidences a residual interest in the assets
of an entity after deducting all of its ENTRIES:
liabilities. There is no obligation to pay cash Buying (Buyer):
or to deliver a financial asset. Dr. FA @ FVTPL
Issed common shares/preference Dr. Dividends Receivable
shares are equity instruments. Cr. Cash
EXCEPTION: Redeemable preference Dividends-on: (The FV or transaction price
shares. The holder of RPS can claim cash normally includes the amount of dividends
from the issuer, so it is classified as a recevable)
liability. Net Asset Value in mutual funds are BUYER
also a financial liability of the mutual fund Dr. Dividends Receivable
because it is withdrawable anytime. Haha Cr. Dividends Income
ako na lang kasi jk SELLER
================================= Dr. Cash
INVESTMENTS IN EQUITY SECURITIES Dr. Loss on Sale (if loss)
Cr. FA @ FVTPL
When you invest in equity securities, you Cr. Dividends Receivable
might receive dividends. Cr. Gain on sale (if gain)
Ex-Dividend Date: (The selling investor will
Dividends, generally, are distributions of still receive the dividends, so the amount of
earnings of the issuing entity (investee). FA will be most likely not including the
amount of dividends, unlike in
Important dates with regards to dividends Dividends-on).
(in chronological order): BUYER
1. DATE OF DECLARATION - the BoD Dr. FA @ FVTPL
declares dividends (announcement). Cr. Cash
SELLER

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

 Dr. Cash
Dr. Loss on Sale (if loss) Take note that the total effect in PL will be
Cr. FA @ FVTPL the same.
Cr. Gain on sale (if loss)
b. OF DIFFERENT CLASS -
4 MAJOR FORMS OF DIVIDENDS: ordinary shareholders may receive
1. CASH DIVIDENDS - most common. The preference shares; preference shareholders
amount of income is equal to the cash to be may receive ordinary shares.
received. ACCOUNTING TREATMENT:
Pro-forma entry: *Traditional Approach
Dr. Cash Div. Receivable Allocate the CA of the original
Cr. Cash Div. Income investment based on the relative FV
No income under traditional
2. PROPERTY DIVIDENDS - non-cash approach
assets. Not fairly common but is still
possible. Amount of income is normally Dr. FA (pref. shares) @ FVTPL
equal to the FV of the property. Cr. FA (common shares) @ FVTPL
Pro-forma entry:
Dr. Property Div. Receivable *Modern Approach (updated)
Cr. Property Div. Income Recognize the received share
dividends equal to their FV
3. SHARE DIVIDENDS - Investors would Dividend income (preferrable) or
receive additional shares of investee entity. unrealized gain
POV of INVESTOR, two types of share
dividends: Dr. FA (pref shares) @ FVTPL
a. OF THE SAME CLASS (common) Cr. Dividend Income
- ordinary shareholders receive ordinary
shares; preference shareholders receive Shares of another entity: If for example, A
preference shares. Corp. has an investment in B corp, and
ACCOUNTING TREATMENT: issues their investments to their investors, it
*Traditional Approach is called PROPERTY DIVIDENDS even
Memorandum Entry only (cost or though they are "shares" in nature.
carrying amount PER share will
DECREASE) 4. LIQUIDATING DIVIDENDS
-No effect in assets and equity =================================

*Modern Approach (updating)

Total FV of all shares incl. Share Dividends
vs. Carrying amt of investment
Dr. FA @ FVTPL
Cr. Unrealized Gain P/L

Dr. Unrealized Loss

Cr. FA @ FVTPL

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

INVESTMENT IN EQUITY SECURITIES
Initial Recognition:
Measurement: at Fair Value. Transaction costs will be
1. at FVTPL expensed outright.
-Default classification. If there are no
other information regarding how it should be Subsequent Measurement:
accounted for, it is FVTPL. at Fair Value as at reporting date.
-This includes heald for trading Changes in the FV are reported in P/L
securities. This is the buying and selling to ENTRIES:
generate short-term profits. Increase in fair value:
Dr. FA @ FVTPL
2. at FVTOCI Cr. Unrealized Gain - P/L
There are conditions before you classify a Decrease in fair value:
FA as FVTOCI: Dr. Unrealized Loss - P/L
-Explicit and irrevocable designation Cr. FA @ FVTPL
AT INITIAL RECOGNITION. Once you Sale: Compare the proceeds and the
classify it as FVTOCI, you cannot reclassify carrying amount. If P>CA, realized gain. If
it at FVTPL. Normally, you designate as P<CA, realized loss. Carrying amount to be
such at the date of acquisition. used is at the immediately preceding
-Should not be held for trading. reporting date (in the academe). However,
in practice, the values of the investments
EQUITY SECURITIES: are updated daily.
FVTOCI to FVTPL and FVTPL to FVTOCI Dr. Cash
reclassifications are NOT ALLOWED. Dr. Loss on sale (if loss)
Cr. FA @ FVTPL (at CA, not cost)
DIFFERENCE BETWEEN P/L AND OCI Cr. Gain on sale (if gain)

P/L - Normally what we call as the net Why unrealized? Because the security is
income or net loss. This is the financial still in your possession. It will only be
performance indicator of the entity because realized when sold.
these are directly related to the main
operations of an entity. If you receive dividends on FVTPL equity
investments:
OCI - added/subtracted to/from P/L to get Cash dividends - reported in P/L
total comprehensive income. Items under
OCI are recognized outside the P/L WHEN ASKED how much is to be reported
because these amounts are volatile and in your P/L, you include:
unrelated to operations of an entity. +Unrealized Gain
-Unrealized Loss
The total comprehensive income is the +Gain on Sale
income not involving the owners. -Loss on Sale
================================ +Cash Dividends
ACCOUNTING FOR INVESTMENTS IN =Net Amount in P/L
EQUITY SECURITIES AT FVTPL ================================

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

ACCOUNTING FOR INVESTMENTS IN Take note, on the year of sale, only the
EQUITY SECURITIES AT FVTOCI Gain/Loss will appear in OCI. The transfers
will not appear in OCI.
Initial Measurement:
at Fair Value PLUS transaction costs. If you receive cash dividends from FA @
FVTOCI equity instruments, you report the
Subsequent Measurement: income in the PROFIT/LOSS section even if
at Fair Value at reporting date. you are holding FA @ FVTOCI.
Changes in FV are reported in OCI.
ENTRIES: The unrealized gain/loss during the year
Increase in FV: can be seen in OCI section. Not closed to
Dr. FA @ FVTOCI Retained Earnings.
Cr. Unrealized Gain - OCI The CUMULATIVE unrealized gain/loss at
Decrease in FV: reporting date will be at the shareholders'
Dr. Unrealized Loss - OCI equity.
Cr. FA @ FVTOCI Example:
Sale: Compare the proceeds and the SHE
carrying amount. If P>CA, gain on sale, Share Capital xx
BUT in OCI. P<CA, loss on sale, BUT in Share Premium xx
OCI. Still in OCI even if it is already Retained Earnings xx
realized. Cum. Unr. Gain/Loss xx
Entry: =TOTAL SHE xx
1. Dr. Cash You compute for the cumulative unrealized
Dr. Loss on sale - OCI (if loss) gain/loss as follows:
Cr. FA @ FVTOCI All unrealized gains are added, all
Cr. Gain on sale - OCI (if gain) unrealized losses are added, then net them.
ANOTHER WAY: Original cost vs. FV. If
2. Dr. Unrealized gain - OCI (cum) Original Cost<FV, cum. unrealized gain in
Cr. Retained Earnings SHE (addition). If Original Cost>FV, cum.
if unrealized gain unrealized loss in SHE (deduction).
Dr. Retained Earnings
Cr. Unrealized Loss - OCI (cum_ =================================
if unrealizedloss =
COMPARISON OF FVTPL AND FVTOCI
Dr. Gain on Sale - OCI AMOUNTS FOR INVESTMENTS IN
Cr. Retained Earnings EQUITY SECURITIES

Dr. Retained Earnigns The Total Comprehensive Income is

Cr. Loss on Sale - OCI composed of all the amounts in P/L and in
OCI.
This is called DIRECT TRANSFER
to Retained Earnings. FA @ FV THROUGH P/L
Amounts in P/L:
Transaction Costs

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

 Cash/Property Dividends Dr. FA (FV of given up)
Unrealized Gains/Losses Dr. Loss on exchange (if loss)
Gain/Loss on Sale Cr. Noncash Asset (Carrying Amt)
Cr. Gain on exchange (if gain)
Amounts in OCI:
NONE Flaw: It prioritizes FV of asset given.

Amounts in Equity: MODERN APPROACH HIERARCHY

Included in Retained Earnings (PFRS 9)
a. FV of investment
FA @ FV THROUGH OCI Stock market - listed entities
Amounts in P/L: Valuation models - unlisted
Cash/Property Dividends b. FV of asset given up

Amounts in OCI: Entry:

Unrealized Gains/Losses Dr. FA (FV of FA)
Gain/Loss on Sale Dr. Loss on exchange (if loss)
Cr. Noncash Asset (Carrying amt)
Amounts in Equity: Cr. Gain on exchange (if gain)
Included in Retained Earnings
(Dividends) Take note that the standard always requires
Cumulative Unrealized Gain/Loss the FV of your equity securities.
(orig cost vs FV)
LUMP-SUM APPROACH
=================================
= Traditional: allocate the lump-sum price of
OTHER MATTERS the financial assets based on their
RELATIVE fair values
Dividend in the perspective of the investor Entry:
does not affect the SHE. Dr. FA - A Allocated Price
Dr. FA - B Allocated Price
Other ways of acquiring investments: Cr. Cash Lump-sum price
exchange and lump-sum
Modern: Measure the financial assets equal
EXCHANGE - initial measurement of to their fair values
investment. Entry:
Dr. FA - A (FV)
HIERARCHY OF MEASURING Dr. FA - B (FV)
INVESTMENT (traditional approach) Cr. Cash (lump-sum)
a. FV of asset given (noncash asset) Cr. Unrealized Gain (balancing)
b. FV of investment or asset received
c. Carrying amount of asset given TRANSACTION PRICE =/= FV

Entry: Traditional Approach: not addressed

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

Modern Approach: b. Share split-DOWN
Dr. FA (at FV) -decrease in number of shares
Dr. Loss on initial recog (if loss) -increase in par value of shares
Cr. Cash (cash paid) -happens in consolidation
Cr. Gain on initial recog (if gain) -share split down is done by listed
Or use unrealized gain/loss amounts companies that are normally going private

We do not use the amount of cash used in Accounting Approach for Share Splits:
the transaction because of the nature of TRADITIONAL
financial asset. The FV of FA is the amount Memorandum entry only. BUT in cases of
you will receive. split-ups, decrease in cost or carrying
================================= amount per share. In split downs, incrase in
= cost or carrying amount per share.

LIQUIDATING DIVIDENDS - Accounted for MODERN

as return of investment. These are Recognize at fair value. Financial assets are
distributions from a corporation in the presumed to be new.
middle of liquidation proceedings. If the Dr. Investment (new shares after)
entity is a wasting asset entity, they are also Dr. Unrealized Loss (if loss)
allowed to issue liquidating dividends. Cr. Investment (old shares, before)
Cr. Unrealized Gain (if gain)
Accounting: Normally done by entities engaged in
INITIALLY - as a reduction of investment. investing or financial institutions.
Dr. Cash/Any relevant account =================================
Cr. Investment
IF: amounts received exceed the carrying SHARE RIGHTS are also called
amount of investment, pre-emptive rights. Before an entity offers
Dr. Cash/Noncash Asset their shares to the general public, existing
Cr. Investment shareholders receive the first priority to
Cr. Dividend Income (excess) prevent dilution of their interest.

SHARE SPLITS Normally, the terms for share rights are

a. Share split-UP advantageous for existing shareholders.
-splitting UP the number of the They can acquire new additional shares at
shares an exercise price lower than the fair value.
-increase in number of shares, but
decrease in par value per share Accounting for Share Rights:
-all in all, no effect in corporation.
-Example, if 2 for 1, 2 shares will be Separately account for the share rights.
issued for 1 share. If you have 100 shares, TRADITIONAL - reduce the carrying
you will have 200 shares after the split. amount of the related investment equal to
-Shares are increased for the rights' fair value.
affordability purposes. Dr. Investment in Share Rights
Cr. Main investment account

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

MODERN INVESTMENTS IN ASSOCIATE
Dr. Investment in Share Rights
Cr. Unrealized Gain These are investment in equity securities
covered by PAS 28 (Investments in
SOLD RIGHTS: Assocate and Joint Venture)
Dr. Cash
Dr. Loss on sale The voting shares are the common shares.
Cr. Investment in Share Rights
Cr. Gain on sale Levels of Ownership:
<20% - FVTPL or FVTOCI
EXPIRATION OF RIGHTS: 20% to <50% - Investment in Associate
Dr. Loss on expiration of rights 50% to 100% - Investment in Subsidiary
Cr. Investment in share rights
An ASSOCIATE is defined as an investee
EXERCISE OF SHARE RIGHTS: add the entity over which an investor has
investment in share rights to the cost of the SIGNIFICANT INFLUENCE.
new investment. Significant Influence is defined as
Dr. Investment in Eq Sec (new) the power to participate in operating and
Cr. Cash financial decisions of an investee entity,
Cr. Investment in share rights BUT NOT control or joint control.
Control is the power to govern
NOT separately accounted for: related in the investments in subsidiaries
Memorandum Entry only. Additional which will be covered in AFAR. Joint control
accounting issues will arise only in the covers investments in joint venture which is
separate accounting form. also covered in AFAR.

NOT STRAIGHTFORWARD ACCOUNTING QUANTITATIVE PRESUMPTIONS: In the

FOR SHARE RIGHTS arise from its absence of additional information, if
theoretical value. This is used when the FV ownership of voting shares ...
of share rights is not determinable. >=20%, significant influence
<20%, no significant influence
The theoretical value of share rights
depends whether it is ex- or -on. QUALITATIVE ASSESSMENT: Any one of
(FV of Share Right on these factors may indicate the existence of
-Exercise Price) significant influence even without meeting
/ the >=20% ownership interest threshold.
Number of rights needed to A. Representation in the board of directors
acquire share +1 or any equivalent governing body
Other scenario: B. Participation in policy-making process -
(FV of share Ex right being part of sub-committees fpr certain
-Exercise Price) matters
/ C. Material transactions between the
Number of rights needed to entities
acquire one share D. Interchange of management personnel

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

E. Provision of essential, technical OR
information B. Share in the FV of associate's net assets,
still plus transaction costs, computed as
ADDITIONAL CONSIDERATIONS in follows:
determining significant influence: FV of assets - FV of liabilities
A. Possible exercise of contracts giving
additional voting power Share in FV of associate's net asset
VS
COMPUTING 20% Threshold - just for the Cost
purpose of assessing significant influence. If equal, no accounting issue
No. of Voting Shares Held If SFVANA < cost, at cost, and there
/Total Outstanding Voting Shares is goodwill, but NOT accounted for
separately.
No. of Shares Held If SFVANA > cost, measure
+Possible Shares (from fwdcontracts*) theinvestment equal to the share in FV of
/No. of outstanding shares net assets. At the same time, there is
corresponding investment income.
*Only consider if the current contract
is currently exerciseable In scenarios 1 and 2, the entry is
Dr. Inv. in Assoc
Outstanding Shares is computed as... Cr. Cash
No. Of Issued Shares In scenario 3, you measure it at a higher
-Treasury Shares amount compared to cash paid.
Dr. Inv. in Assoc
A corporation is a juridical entity. By fiction Cr. Cash
of law, it is granted a separate personality. Cr. Investment Income
However, on its own, it cannot think. A
corporation still needs natural persons to Computing the share in FV of associate's
operate, known as the board of directors, Net Asset is as follows:
who make the decisions for the corporation. Percentage of ownership
This board is elected by the shareholders. If *Total FV of associate's net asset
a shareholder owns 20% ownership *******************
interest, and there are 10 members of the SUBSEQUENT MEASUREMENT
board, they have the capacity to elect 2
members or 20% of 10. The accounting for subsequent
================================= measurement is called equity method.
= EQUITY METHOD views the economic
Accounting procedures under PAS 28 relationship between the associate and the
********************* investor. The information presented is more
INITIAL MEASUREMENT - THE HIGHER reliable.
OF Computation:
A. at its cost PLUS transaction costs Initial Measurement/Beg. Bal
Cost is normally the cash paid. It is +Share in Associate's PROFIT
not necessary that it is equal with the FV. +Share in Associate's OCI Credit

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

-Share in Asspcoate's LOSS Cr. Share in Associate's Loss/OCI-Loss
-Share in Associate's OCI Debit Cr. Share in Associate's Dividends
-Share in Associate's Dividends =ENDING BALANCE
=ENDING BALANCE of Inv. in Associate
INVESTOR'S COMPREHENSIVE INCOME:
The word "share" pertains to the percentage In the Profit or Loss:
of existing ACTUAL ownership. To compute, +Share in Associate's Profit
for example, -Share in Associate's Loss
Associate's Profit X % ACTUAL Ownership +Excess of Share in FV of NA
This computation is also applicable In the OCI:
in losses, dividends, etc. +Share in Assoc. OCI-Credit
-Share in Assoc. OCI-Debit
Share in associate's dividends are deducted =TOTAL COMPREHENSIVE INCOME
because whatever you receive in dividends
represent your investment balance. You are Changes in FV under the equity method are
realizing your investment slowly by way of not recorded. Therefore, NO UNREALIZED
dividends. Moreover, the declaration of AMOUNTS.
dividends is not an enough determinant =================================
whether the performance of a company is ADJUSTMENTS TO THE AMOUNT OF
good or not. REPORTED PROFIT OR LOSS OF
ASSOCIATES
To track the financial performance, the
indicator is normally the amount of profit or For the purposes of computing investor's
loss and OCI (to a lesser extent). share in P/L, amounts will be adjusted.
Profit = Good
Loss = Not so good These adjustments are NOT recorded by
the associate.
PRO-FORMA ENTRIES:
Share in Associate's Profit 1. IF THE INVESTMENT WAS ACQUIRED
Dr. Investment in Associate NOT ON JANUARY 1
Cr. Investment Income - P/L Normally, if you have the asset from
Cr. Investment Income - OCI Jan1 to Dec31, you have share for the
Share in Associate's Loss associate's profit for the whole year.
Dr. Investment Loss - P/L HOWEVER, let's say you have 1.2M
Dr. Investment Loss - OCI net income for the whole year, but you only
Cr. Investment in Associate gained significant influence in July 1. First,
Share in Associate's Dividends look at the problem if it stated whether it
Dr. Cash provided amounts Jan1-Jun30. If not given,
Cr. Investment in Associate PRO-RATE the income. Therefore,
1.2M//12months = 100k/mo. From July 1 to
T-Account Effects: Investment in Associate Dec31, 6 months. So, you have 100k*6 =
Dr. Cash Paid 600K pro-rated associate's profit.
Dr. Excess Share in Associate's FV of NA MULTIPLY this to your actual %of
Dr. Share in Associate's Profit/OCI-Profit ownership, e.g.: 20%, to get 120k share.

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

 You only share in the associate's DIFFERENCES IN ACCOUNTING
profit from the point you gained significant POLICIES
influence because that's the period you
contributed to the associate's profit. Certain accounting standards allow entities
to use different ways to account for their
2. ASSOCIATE'S PREFERENCE SHARES financial statement elements.
- Entities can have both ordinary and
preference shares. The amount of profit is Examples:
attributed to the owners of the corporation. Inventory - FIFO or WA
Normally, you have two: ordinary and PPE/Intangibles - cost/revaluation
preference sahreholders. Investment properties - cost or FV

Any amount of profit should be allocated or First and foremost, follow the investor's
attribute it to the shareholders. FIRST will policy. The amounts in the associate's profit
be to the preference shareholders. The or loss are stated in their accounting
remaining will be to ordinary shares. policies. Therefore, the investor should
restate the amouts in accordance with their
The amount of profit/loss of the associate practice to match them.
you will base your computation on is the E.g.: Investor uses FIFO, associate
profit/loss of the associate less the profit uses WA. Adjust WA to FIFO. If the investor
attributable to preference shares. uses cost model for PPE, then the amount
to be used in the associate's records of OCI
This is more on determining the amount to should not include revaluation surplus.
be deducted from the associate's profit or Therefore, ADJUST THE
loss. ASSOCIATE'S REPORTED PROFIT OR
LOSS.
Three types of Preference Shares
A. NONCUMULATIVE - deduct the amount EXAMPLE:
of actual dividend declaration. If there is Investor Associate
none, then zero. PPE Cost Revaluation
>Restate amounts using cost model.
B. CUMULATIVE - one year worth of Depreciation expense should be based on
dividends even if there is no declaration. cost, not on revalued amount.
Even if there is 5 year dividends in arrears, >Gain or loss on sale should be based on
you still deduct 1 year because those are carrying amount using original cost, not
already deducted in the prior years. revalued amount.
ALWAYS one year worth will be deducted to >If there is revaluation increase by the
the associate's profit or loss. associate, DO NOT recognize revaluations.

C. REDEEMABLE - presume to be recorded ADJUSTMENTS IN ASSOCIATE'SPROFIT

as interest expense. No amounts to be OR LOSS (For the purpose of computing
deducted. the investor's share in P/L ONLY)
=================================
=

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

Differences between the FV and CA of These are transactions from the investor to
associate's assets and liabilities as of the and from the associate. There are two
date of acquisition of significant influence by kinds:
investor (not every reporting date) A. UPSTREAM TRANSACTIONS - these
transactions are characterized by
Scenario 1: FV > Carrying Amt ASSOCIATE TO INVESTOR.
(Undervaluation) Accounting: Deduct income from reported
If ASSET: Undervalued assets are deducted P/L of associate adjusted P/L x
or treated as a deduction from the P/L %Ownership Interest
reported by the associate
B. DOWNSTREAM TRANSACTIONS -
If LIABILITIES: Undervalued liabilities are these transactions are characterized by
added or treated as an adition to the P/L INVESTOR TO ASSOCIATE.
reported by the associate Accounting: Fully deduct the netincome of
the investor
Scenario 2: FV < Carrying Amt
(Overvaluatin) The standard for intercompany transaction
If ASSET: Overvalued assets are added or states that recognize income to the extent of
treated as an adition to the P/L reported by unrelated investor's interest.
the associate =================================
=
If LIABILITIES: Overvalued liabilities are ASSOCIATE WITH EXCESSIVE LOSSES
deducted or treated as a deduction from the
P/L reported by the associate 1. Identify total interest in the investee
(associate). This amount is comprised of the
Inventory changes in FV and CA are investment in associate and amount cannot
recorded only when sold. It can be partial or be expected to be settled. Also, the
total, if for example only a portion of investment in preference shares of
inventory is sold. associates, and unsecured and long-term
receivables. EXCLUDED ARE trande
PPE Changes in FV and CA are accounted receivables, secured receivables
for in two ways:
If depreciable, equally added or Excess amount of losses are not
deducted during the remainder of its life. recognized. However, if the associate
If non-depreciable, same with subsequently reports profit, you will not
inventory: when sold. recognize as your share in profit.
COMPUTATION:
Liability changes in FV and CA are treated (Proft X %Ownership)
as an adjustment to interest expense during -Previous amounts of share in loss not
the remaining term. recognized
=SHARE IN PROFIT
INTERCOMPANY TRANSACTIONS
SIGNIFICANT INFLUENCE ACHIEVED IN
STAGES

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

 Cr. Investment in Associate (sold)
When you slowly climb your way up to Cr. Gain on investment
significant influence, you either account for Pro-rate the interest of the portion sold and
your investments either at FVTPL or the retained investment.
FVTOCI. But on the date you reach E.g.: 25% to 15% ownership
significant influence: 15%/25% x Carrying Amount
1. Measure the previous interest held @ 10%/25% x Carrying Amount
Fair Value. Subsequent Entry:
The changes in FV will be reflected Dr. FA @ FVTPL/FVTOCI
in PL if FVTPL or OCI if FVTOCI. Dr. Loss on remeasurement of
2. Measure the investment in associate as retained interest
follows: Cr. Investment in associate
FV of initial interest (retained)
+Cost of additional investment Cr. Gain on remeasurement of
retained interest
LOSS OF SIGNIFICANT INFLUENCE
May arise from: Then, equity method is discontinued.
1. Full disposal Account changes in FV by recognizing them
in P/L or OCI, and you will no longer be
STEP 1: Update the carrying amount of the sharing in the associate's profits.
investment based on share in P/L and OCI
STEP 2: Record the sale INVESTMENT IN DEBT SECURITIES
Entry: FAIR VALUE AT PROFIT/LOSS (FVPL)
Dr. Cash
Dr. Loss on sale (if loss) Debt securities represent liabilities of the
Cr. Investment in Associate issuer or the counterparty. Your point of
Cr. Gain on sale (if gain) view here is the investor.

2. Partial disposal Examples of debt securities:

INVESTOR INVESTEE
STEP 1: Update the carrying amount of the Inv. in bonds Bond payable
investment Loans receivable Loans Payable
STEP 2: Determine the following: Inv. in R.Pref.Shs Red.Pref.Share (Liab)
A. Cash reeived and FV of Retained
Investment To determine whether it is a debt security,
B. Updated carrying amount of the check to see if the item is the liabilitiy of the
investment issuer.
The difference of A and B will be reported in
P/L, regardless if the investment (retained ACCOUNTING FOR DEBT SECURITIES
investment) is accounted for in FVTPL or To determine whether to classify a debt
FVTOCI. security is FVTPL, FVTOCI, or amortized
Entry: cost, consider BOTH of the following:
Dr. Cash 1. Business model for managing cash flows
Dr. Loss on sale from debt securities; AND

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

2. Characteristics of cash flows So, regardless of the business model, your
investments that fail the SPPI test are
CONSIDERING BUSINESS MODEL classified at FVTPL. The reason for failure
When assessing an entity's business model, for such investments are normally in
LOOK at the actual facts. This is NOT prepayment terms. Also, leverages could be
merely an assertion or intention. a reason for failing the SPPI test, based on
indices. When such indices change, the
You may look at the following to determine interest also changes. After such change,
the business model: the interest can no longer be classified as
a. Performance evaluation and reporting - "interest" because it is no longer normal and
b. Risks ecountered does not cover the basic lending agreement
c. Compensation of managers (inflation, risk, profit margin of creditor, etc.).

When assessing the business model, you An entity can have debt securities of
take a look at their realization of cash. They different classifications all at the same time
have two main classifications: because of the diversity of the business
a. Held until maturity (HTM) - normally model.
classified at amortized cost =================================
b. Selling the financial assets (HFT) - =
normally classified at FVTPL ACCOUNTING FOR DEBT SECURITIES
c. HTM or Sell the FA - normally classified AT FVTPL
at FVTOCI
Review: Debt securities that are helf for
BUT, the characteristics of contractual cash trading and debt securities which failed the
flows will OVERRIDE the assignment of SPPI test are both classified at FVTPL.
classification of debt securities based on the
business model. Additional: If a debt security is initally
recognized and was given irrevocable
CHARACTERISTICS OF CONTRACTUAL designation at FVTPL, classify it as FVTPL,
CASH FLOWS regardless of the business model and SPPI
The debt security's contractual cash flows test, PROVIDED that it reduces accounting
should be solely payments of principal and mismatch.
interest (SPPI).
In the accounting mismatch, the FA's asset
By default, if we are just considering the portion could be recognized at FVTOCI, but
business model, if it is financed by a liab (FVTPL) as well as
a. HTM - amortized cost, but should PASS interest expense at P/L, the standard allows
the SPPI test the measurement of FA to FVTPL. This
b. HFT - at FVTPL; investments FAILED in reduces the accounting mismatch.
SPPI test regardless of business model
c. HTM or Sell the FA - FVTOCI, but should INITIAL RECOGNITION: When the
PASS the SPPI test entity/investor becomes party to the
contract.

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

INITIAL MEASUREMENT: at FV.
Transaction costs are EXPENSED No. of periods used in PV calculation is
OUTRIGHT. DECREASING

SUBSEQUENT MEASUREMENT: measure Example:

at FV every reporting date. Changes in FV Maturity Date = 12/31/2025
are reported in P/L. Reporting dates:
12/31/2021 - 4 periods
ADDITIONAL CONSIDERATION: Interest 12/31/2022 - 3 periods
income is computed as: 12/31/2023 - 2 periods
Face Amount Market yields:
*Stated Rate/Nominal Rate Depending on the reporting date
================================
COMPUTATION OF FAIR VALUE: PRO-FORMA JOURNAL ENTRIES ON...
1. Quoted Price (Market Approach)
Quoted Price Example: 98, 101, 97 INITIAL RECOGNITION:
Dr. Inv. in Debt Sec. @ FVTPL
Face Amount* Dr. Transac Costs (if any)
*Quoted Price (Stated in %) Cr. Cash
=FAIR VALUE
CHANGES IN FV
*Normally, the face amount is the amount to Dr. Inv in Debt Sec. @ FVTPL
be received by the investor when the Cr. Unrealized Gain P/L
security is held to maturity.
Dr. Unrealized Loss P/L
Example: Cr. Inv. in Debt Sec. @ FVTPL
Face Amt = 5mil ===============================
Quoted P = 101% ACCOUNTING FOR SELLING OF
Fair Value = 5.05 Million INVESTMENT:

If the quoted price is above 100%, the FV is Compare the carrying amount and
larger than the face amount. proceeds. Academically, this carrying
amount is the FV as of the last reporting
2. Market Yields (Income Approach) date.
Involves the PV of cash flows.
The discount rate to be used would be the CA < PROCEEDS = Gain on Sale***
market yield as of reporting date.
As of each reporting date, it is possible that CA > PROCEEDS = Loss on Sale***
you will use a fluctuating rates. ***Selling on interest payment date

If Nominal Rate = Market Rate, Face IPD can be annually, semi-annual, or

Amount = Fair Value quarterly. The computation of accrued
interest on notes receivable is also
If MR<Nominal Rate, FV > Face Amt applicable in debt securities.

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

The Accrued Interest will be computed as: ILLUSTRATIVE EXAMPLE:
Principal Annual interest = 120,000
*Stated Rate Jan1-Jul1 = 60,000
*Time (from last IPD to reporting date) Jul1-Dec31 = 60,000
=ACCRUED INTEREST
You wil receive a total of 120,000 since you
If sold NOT ON interest payment date, you hold the investment. However, the income
have additional considerations: you wil recognize is only 60,000. The issuer
-Additional amount of accrued interest will pays the interest to the investment holder at
be received (last IPD up to date of sale) IPD, regardless whenever the new investor
PRO-FORMA ENTRY: purchased the FA from the previous owner.
Dr. Cash
Dr. Loss on Sale (if loss) ENTRIES:
Cr. Inv. in Debt Sec @ FVTPL 12/31 Dr. Cash 120,000
Cr. Interest Income** Cr. Int. Inc 60,000
Cr. Gain on sale (if gain) Cr. Int. Rec 60,000

**Will only be entried if sold not on IPD =================================

**Can be interest receivable if you have a =
separate entry as follows: MARKET TERMS
Dr. Int. Receivable
Cr. Int. Income CLEAN PRICE - Price excluding accrued
In this situation, this is accrued separately interest
compared to the above entry.
================================= DIRTY PRICE - price including accrued
= interest
BUYING OF INVESTMENT NOT ON IPD:
Additional amount of accrued interest will be Initial measurement of investment is at
PAID (last IPD to date of purchase). clean price. If you are given dirty price,
PRO-FORMA ENTRY: remove the accrued interest component.
Dr. Inv. in Debt Sec. @ FVTPL =================================
Dr. Int. Receivable =
Cr. Cash SUMMARIZATION:
Ex.:
If FA is purchased on Jul1, the interest form Initially, and subsequently, measure the debt
Jan1 to Jul1 is not earned. You will only security @ FV
earn Jul1-Dec31. In addition to that,
INT INC - Jul1-Dec31 Amounts to be reported in P/L:
INT RECEIVED - Jan1-Dec31 +Unrealized Gains
Therefore, Int. Received is NOT -Unrealized Losses
NECESSARILY equal with interest income. +Gain on Sale
We can say that this is a form of -Loss on Sale
reimbursement. +Interest Income*

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

 -Transaction Costs CREDIT RISK - % failure to pay
2. Sold very near the maturity date
*Interest income = Face Amt x Stated Rate 3. You may sell as long as the amount is
================================= insignificant OR infrequent
=ADDENDUM ON FVTPL INTEREST
INCOME: In case of both significant AND frequent
sales, you will have to reassess your
Face Amount business model.
*Stated Rate
*Time(**) ACCOUNTING PROCEDURES:

**From the date of purchase up to the INITIAL RECOGNITION: When the entity
reporting date (IF UNSOLD) becomes party to the contract

Example: your purchase date is on April 1. INITIAL MEASUREMENT: at FV PLUS

You hold the investment until Dec 31. You Transaction Costs (unlike FVTPL)
have 9 months worth of interest.
FV normally uses the INCOME APPROACH
**Date of purchase up to the date of sale. or the PV of cash flows discounted at
Example: You purchased an investment on market rate as of initial recognition
March 1, and sold it June 30. You have 4
months of interest income. Moving forward, the market rate will become
the EFFECTIVE INTEREST RATE, but it
won't be EIR if you have transaction costs. If
INVESTMENT IN DEBT SECURITIES you have TCosts, the EIR will be different.
AMORTIZED COST The EIR will not be equal to your market
rate at initial recognition.
Investments classified at amortized cost are
as follows: The concepts of interest-bearing note @
1. Business Model - HOLD TO MATURITY; off-market rate is very similar with the
and computation of debt instruments at
2. Pass the SPPI Test amortized cost.

EXCEPTION: investments that are In computing PV,

irrevocably designated as FVTPL to reduce PRINCIPAL/FACE AMOUNT - PV of single
accounting mismatch. sum
INTEREST - PV of Ordinary Annuity
The standard states that you don't have to
wait for maturity. You may sell hold to RELATIONSHIP OF EIR AND THE STATED
maturity investments before maturity and RATE
still classify them at amortized cost under EIR/MARKET RATE>STATED RATE:
the following grounds: Discount
1. Significant increase in issuer's (debtor or FV<FACE AMOUNT
borrower, counterparty) credit risk Interest Income>Interest Received

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

 Determine the carrying amount without
EIR/MARKET RATE<STATED RATE: using amortization table.
Premium From 12/31/21, 4 periods. 12/31/22, 3
FV>FACE AMOUNT periods.
Interest Income<Interest Received
For amortization table review, refer to
Stated Rate is the basis of the amount of Scratch 001.
interest to be received
If DISCOUNT, carrying amount/PV as well
Face Amount is the amount to be received as interest income are INCREASING. The
at maturity CA/PV will be equal to the face amount by
maturity.
The amount of apparent gain for debt
instruments at a discount will be increasing If PREMIUM, carrying amount/PV as well as
the interest income piece by piece. Same interest income are DECREASING.
concept applies with debt instruments at a
premium. Amortization table presumption is presumed
to be annually.
You may also state the investment in debt
security net of the discount or the premium Interest income is recognized in the profit or
is included already. You don't have to loss. Interest income only uses ONE EIR all
separately account for an adjunct account. throughout, regardless of your market rate
at reporting period.
SUBSEQUENT MEASUREMENT: As of
EACH reporting date, based on the carrying If based on amortization table. changes in
amount or the present value column on the FV are NOT RECOGNIZED, unlike FVTPL.
amortization table.
Columns of the amortization table: ACCOUNTING FOR SALE OF
Date INVESTMENTS HELD AT AMORTIZED
Interest Received/Principal Received COST:
Interest Income
Amortization ON Interest Payment Date:
Present Value/Carrying Amount Proceeds VS Carrying Amt/PV (updated if
IPD)
Shortcut in determining the carrying amount If Proceeds>, gain on sale
without using the amortization table: PV of If Proceeds<, loss on sale
remaining cash flows discounted at EIR Both are recorded in P/L
(determined at initial recognition) over the ENTRY:
remaining periods Dr. Cash
Dr. Loss on sale (if loss)
EXAMPLE: Investment Maturity @ Cr. Inv. in Debt. Sec @ AC
12/31/25. Today is 12/31/21. Acquisition is Cr. Gain on Sale (if gain)
1/1/21. EIR is the same all throughout.
NOT ON Interest Payment Date

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

UPDATE the carrying amount 2. PREMIUM - Interest
1. Determine the immediately preceding IPD Income(EIR)<Interest Receeived(SR)
2. Partially amortize the investment from Entries:
last IPD up to the date of sale Dr. Cash**
3. Recognize PARTIAL interest income* Cr. Interest Income
from last IPD up to the date of sale Cr. Inv. in Debt Sec @ AC*
4. Additional amounts will be received for
accrued interest* *Can be found in the amortization table.
Decreases the amount of your investment.
*Amount of accrued interest is based on **Amount of interest received.
STATED RATE =================================
**Interest income is based on the EIR =
If asked total amount, OTHER MATTERS: REPORTING DATE
NOT ON INTEREST PAYMENT DATE
ENTRY:
Dr. Cash (incl. accrued int.)* You will recognize accrued interest from the
Dr. Loss on sale (if loss) last interest payment date up to the
Cr. Inv. in Debt Sec @ AC reporting date.
Cr. Interest Income
Cr. Gain on sale (if gain) You will subsequently amortize further, but
the interest income will be different.
The gain or loss on sale does not include COLUMNS:
the accrued interest component in cash Date
because it already has interest income (gap: period covered)
counterpart. Use the clean price. This is Interest Received/Principal
also applicable in all other debt securities. Interest Income
================================= Amortization
= PV/CA
PRO-FORMA ENTRIES ON DISCOUNT
OR PREMIUM AMORTIZATION Example on Supplementary 001
=================================
Initial Results of Accounting for Debt =
Securities: DATE OF PURCHASE NOT ON IPD
1. DISCOUNT - Interest
Income(EIR)>Interest Received (SR) For example, your date of purchase is July
Entries: 1, 2021, and your IPD is 12/31/20.
Dr. Cash** PROCEDURES:
Dr. Inv. in Debt Sec @ AC* 1. Additional amounts of accrued interest
Cr. Interest Income will be paid. Accrued interest is computed
as last IPD until the date of purchase.
*Can be found on the amortization column. Pro-forma entry:
Increases the amount of your investment. Dr. Inv. in Debt Sec @ AC*
**Represents interest received Dr. Interest Receivable
Cr. Cash

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

*at PV using market rate as of initial transaction costs, if any. Then, the EIR will
recognition. change due to the transaction costs.
Example:
12/31/20 - IPD SUBSEQUENT MEASUREMENT: Measure
4/1/21 - Date of purchase at FV on each reporting date. Despite of
Simplification: this, you will use the amortization table as if
STEP 1: Identify the immediately preceding this is classified as amortized cost
interest payment date investment.

STEP 2: Compute for the PV as of the The measurement of the investment at FV

immediately preceding interest payment every reporting date is the HFT element.
date (as if the date of purchase is 12/31/20). The amortization table is the HMT element.
Use PV of single payment for 5 years on the
principal, and PV of OA for the interest for 5 You will use the amortization table to know
years also. The discount rate to be used is the interest income, also using the effective
the market rate as of the ACTUAL date of interest rate determined at initial
purchase (04/01/2021), not the 12/31/20. recognition. Aside from that, you will also
We only use this in the number of periods. use the amortized cost for the amounts to
be reported in the OCI.
STEP 3: Partial amortization is needed
(12/31/20 to 04/01/21). View excel for At each reporting date, you compare the
example. Additional issue will only arise at amortized cost and the fair value.
the date of purchase. Subsequently,
proceed normally. FVTOCI and Amortized Costs are closely
related, especially the amounts reported in
the P/L.
INVESTMENT IN DEBT SECURITIES =================================
FAIR VALUE THROUGH OCI AT EVERY REPORTING DATE, IF...
FV>Amortized Cost, cum. unrealized gain
Investments classified at FVTOCI meet the FV<Amortized Cost, cum. unrealized loss
following requirements:
1. BUSINESS MODEL: Hold to maturity You will first determine the totals due to the
AND held for trading "cumulative" word. These are reported in
2. Should PASS the SPPI test. IF failed, the equity section (OCI).
FVTPL.
To determine the OCI amounts during a
ACCOUNTING: particular period, determine the breakdown.
Cum. Unrealized Gains/Losses
INITIAL RECOGNITION: When the investor Beginning VS Ending balances
becomes party to the contract
SCENARIO 1: Increase in Cum. Unr. Gain
INITIAL MEASUREMENT: Measure at FV, Report the unrealized gain in OCI
like ALL financial assets. And, PLUS
SCENARIO 2: Decrease in Cum. Unr. Gain

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

Report the unrealized loss in OCI transfer will take place for the RELATED
cumulative amounts.
SCENARIO 3: Inrease in Cum. Unr. Loss
Report the unrealized loss in OCI RULES ON RECLASSIFICATION
CUM. UNR. GAIN: Addiition to Gain on Sale
SCENARIO 4: Decrease in Cum. Unr. Loss OR deduction from loss on sale. The effect
Report the unrealized gain in OCI of these are reduction in OCI.
Dr. Unrealized Gain - OCI
SCENARIO 5: Change from Cum. Unr. Gain Cr. Gain (Loss) on Sale
to Cum. Unr. Loss
Report the unrealized loss in OCI CUM. UNR. LOSS: Deduction from Gain on
Sale OR addition to loss on sale. The effect
SCENARIO 6: Change from Cum. Unr. Loss of these are an addition to the OCI.
to Cum. Unr. Gain Dr. Gain (Loss) on Sale
Report the unrealized gain in OCI Cr. Unrealized Loss - OCI
=================================
= The reclassification of the above amounts
SALE OF INVESTMENT ON INTEREST have NO EFFECT on total comprehensive
PAYMENT DATE income

If an investment is sold at IPD, the SHORTCUT IN DETERMINING THE FINAL

underlying amortized cost is most likely AMOUNT OF GAIN OR LOSS
updated.
Proceeds>Amortized Cost: Total gain on
Similarly with others, you will compare the sale (final amount)
proceeds and the carrying amount.
Normally, the carrying amount is determined Proceeds<Amortized Cost: Total loss on
at the immediately preceding reporting date. sale (final amount)
=================================
IF =
Proceeds>Carrying Amount, gain on sale SALE OF INVESTMENT NOT ON
Proceeds<Carrying Amount, loss on sale INTEREST PAYMENT DATE

The gain or loss on sale are reported in the If it is not the IPD, the amortized cost is not
P/L, not OCI. The amounts computed above updated.
are just preliminary amounts. Additional
considerations are necessary for FVTOCI, STEP 1: Update the amortized cost up to
the date of sale
The cumulative unrealized amounts in STEP 2: Amount in the amortization column
equity are contrasted in investments in +- amortized cost @ IPD
equity securities @ FVTOCI. In investments STEP 3: Receive additional amounts for
in debt securities, we have a accrued interest as a form of reimbursement
RECLASSIFICATION to P/L. No direct (from last IPD to date of sale)
STEP 4: Apply normal procedures

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

RECLASSIFICATIONS, AND TRADE AND FVTOCI. You will still account for your the
SETTLEMENT DATE ACCOUNTING changes in FV of your investment until Dec.
31, 2019 in the P/L, and the interest income
Recalling the major classifications of is computed using the face amount
financial assets: multiplied by the stated rate.
1. Investments in equity securities
a. FVTPL If an entity follows a calendar year period,
b. FVTOCI most of the time, the reclassification date is
NO reclassications are allowed. Equity January 1 of the next period.
investments are designated at initial
recognition and are irrevocable. For an entity following a fiscal year ending
(example) June 30 of each year, and a
2. Investments in debt securities change in business model occured in April
a. FVTPL 23, 2018, the reclassification date is July 1
b. Amortized Cost of the same year.
c. FVTOCI
Reclassications are ALLOWED. The trigger If the problem is silent, assume calendar
to reclassify debt securities require a year.
change in business model. =================================
==
The change in business model should be RECLASSICATION OUT FROM FVTPL
ACTUAL and FACTUAL. The change
should be substantiated and not merely FVTPL-out reclassifications are easier
based on change on intentions, as this is compared to the latter.
subject to management abuse and are not
reflective of actual results in the financial 1. FVTPL TO FVTOCI
reports. Another factor not considered as a a. CONTINUE measuring the investment at
change in business model is the temporary fair value. Dec. 31, X1 FV = Jan. 1, X2.
disappearance of market. Such b. Most likely, NO gain or loss on
disappearance are temporary and does not reclassification date.
warrant an entity to reclassify a debt c. Amortization table will start to be used
instrument to another classification. moving forward from the date of
reclassification (prospectively).
Reclassifications are effected on the d. EIR is determined at reclassification date
reclassification date, and NOT on the date (it is considered as the initial recognition)
of change. The RECLASSIFICATION DATE e. RECLASSIFYING ENTRY:
is the first day of the subsequent period Dr. Inv. in Debt Sec @ FVTOCI
after the change in business model. Cr. Inv. in Debt Sec @ FVTPL
Example:
Date of change in BM: Nov. 23, 2019 2. FVTPL TO AMORTIZED COST
Reclassification date: Jan. 1, 2020 a. Initial measurement is FAIR VALUE at
The date where you record the reclassifying reclassification date on the amortization
entry is on January 1, 2020. For example, table
you reclassified an FVTPL investment to b. No gain or loss on reclassification date

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

c. Amortization table will be used moving form part of the initial recognition of the
forward FA@AC investment.
d. EIR at reclassification date will be used d. RECLASSIFYING ENTRY:
e. RECLASSIFYING ENTRY: Assuming unrealized gain - OCI:
Dr. Inv. in Debt Sec @ AC Dr. Inv. in Debt Sec @ AC
Cr. Inv. in Debt Sec @ FVTPL Dr. Unrealized gain - OCI
================================= Cr. Inv. in Debt Sec @ FVTOCI
== Assuming unrealized loss - OCI:
RECLASSICIATION OUT FROM FVTOCI Dr. Inv. in Debt Sec @ AC
Cr. Inv. in Debt Sec @ FVTOCI
1. FVTOCI TO FVTPL Cr. Unrealized Loss - OCI
a. Initially measure the FVTPL investment at =================================
FAIR VALUE on reclassification date ===
b. Gain or loss will be recognized from RECLASSIFICATION OUT OF
cumulative unrealized gains or losses AMORTIZED COST
(differences bet. amortized cost and FV of
FVTOCI investment accumulated in SHE 1. AMORTIZED COST TO FVTPL
section) coming from the reclassification to a. Measure the FVTPL investment at fair
P/L value on reclassification date
If cum. unr. gain, gain b. Gain or loss wil be recognized in P/L as
If cum. unr. loss, loss difference of amortized cost and FV on
c. No amortization table to be used (interest reclassification date
income is based on face amount*stated Gain if FV>Amortized Cost
rate) Loss if FV<Amortized Cost
d. RECLASSIFYING ENTRIES: c. NO amortization table will be used
Dr. Inv. in Debt Sec @ FVTPL prospectively. Interest income will be based
Cr. Inv. in Debt Sec @ FVTOCI on face amount*stated rate
d. RECLASSIFYING ENTRY:
Dr. Loss on Reclassification - P/L Dr. Inv. in Debt Sec @ FVTPL*
Cr. Unrealized Loss - OCI Dr. Loss on Reclassification
Cr. Inv. in Debt Sec @ AC**
Dr. Unrealized Gain - OCI Cr. Gain on Reclassification
Cr. Gain on Reclassification - P/L
*Fair Value
2. FVTOCI to Amortized Cost **Amortized cost on reclassification date
a. Use the SAME amortization table
No change in EIR 2. AMORTIZED COST TO FVTOCI
b. Initially measure the AC investment equal a. Measure the FVTOCI investment at fair
to its amortized cost on the date of value on reclassification date
reclassification (as if amortized cost ever b. Gain or loss wil be recognized in OCI as
since) difference of amortized cost and FV on
c. Cumulative unrealized gains or losses - reclassification date
OFFSET with the investment account. Gain if FV>Amortized Cost
Whatever the amount of CUG/L, they will Loss if FV<Amortized Cost

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

c. SAME amortization table will be used
prospectively (EIR will not change)
d. Interest income will still be based on EIR
e. RECLASSIFYING ENTRY:
Dr. Inv. in Debt Sec @ FVTOCI*
Dr. Loss on reclassification - OCI
Cr. Inv. in Debt Sec @ AC**
Cr. Gain on Reclassification - OCI

*Fair Value on reclassification

**Amortized cost on reclassification

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA

RIO, STEPHEN JAY C. BSA 2-2 PAMANTASAN NG LUNGSOD NG MAYNILA