PFRS 9 & PAS 28

Conceptual Framework and Accounting Standards

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Investments

are assets held by an entity for the

accretion of wealth through distribution
such as interest, royalties, dividends
and rentals, for capital appreciation or
for other benefits to the investing entity
such as those obtained through trading
relationships.
PFRS 9- Financial Instruments Financial Assets

1.Cash
Debt Instruments
2. A contractual right to receive cash or
another financial asset from another
entity.

3. An equity instrument of another entity. Equity Instruments

4. A contractual right to exchange

financial instrument with another entity Derivative
Instruments
under conditions that are potentially
favorable.
 Equity Instruments
Equity securities- represent ownership shares and right,
warrants or options to acquire or dispose ownership
shares at a fixed or determinable price.

Examples: (1)ordinary shares, (2)preference shares,

(3) rights or option to acquire ownership shares.
Note: Evidenced by a share/stock certificate

Standards: PAS 39, PFRS 9

% of Equity Ownership
1. less than 20%- Financial asset
purpose: dividends/ speculation*
method: FVPL/ FVOCI
*Speculation-expects to increase in fair value

2. 20%-50%- Investment in associate (IAS/PAS 28)

purpose: significant influence
method: Equity method
3. more than 50%- Investment in subsidiary
purpose: control
method: Cost/ Equity method (IFRS/PFRS 3)
Measurement of Equity Investments
1. Held for trading/ Trading Securities
 FVPL “ by requirement”

2. Not held for trading

 FVPL (general rule) “by designation”

3. All other quoted equity instruments

 FVPL “ by consequence”
  FVPL Measurement
 Purchase price/ Transaction price
 Transaction Cost -“expensed outright”
 Fair value changes -“recognized in P/L(other income)”
unrealized gain or loss

 Dividend received/ -dividend income recognized in P/L”

receivable

 Disposal -difference between proceeds and carrying

amount at disposal date is recognized in P/L
Proceeds < CA= loss on sale
Proceeds > CA= gain on sale

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 4. Not held for trading
 FVOCI “ by irrevocable election/ designation”
 FVOCI Measurement
 Purchase price/ Transaction price
 Transaction Cost - “Capitalized”
 Fair value changes - “recognized in OCI (unrealized gain/loss)”

 Dividend received/ - dividend income recognized in P/L”

receivable
-difference between proceeds and carrying amount at
 Disposal
disposal date is recognized in Retained earnings
-Unrealized gain/loss(cumulative changes in FV) is
transferred to Retained Earnings
Note: Impairment is not necessary for both equity instruments measured at
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FVPL and FVOCI.
5. Unquoted equity instruments

-at cost (best representation of market value)

6. Investment in associate

-Equity Method
7. Investment in Subsidiary
-Cost/ equity method/ consolidation method
Items of OCI
 Financial Statement Presentation-
Equity Instruments

FVPL Current Asset

Noncurrent Asset (generally)

FVOCI Current Asset- if expected to be
sold within one year after the reporting
period.
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Investment in Associate (PAS 28)

Associate- An entity over which the

investor has significant influence.

Significant Influence- the power to

participate in the financial and operating
policy decisions of the investee but is not
control or joint control over those policies.
 Significant Influence?
I. Quantitative II. Qualitative
Other indicators: (other than the
General Rule: (threshold)
threshold)
The investor holds, directly
1. Representation in the board of
or indirectly through
directors.
subsidiaries 20% or more
2. Participation in policy making
of the voting power of the
process.
investee.
3. Material transactions between
the investor and the investee.
20%or more but 4. Interchange of managerial
less than 50% personnel.
5. Provision of essential technical
information.
Note: Potential voting rights are considered in determining significant influence.
(e.g. currently exercisable warrants, currently convertible debt or equity instruments)
Measurement and Classification

Equity method
 Initial measurement at cost
 Subsequent measurement- adjusted for
the investor’s share in the changes in
the equity of the investee.

Classification
Generally classified as Non-current asset
 Applying the equity method

Investment in Associate
(1)Beginning @Cost XX

(2)Share in Net income XX XX Share in Net Loss (3)

(4)Share in OCI (up) XX XX Share in OCI (down) (5)

XX Share in dividends (6)

Excess of cost over carrying amount
 Price paid/Cost investment > Carrying amount of
net assets acquired

The excess can be attributed to:

(1)Undervaluation of investee’s asset
a. Depreciable asset – excess is amortized based
on remaining useful life.
b. Inventory and Land – excess is amortized
when sold.
(2)Goodwill
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Sample Problem- Excess of cost over carrying amount
NAY Company purchased 25% of the outstanding ordinary share of TAY
Company for 200,000. The carrying amount of TAY Company’s net asset was
P400,000. The net asset of TAY on the date of acquisition are fairly stated
except for a depreciable asset with a remaining useful life of 5years, for which
the value is P400,000 greater than its carrying amount.
Acquisition Cost P200,000
CA of net assets acquired (25% x 400,000 ) (100,000)
EXCESS OF COST OVER CA 100,000

Undervalued depreciable asset (25% x 400,000) 100,000

Note: The entire excess is attributable to the depreciable asset

Investment Income (100,000/5 years) 20,000

Investment on associate
20,000
 Investment in Associate
(1)Beginning @Cost XX

(2)Share in Net income XX XX Share in Net Loss (3)

(4)Share in OCI (up) XX XX Share in OCI (down) (5)

XX Share in dividends (6)

XX Amortization of Excess Cost(7)

Excess of net fair value over cost
 Price paid/Cost investment < Net fair value of the
associate's assets and liabilities

Included in income in the determination of the investor’s share of

the associate’s profit or loss in the period in which the
investment is acquired.

Investment in Assoc. XX
Investment Income XX
 Investment in Associate
(1)Beginning @Cost XX

(2)Share in Net income XX XX Share in Net Loss (3)

(4)Share in OCI (up) XX XX Share in OCI (down) (5)

XX Share in dividends (6)

(8)Excess of net FV XX
XX Amortization of Excess Cost(7)
at the acquisition year

Ending Balance XX
 Debt Instruments
a financial instrument which can be bought or
sold between two parties and has basic terms
defined such as notional amount, interest
rate, maturity and renewal date.

Standards: PAS 39, PFRS 9

 Bond Investments
“A formal unconditional promise made under seal to
pay a specified sum of money at a determinable
future date, and to make periodic interest payments
at a stated rate until the principal sum is paid.”

 Bondholder (creditor)- invests in bonds.

 Bond issuer (debtor)- issues the bond certificate,
 Bond certificate- a certificate of indebtedness to
receive principal and interest. Serves as a proof of
ownership by the bondholder.
 Bond indenture- a contract that specifies the terms
of the bond.
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Measurement and Classification
1.Initial Measurement
 Bond investments are recognized initially at fair value plus
transaction cost that are directly attributable to the
acquisition.

Note: Bonds investment held for trading (FVPL), transaction

cost are expensed immediately.

2.Subsequent Measurement
 FVPL
 FAAC (amortized cost)
 FVOCI
Classifications
1. Financial asset held for trading
2. Financial asset amortized cost
3. Financial asset at fair value through other
comprehensive income
4. Financial asset at FVPL by irrevocable
designation (Fair value option)
 1. Held for trading/ Trading securities- FVPL
 Business Model: To sell the asset
 Transaction Cost -“expensed outright”
 No discount or premium amortization
 Interest income is based on nominal rate- recognized in P/L
 No Impairment

 Fair value - the difference between current fair value and

changes carrying value is recognized in P/L (unrealized
gain/loss)

 Disposal -difference between net selling price (proceeds)

and carrying amount at disposal date is
recognized in P/L (gain or loss on sale)
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Note: Nominal/ stated rate is the rate appearing on the face of the bond.
 #1 Practice Problem: Debt Securities FVPL

On January 1, 2021, MOM Corp. purchased bonds at P1,000,000 at

98. The bonds mature on January 1, 2024 and pay 12% interest
beginning Jan 1, 2022. MOM Corp.’s business model is to sell such
bonds in the near term to take advantage of fluctuations in fair
value. The bonds were classified as held for trading for trading
investments. On December 31, 2021, the bonds are quoted at 102.

Required:
1. Prepare the necessary journal entries for 2021.
2. Determine the unrealized gain/loss on December 31,2021.

NOTE: Be ready for your answers next meeting….

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 2. Financial Asset at Amortized Cost- FAAC
 Business Model: Collect contractual cash flows, solely held for collection
of principal and interest.
 Transaction Cost -“capitalized”
 Discount or premium are amortized
 Interest income - computed using the “effective interest method”

 Fair value changes - None

 Impairment loss applied (P/L)
 Disposal -difference between net selling price (proceeds)
and its amortized cost at the time of disposal.
Recognized in P/L

Note: Can be measured at FVPL (fair value option) by irrevocable

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3. Financial asset at fair value through other comprehensive income-
FVOCI
 Business Model: (1)Held for collection of contractual cash flows and (2)sell
the asset in an open market
 Transaction Cost -“Capitalized”
 Discount or premium are amortized
 Interest income - computed using the “effective interest method”
 Impairment loss applied (P/L)

 Fair value changes -difference between fair value at year end and its
amortized cost at year end. Unrealized gain/loss
recognized in OCI
 Disposal - Gain or loss on sale is recognized in P/L
- Cumulative gains or losses previously
recognized in OCI are reclassified to profit
or loss. (recycling)
Note: Can be measured at FVPL (fair value option) by irrevocable designation.
 Thank you and
God Bless!

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 Textbooks:
Auditing and Assurances: Concepts and Applications, Cabrera,
2020-2021 Edition.

Auditing and Assurance: Concepts and Application, Part 1,

Asuncion, Ngina, Escala, 2021 Edition

Applied Auditing, Cabrera

Intermediate Accounting Vol.1, Valix, 2020 Edition

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