Available for Sale Securities Question: > Diba po included sa cost ng investment sa available for sale securities yung

m ga taxes, brokerage fee, and the like. Ibig sabihin po nito kapag may purchase n g AFS laging dalawa lang ang account na involved like DR Inv. eqty sec-AFS CR Cash >About knowing the cost of stock rights. Nakita ko po ang solution nato ki Uberi ta MV Cost 69/75 * 3,040,000 6/75 * 3040000 Allocated Cost 2796800 243200

Pref. Share Warrant

Question: Bakit po base sa market value (getting ratio) ang ginagamit para malam an yung new cost ng investment saka cost ng warrant?Alam kung parehas yung numbe r of sa warrants saka sa shares but I don't get the point. >Para po ba ma determine ang unrealized gain or loss sa AFS, laging yung cost nu ng acquisition ang basehan?Eh...bakit sa Trading securities para madetermine ang unrealized g/l yung previous market value yung basehan?Similar po ba to sa pagd etermine ng realized g/l sa both securities? Bakit po sa AFS based on Historical Cost while sa Trading Sec. base sa Market Va lue? >Hindi ko po gets ung paggamit ng FIFO kapag may ibebentang investment. Please g ive me examples of this. Explanation 1: Mahaba ang explanation dun sa tanong mo on how unrealized gain/loss is calculate d, kaya uunahin ko na 'tong madali (1st Q). Always remember that Transaction Cos ts (a.k.a. Issue Costs) are capitalized if the debt/equity instrument involved i s AFS or HTM, kaya tama ung sinabi mo na 2 accounts lang ang laman ng entry mo. If the D/E instrument involved naman is Trading Securities (or Held for Trading) these incidental costs (broker's fees, taxes, etc.) are expensed outright as in curred. Question 2: ano po ba ang basehan para makuha ang cost per stock right?kasi what i have in m ind is after getting the allocated cost just divide it by the number of stock ri ghts. pero ang nakalagay sa libro ni robles treated as derivative daw which mean s to say measured at FV daw. Yung libro po pala ni robles na tinutukoy ko ay yun g 2010 edition Explanation 2: I have attached a table which summarizes the valuation of the three types of Deb t and Equity securities for your reference. Using this table we will now be able to answer your queries.

You asked: Para po ba ma-determine ang unrealized gain or loss sa AFS, laging yun g cost nung acquisition ang basehan? The correct answer is NO. Also, you asked: b akit sa Trading securities para madetermine ang unrealized gain/loss yung previo us market value yung basehan? This statement is CORRECT. A scrutiny of the attached table will show that at yearend valuation in the year of acquisition of the D/E instrument both T/S and AFS securities are to be rest ated at their Fair Values. In the year of acquisition, the comparison shall be b etween acquisition cost and fair value of the instrument. In the subsequent year s, the comparison shall be on the restated (fair) values versus the current fair values. You will note that yearend adjusting entries shall be made as follows: If instrument is T/S (and decline in value is temporary) (Dr.) Unrealized loss (P&L item) (Cr.) Investment T/S or If instrument is T/S (gain is to be recorded) (Dr.) Investment T/S (Cr.) Unrealized gain T/S (P&L item) If instrument is AFS (and decline in value is temporary) (Dr.) Unrealized loss (OCI, Stockholders Equity item) (Cr.) Investment T/S or If instrument is T/S (gain is to be recorded) (Dr.) Investment T/S (Cr.) Unrealized gain T/S (OCI, Stockholders Equity item) In the subsequent year, the decline (or appreciation in value, as the case may b e) shall be recorded in the same manner as above, comparing the current FMV from the previously restated Investment account. Make sure to understand that the Unrealized gain/loss (if instrument is T/S) is a profit and loss item. On the other hand, if the instrument is AFS the Unrealiz ed gain/loss is an OCI (Other Comprehensive Income) item which is shown as a ded uction in the Stockholders Equity. Hence, any fluctuations in fair values of an A FS instrument do not impact on the P&L but on the Stockholders Equity. Also, you need to understand the difference between a regular Statement of Income and the Statement of Comprehensive Income . This, I believe, is discussed elsewhere in your Financial Accounting subject. (See Acctg4Investment,xls) Explanation 3: For the question: 1) Similar po ba to sa pagdetermine ng realized g/l sa both securities? 2) Bakit po sa AFS based on Historical Cost while sa Trading Sec. base sa Market Value? Realized gains/losses are to be recognized when securities are disposed off, as in arm's length sale of instruments. When the securities sold are T/S, the net p roceeds on sale is compared with the carrying value in arriving at realized gain or loss. For AFS securities, however, the comparison in effect is between the n et proceeds and the original acquisition cost due to the existence of the Unreal ized gain/loss sitting in the Equity section. When AFS securities are disposed o ff, naturally the related Unrealized gain/loss should likewise be closed off fro m the books. Let me know if you require an illustration.

Clarifications: Ang ibig sabihin po ba nung cell sa 3rd column second row(AFS), 1st priority yun g FV, 2nd priority yung Cost, at 3rd priority yung amortized cost, when measurin g AFS at the end of closing to determine unrealized g/l? Tama po ba ang pagkakaintindi ko? Ang Realized g/l only arise kapag binenta na. Sa T/S yung realized g/l binabase sa Carrying Value while sa AFS sa acquisition cost. Kaya to ganito kasi, there i s a need to close the unrealized g/l para di makaapekto sa ibang AFS or T/S, but since yung unrealized g/l nang T/S ay nakalagay sa income statement, kinoclose nato every end of the year so ang matitira nalang ay yung dati ng adjusted FV pl us the needed adjustment for the right FV. Sa AFS naman, permanent yung unrealiz ed g/l which is based on acquisition cost dahil permanent yung unrealized g/l n iya, so carried over siya sa subsequent year. Para maclose yung unrealized g/l n iya kailangan din iclose yung market adjustment account nung security, kaya yung matitira ay yung acquisition cost nalang. Medyo di ko po makuha lalo na po sa part na kung bakit kailangan ibased yung rea lized g/l ng AFS sa acquisition cost unlike T/S na sa carrying value Explanation for clarifications: Ung understanding mo and your explanations are almost perfect. Meron lang tayong minor tweaks na kelangan gawin. You said "Ang Realized g/l only arise kapag bin enta na", take note that the term you should use is "DISPOSED OFF", i.e. di lang sa pagbebenta ang disposal xe, like when you "retire or convert" your bond inve stments, that's also disposal and, in such a case, you need to book any realized gains/losses. Next, you said "Sa AFS naman, permanent yung unrealized g/l which is based on ac quisition cost dahil permanent yung unrealized g/l niya, XXX". Medjo delikado u ng term na "permanent" alam mo naman sa accounting merong connotation ang "perma nent". So palitan natin ng "carried over from period to period", what do you thi nk? They continue to sit in your books 'til the related securities are disposed off. All the other statements I agree 100%. Two thumbs up for you, mate! Illustration: Acquisition cost (purchased AFS in mid yr) P10,000 FMV at yrend 1 P11,000 FMV at yrend 2 P9,200 FMV at yrend 3 P13,000 Disposed at start of yr 4 for P12,500 J/E Investment in AFS securities 10,000 Cash Yr1 Investment in AFS securities 1,000 Unrealized gain on AFS Yr2 Unrealized gain/loss on AFS 1,800 Investment in AFS securities Yr3 Investment in AFS securities 3,800

10,000 1,000 1,800

Unrealized gain on AFS Yr of disposal Cash Unrealizedgain on AFS 3,000 Realized gain on sale of AFS sec cost) Investment in AFS securities

3,800 12,500 2,500 (shortcut: Proceeds vs Orig acq 13,000

Make T accounts of both Investment in AFS and Unrealized G/L, and you will see t hat the Yr3 balance of the two accounts are P13,000 (debit) and P3,000 (credit), respectively. Additional Questions: kaya po ako confuse sa AFS dahil sa problem nato. The company carries the ff. sec on dec 31, 09 No. of shares cost x ord shares 4k 330k y ord shares 1k 200k z ord. shares 2k 300k on july 1, 10 the corp. sells all of y ord. shares for 170k on dec. 31, 10 the sec. are quoted as follows: x-72; z-160 Ngayun sabi ng prof namin ang req'd bal. daw sa market adj. acct. ay (22k) so napansin cost yung binasehan niya. pede po bang maging both investment in associate saka AFS ang isang security o t alagng pili lang ng isang classification? tapos about: excess of cost over book value bakit binabawas sa inv. account yung excess? bakit accounted as a share in loss from an investee yung binabawas? pano po yung sa case ng land, eh hindi naman siya depreciable asset? Explanation on Additional Questions: There are income & expense accounts not recognized in profit or loss and are usu ally required by PFRS to be recognized directly in the equity section of the sta tement of financial position. These includes the Unrealized Gain/(Loss) on AFS ( PAS 39)..If you will post the entries chronologically, the computation for the e nding balance of Unrealized Gain/(Loss)-AFS will be: Unrealized Gain/(Loss)-Beg Reversal of Unrealized Loss-Sec Y Recognition of Unrealized Loss-Dec31 Unrealized Gain/(Loss)-End Entry on sale of Security Y: Dr Cash 10 40 (72) (22) 170 market 330k 160k 350k

Dr Cr Cr

Loss on Sale AFS-Security Y Unrealized Loss-Sec Y

30 160 40

The treatment would be different, in a sense that Unrealized Gain/(Loss) on Trad ing Securities are included in profit or loss of the "current period". Quick Notes lang po: Unrealized Gains/Loss - Trading >>> presented in P&L Statement Unrealized Gains/Loss - AFS >>> presented in SHE as Other Comp. Inc. Explanation no. 2: Ang tanong mo: "bakit binabawas sa inv. account yung excess?". First of all, k elangan maliwanag na HINDI LAHAT ng excess of cost over BV eh binabawas sa Inves tment account, as in the case of the "excess" arising from undervaluation of a n on-depreciable asset, like land. The very reason why Excess of Cost over Carrying/Book Value (undervaluation of d epreciable assets) is amortized in the books of the Investor is to adjust SOPA ( Share on Profits of Associate) due to understated depreciation charge recorded i n the books of Investee. If you will draw a T-account of your Investment account, you will be able to see clearly what comprises the debits and credits of the Equ ity Investment account. On the debit side you'll find acquisition cost, Share on Profits of Associate (SOPA), while on the credit side you'll see dividends rece ived, SOLA (share on loss) and amortization of cost over book value. As you will see, SOPA increases the Investment account. Now, take note that the basis of yo ur SOPA is Investor's equity ratio multiplied by Investee's Net Income. An overs tated Net Income base will yield an overstated SOPA and, concomitantly, overstat ed Investment account. So bakit binabawas ung amortization ng excess? It's becau se the Investment account is overstated due to the recording of overstated SOPA. To illustrate, assume for example that Investee Company has in its books P1M wo rth of depreciation based on an understated Admin Building worth P20M depreciate d over 20 years. The correct value of the Building for instance is P25M, which m eans the depreciation should have been P1.25M. This undervaluation of the buildi ng impacts on the amount of depreciation (understates the charge due to understa ted depreciable base) that is recognized in the books of Investee. An understate ment of depreciation charge, you guessed correctly, overstates Net Income of Inv estee. An overstated income of Investee naturally yields overstated SOPA. It is for this reason that we amortize the excess by charging the Investment account t o adjust and nullify the overstated SOPA. When the excess is due to undervaluation of land, no amortization may be taken u p in the books of Investor. Tama ung tanong mo, hindi depreciable asset ung land kaya dapat walang impact sa Net Income ng Investee and, therefore, wala din dap at adjustment sa Investment account ni Investor. The apparent "excess" stays in Investor's books until the equity investment is disposed off. Additional Questions no. 2: Eh di ba po yung amortization, every year tapos yung fair market value pabagobag o so pano po yung amortization kapag nagbago ulit yung fair market value? nagaadjust then po ba yung investee para maitama yung depreciation na nirecord? yung sa case ng land, included po ba sa value ng land yung excess over book valu e? Explanation to Additional Question no. 2:

Eh di ba po yung amortization, every year tapos yung fair market value pabagobag o so pano po yung amortization kapag nagbago ulit yung fair market value? This is exception to the rule. When equity method is applicable in equity investment, no YE adjustment on Fair Value is made. Pag fair value method lang ang ginagamit dun ka lang magkakaroon ng YE adjustment to reflect the current fair value of your equity investment in the books. nagaadjust then po ba yung investee para maitama yung depreciation na nirecord? yung sa case ng land, included po ba sa value ng land yung excess over book valu e? Investee has that option to restate its undervalued asset. But for board exam pu rposes, you will assume that Investee does not adjust and continues to carry its (undervalued) depreciable assets as they are. The straight answer to your Q? NO . Di maliwanag ung Q re sa land... Heto ang intindi ko (giving example): Land orig inally valued at 10M when in fact the FV at the time of Investor's purchase of I nvestee's shares of stocks is 30M. In this case, Investee's net assets is underv alued by 20M in its books. However, for purposes of the purchase of shares, the purchased net assets correctly includes the 20M. Kaya instead na ang NA as per I nvestee's FS is 100M, ang naging bayaran is based on 120M (100M+20M). Kaya kung 30% ang binili mo as Investor, ang binayaran mo most likely is 36M (120M X 30%) although the NA as per FS is only 100M. Dito na nagkakaroon ngayon ng 6M {36M (100M X 30%)} excess of cost over BV. Owing to the undervaluation of land, this excess stays in Investor's investment account 'til disposed off.