FA-FVPL, FA-FVOCI, & FA- AMORTIZED COST

Under PFRS 9, paragraph 4.1.1, financial asset are classified into three, namely:

1. Financial assets at fair value through profit or loss

2. Financial assets at fair value through other comprehensive income
3. Financial assets at amortized cost

INITIAL MEASUREMENT
An entity shall measure a financial asset at FAIR VALUE plus, in the case of financial asset
not at fair value through profit or loss, TRANSACTION COSTS that are directly attributable
to the acquisition of the financial asset. (PFRS 9, p. 5.1.1)

Transaction costs do not include debt premiums or discounts, financing costs, and internal
administrative or holding costs.

SUBSEQUENT MEASUREMENT

After initial recognition, an entity shall measure a financial asset at (PFRS 9, p. 5.2.1):

1. Fair value through profit or loss Equity & Debt Investments

2. Fair value through other comprehensive Equity & Debt Investments

income
3. Amortized Cost Debts Investments
only

PFRS 9
EQUITY INVESTMENTS
Equity Investments

Held for trading Not held for trading

FVTPL

Less than 20% 20% but not more More than 50%
than 50%

FVOCI option elected?

Yes No
 Other equity investment:
Quoted equity investment: FVTPL
Unquoted equity investment: Cost

EQUITY INVESTMENTS
Not held for trading
Point of Comparison Held for trading FVOCI option elected Not elected FVOCI option
Initial measurement
Fair value Capitalized Capitalized Capitalized
Transaction Cost Expensed Expensed Capitalized
Change in Fair Values Profit/Loss Profit/Loss Other Comprehensive
Income (OCI)
Retained Earnings, any
Gain/Loss in Disposal Profit/Loss Profit/Loss cumulative UG/UL is
transferred to Retained
Earnings
Impairment Does not apply Does not apply Does not apply

TRADING SECURITIES – EQUITY INVESTMENTS

A financial asset is held for trading if (PFRS 9, Appendix A):

(a) It is acquired principally for the purpose of selling or repurchasing it in the
near term.
(b) On initial recognition, it is part of a portfolio of identified financial assets
that are managed together and for which there is evidence of a recent actual
pattern of short-term profit taking.
(c) It is a derivative, except for a derivative that is a financial guarantee contract or a
designated and an effective hedging instrument.

If the investment in equity instrument is held for trading, subsequent changes in fair value are
always included in profit or loss.
Unrealized Loss –TS Other Expense (P/L)
Unrealized Gain –TS Other Income (P/L)

On derecognition of a financial asset “the difference between the carrying amount and the
consideration received, including any new asset obtained less any new liability assumed, shall be
recognized in profit or loss.

NOT HELD FOR TRADING – EQUITY INVESTMENTS

 An entity may make an irrevocable election to present in other comprehensive income (OCI)
subsequent changes in fair value of an investment in equity instrument that is not held for
trading. (PFRS 9, p. 5.7.5). If the investment in equity instrument is held for trading, the election to
present unrealized gains and losses in other comprehensive income is not allowed.

Gain or loss on disposal of equity investment measured at FVOCI is recognized in retained earnings
in accordance with PFRS 9, para. 5.7.1b. Moreover, the cumulative gain or loss previously
recognized in other comprehensive income is also transferred to retained earnings in accordance
with PFRS 9 Application Guidance, paragraph 5.7.1.

PFRS 9

DEBT INVESTMENTS

Debt Investments

Held for trading Not held for trading

FVTPL Business model

Hold for collection of Hold for collection of

contractual cash flows contractual cash flows
and for sale of financial
asset

Elected Fair Value Option Elected Fair Value Option

 TRADING SECURITIES – DEBT INVESTMENTS

A financial asset is held for trading if (PFRS 9, Appendix A):

(d) It is acquired principally for the purpose of selling or repurchasing it in the near
term.
(e) On initial recognition, it is part of a portfolio of identified financial assets that are
managed together and for which there is evidence of a recent actual pattern of
short-term profit taking.
(f) It is a derivative, except for a derivative that is a financial guarantee contract or a
designated and an effective hedging instrument.

If the investment in equity instrument is held for trading, subsequent changes in fair value are
always included in profit or loss. Interest income is based on the nominal interest rate rather than
the effective interest rate.

Unrealized Loss –TS Other Expense (P/L)

Unrealized Gain –TS Other Income (P/L)

On derecognition of a financial asset “the difference between the carrying amount and the
consideration received, including any new asset obtained less any new liability assumed, shall be
recognized in profit or loss.

NOT HELD FOR TRADING – DEBT INVESTMENTS

Financial asset shall be measured at amortized cost if both of the following conditions are
met (PFRS 9, p. 4.1.2):

(a) The business model is to hold the financial asset in order to collect contractual
cash flows on specified date.
(b) The contractual cash flows are solely payments of principal and interest on the
principal amount outstanding.

Financial asset shall be measured at fair value through other comprehensive income if
both of the following conditions are met (PFRS 9, p. 4.1.2A):
 (a) The business model is achieved by collecting contractual cash flows and by
selling the financial asset.
(b) The contractual cash flows are solely payments of principal and interest on
the principal amount outstanding.

Interest income is recognized using the effective interest method as in amortized cost
measurement. Note that for debt investment measured at FVOCI, the cumulative gain or
loss previously recognized in OCI is reclassified to profit or loss on disposal of the
investment.

An entity at initial recognition may irrevocably designate a financial asset as measured at

fair value through profit or loss even if the financial asset satisfies the amortized cost or
FVOCI measurement (PFRS 9, p. 4.1.5).

RECLASSIFICATIONS OF FINANCIAL ASSET

Note:

1. Equity Investments – cannot be reclassified

2. Debt Investments – can be reclassified except for debt investments measured at FVPL by
irrevocable election.

Entity shall reclassify financial assets only when it changes its business model for managing the
financial assets. Where reclassification occurs, an entity shall apply the reclassification prospectively
from the reclassification date. Reclassification Date is the first day of the reporting period following
the change in business model that results in an entity reclassifying financial asset.

FROM TO RULES
The fair value at the reclassification date becomes the new gross
carrying amount of the financial asset at amortized cost.

FVTPL Amortized The difference between the new gross carrying amount of the
Cost financial asset at amortized cost and the face amount of the financial
asset shall be amortized through profit or loss over the remaining life
of the financial asset using the effective interest method.

A new effective rate must be determined based on the fair value on

reclassification date.
FVOCI Amortized The fair value at reclassification date becomes the new amortized
Cost cost carrying amount. The cumulative gain or loss previously
recognized in other comprehensive income is eliminated and
adjusted against the fair value at reclassification date. As a result,
the investment is reverted back to amortized cost measurement. The
original effective rate is not adjusted.
Amortized FVTPL The financial asset is measured at fair value on reclassification date.
Cost The difference between the previous carrying amount and fair value
on reclassification date is recognized in profit or loss.
Amortized FVOCI The financial asset is measured at fair value at reclassification date.
Cost The difference between the previous carrying amount and fair value
on reclassification date is recognized in other comprehensive
 income. The original effective interest rate is not adjusted.
FVPL FVOCI The financial asset continues to be measured at fair value. The fair
value at reclassification date becomes the new carrying amount. A
new effective interest rate must be determined based on the fair
value at reclassification date.
The financial asset continues to be measured at fair value. The fair
FVOCI FVPL value at reclassification date becomes the new carrying amount. The
cumulative gain or loss previously recognized in other
comprehensive income is reclassified to profit or loss at
reclassification date.

DIVIDENDS

Date of Declaration This is the date on which the payment of dividends is approved by the
Board of Directors
Date of Record This is the date on which the stock and transfer of book of the
corporation is closed for registration
Date of Payment This is the date on which the dividends declared shall be paid

Dividend-On Between the date of declaration and the date of record

Ex-Dividend Between the date of record and the date of payment

KINDS OF DIVIDENDS

Cash Dividends If equity securities are measured at FVPL or FVOCI, dividends earned are
considered as INCOME. Cash dividends do not affect the investment
account.
Property Dividends These dividends in the form of property or noncash assets. Property
dividends are also considered as income and recorded at FAIR VALUE.
Liquidating Dividends They represent return of invested capital, and therefore, are not
income. The payment may be in the form of cash or noncash assets.
Stock Dividends They are in the form of the issuing entity’s own shares.
(Bonus Issue)
Shares received in lieu Shares received in lieu of cash dividends are income at fair value of the
of cash dividends shares received. In the absence of fair value of the shares received, the
income is equal to the cash dividends that would have been received.
Cash received in lieu of Stock dividends are assumed to be received and subsequently sold at
stock dividends the cash received. Gain or loss may be recognized.

They are additional capital contribution of the shareholders. On the part

Special Assessments of the shareholders, special assessments are recorded as additional cost
of investment and on the part of the entity as share premium.
It is a transaction whereby the outstanding shares are called in and
Share Split Up replaced by a larger number, accompanied by a reduction in the par or
stated value of each share.
It is a transaction whereby the outstanding shares are called in and
Share Split Down replaced by smaller number, accompanied by an increase in the par or
stated value.

STOCK RIGHTS

A stock right or preemptive right is a legal right granted to shareholders to subscribe for new shares
issued by a corporation at a specified price during a definite period.

NOTE: A shareholder receives one right for every share owned. ( 1 share = 1 stock right)

Stock Rights Accounted For Stock Rights Not Accounted for

Separately Separately

Stock rights shall be measured initially at FAIR The receipt of stock right is recorded
VALUE. A portion of the carrying amount of under a memorandum entry.
the original investment in equity securities is
allocated to the stock rights at an amount
equal to the fair value of the stock rights at
the time of acquisition.

In the absence of the market value of the

stock right, the THEORETICAL/PARITY VALUE
is determined to approximate the fair value
of the stock right at the time of acquisition.
The theoretical or parity value is the
assumed fair value of the right that is
derived from the market value of the share.

COMPUTATION OF THEORETICAL/PARITY VALUE OF STOCK RIGHT:

SHARE IS SELLING RIGHT-ON

MV of Share Right On – Subscription Price
Number of Right to Purchase one Share + 1

SHARE IS SELLING EX-RIGHT

MV of Share Right On – Subscription Price
Number of Right to Purchase one Share

TRANSACTIONS NOT ACCOUNTED ACCOUNTED FOR

SEPARATELY SEPARATELY
Receipt of stock rights Memorandum entry Stock Rights xx
Investment in ES xx
Investment in ES xx Investment in ES xx
Exercise of stock rights Cash xx Cash xx
Stock Rights xx
 Cash xx
Stock Rights xx
Gain on sale xx
Sale of stock rights Cash xx
Investment in ES xx Cash xx
(No gain or loss is recognized) Loss on stock rights xx
Stock Rights xx

Expiration of stock Memorandum Loss on stock rights xx

rights entry Stock Rights xx

INVESTMENT IN ASSOCIATE

 at least 20% - presumed significant influence exists unless proven otherwise

less than 20% - presumed there is no significant influence unless clearly demonstrated that such
exists.

 classified as noncurrent asset

 uses equity method
 investee is called an associate

A. Excess of Cost over Carrying Amount

- The investor pays investee more than the carrying amount of his share in the latter’s net assets.

Cost/Amount Paid
Goodwill
Fair Value of Net Assets
Undervaluation
Carrying Amount of Net Assets

- The excess of purchase price or cost over carrying amount is attributed to the following:
 Goodwill
 Undervaluation of assets of the associate

Relevant Journal Entries:

Acquisition of shares from associate Investment in Associate xx

Cash xx

Record goodwill No entry; buried in the first entry

Record undervaluation No entry; buried in the first entry

Amortization of undervaluation Investment Income xx

Investment in Associate xx

Although we attribute excess of cost of carrying amount to goodwill, we do not

record such goodwill as a separate asset account in the statement of
financial position. Such goodwill is actually buried in the “Investment in
Associate” account.
B. Excess of Net Fair Value over Cost

- The fair value of the share of investor in the net assets of the investee is higher than the amount
paid by the investor for such share.

Fair Value of Net Assets

Investment Income
Undervaluation Cost/Amount Paid

Carrying Amount of Net Assets

Relevant Journal Entries:

Acquisition of shares from associate Investment in Associate xx
Cash xx

Record undervaluation No entry; buried in the first entry

Amortization of undervaluation Investment Income xx

Investment in Associate xx

Record excess of fair value over cost Investment in associate xx

(opposite of goodwill) Investment Income xx

C. Associate Incurring Losses

Investment “If investment account is

Account greater than share in loss,
continue to absorb the loss”
Losses

“If investment account is equal

to his share in loss, discontinue
Losses Investment
absorbing the loss. At this
Account
point, investment account has a
zero balance”.
 “Should the associate obtain profit in the
succeeding periods, the portion of the loss
which was unabsorbed previously must
now be absorbed by the investor”

Investment “If investor’s share in loss is

Account greater than investment account,
Losses discontinue absorbing the loss.”

D. Impairment Loss

 Investment in associate account is subject to impairment.

 Carrying Amount of Investment > Recoverable Amount of Investment = Impairment Loss
 Recoverable amount of an investment in associate is assessed for each individual
associate
 If such investment is impaired, the impairment loss shall be charged against the
investment account as a whole & not to goodwill. Note that even if we have attributed
portion of the cost of investment to goodwill, we do not recognize separately such asset
account in the statement of financial position.

E. Sale of Inventory/PPE by Associate to Investor

- These upstream transactions are relevant in the computation of investor’s share in the net
income of the associate

F. Change from Equity Method to FVPL/FVOCI/Cost Method

Before Change – Equity Method After Change- FVPL/FVOCI/Cost

Transactions Method
Dividend declared Decreases investment account. Do No effect to investment account;
(not prorated) not allocate dividends. increases income. Do not allocate
dividends.
Increases investment account. Portion of net income , covered by
Share of net Extract only the portion of net period after change, will have no
income income covered by the period when effect at all to investment account
(prorated) investor is still using equity method.
Difference between carrying amount of & fair value of retained investment at
Transition the point of change shall be reported in profit/loss regardless of the method
used after change.

Any retained investment is measured at fair value.

G. Change from FVPL/FVOCI/Cost Method to Equity Method

- Existing interest is actually being remeasured at fair value. Difference of carrying amount & fair
value shall be accounted as gain/loss on remeasurement (profit/loss) regardless of the method
used before change.

- After remeasurement, reclassify the existing interest at fair value by using investment in
associate account.

- If existing interest was accounted as FVOCI, any UL/G-OCI at the date investee becomes an
associate is closed to retained earnings.

JOURNAL ENTRIES SUMMARY

Transactions Journal Entries
Acquire investment Investment in Associate xx
Cash xx
Excess of cost over carrying amount Investment in Associate xx
Investment Income xx
Associate declares dividends Cash xx
Investment in Associate xx
Associate reports income Investment in Associate xx
Investment Income xx
Associate reports loss Investment Income xx
Investment in Associate xx
Amortization of undervaluation Investment Income xx
Investment in Associate xx
Impairment Impairment Loss xx
Investment in Associate xx
Investment Account* xx
Remeasurement to Fair Value Gain on remeasurement xx
(regardless of method used) or
Loss on remeasurement xx
Investment Account* xx
Reclassification –Cost/FVPL Investment in Associate xx
Investment Account* xx
Investment in Associate xx
Investment Account* xx

UG-OCI xx
Reclassification –FVOCI Retained Earnings xx
or
Retained Earnings xx
UL-OCI xx
*it may be FA-FVPL account or FA-FVOCI account or Investment in Equity Securities account