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.
- Are assets not directly identified with operating activities but only auxiliary relationship to the central revenue producing activities.
- Classified as Current & Non-current
 Current- are by their very nature readily realizable and are intended to be held for not more than one year. Ex.(Trading
Securites expected to be realized within 12 months after the end of RP)
 Non-current – are intended to be held for more than 1 year or are not expected to be realized w/in 12 months after the
end of RP

Purpose of Investments

 Accretion of Wealth
 Capital Appreciation
 Ownership Control
 Meeting Business Requirements
 Protection

Examples of Investments

 Trading securities or financial asset at fair value through profit or loss

 Financial asset at fair value through other comprehensive income
 Investment in nontrading equity securities
 Investment in bonds or financial asset at amortized cost
 Investment in associative
 Investment in subsidiary
 Investment property
 Investment in fund
 Investment in joint venture

Financial Asset

 Cash
 A contractual right to receive cash or another financial asset from another entity
 A contractual right to exchange financial instrument with another entity under conditions that are potentially favorable (there must
be a gain or additional cash inflow)
 An equity instrument of another
entity

Not considered Financial Asset

 Intangible Assets
 Physical Assets
 Controlled Intangible & Physical
assets that does not give rise to a present right to receive cash or another financial asset
 Prepaid Expenses
 Leased Assets

Classification of Financial Asset

 FA at FV through P or L
- Include both equity securities and debt securities
 FA at FV through other comprehensive income
- Include both equity securities and debt securities
 FA at amortized cost
- Include debt securities

The classification depends on the business model for managing financial assets which may be;

1. To hold investments in order to realize fair value changes.

2. To hold investments in order to collect contractual cash flows.

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Equity Security

- any instrument representing ownership shares and right, warrants or options to acquire or dispose of ownership shares at a fixed or
determinable price.
- represent an ownership interest in an entity

Ownership Shares: Ordinary, Preference & rights or options to acquire ownership shares

Owners are known as “Shareholders”

Share

- Is the ownership interest or right of a shareholder in an entity.

- It is evidenced by an instrument called “Share Certificate”
This right pertains to the share in earnings, election of directors, subscription for additional shares and share in net assets upon liquidation.

Equity securities do not include redeemable preference shares, treasury shares and convertible debt.

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Debt Security

- Is any security that represents a creditor relationship with an entity

- It has a maturity date and a maturity value

Nature

• Any contract that reflects a right of the holder to receive cash from the issuer or an obligation for the issuer to pay cash to the holder.
• An example of a debt instrument is a bond.
- A bond is a formal, unconditional promise made under seal to pay a defined sum of money at a predetermined future date, as
well as periodic interest payments at a predetermined rate, until the principal sum is paid.
-

Ex.

1. Corporate Bonds
2. BSP treasury bills
3. Government securities
4. Commercial papers
5. Preference shares with mandatory redemption date or are redeemable at the option of the holder.

Classification of debt securities

• At amortized cost (AC)

• At fair value through other comprehensive income (FVOCI)
• At fair value through profit or loss (FVPL)/ held for trading

Basis of classification

• The entity’s business model for managing the financial assets; and
• The contractual cash flow characteristics of the financial asset.

Classification at AC

A debt security is measured at amortized cost (AC) if both of the following conditions are met:

1. Business model: to hold financial assets in order to collect contractual cash flows (“hold-to-collect” business model); and

2. Contractual cash flows: Solely payments of principal and interest (SPPI)

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Classification at FVOCI

A debt security is measured at fair value through other comprehensive income if both of the following conditions are met:

1. Business model: to collect contractual cash flows and sell the asset (“hold-to-collect and sell” business model); and

2. Contractual cash flows: Solely payments of principal and interest (SPPI)

Classification at FVPL

A financial asset that does not meet the conditions for measurement at AC or FVOCI is measured at FVPL.

A financial asset is measured at FVPL if the business model of managing financial assets is to hold investments in order to realize
fair value changes.

Purchase between interest payment dates

If the debt security is purchased between interest payment dates, any accrued interest shall be excluded
from the initial measurement of the debt security. The accrued interest shall be recorded in a separate
account.

Initial Measurement of Financial Asset PFRS 9, par. 5.1.1

- Provides that at initial recognition, 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.

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 - The
fair
value
of a
FA at
initial

recognition is normally the transaction price, meaning, the FV of the consideration given.
- FA is recognized initially at FV
- Transaction costs that are directly attributable to the acquisition of the FA shall be capitalized as cost of the FA
- If FA is held for trading or is measured at FV through P or L, transaction costs are expensed outright.

Transactions Costs

Included: fees & commissions paid to agents, advisers, brokers & dealers, levies by regulatory agencies
and security exchanges, and transfer taxes & duties.

Excluded: debt premiums or discounts, financing costs and internal administrative or holding costs.

Subsequent
Measurement
PFRS 9, par 5.2.1

Provides that after initial

recognition, an entity
shall measure a FA at;

a. FV through P or L
(FVTPL)
b. FV through other
comprehensive
income (FVTOCI)

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 c. Amortized Cost

Financial Assets at Fair Value through Profit or Loss

Following shall be measured at “fair value through profit or loss”:

1. Trading Securities – measured at FVPL “by requirement,” meaning, required by the standard
2. All other investments in quoted equity instruments – measured at FVPL “by consequence” in
accordance with Application Guidance B5. 1.14 of PFRS 9.
3. Financial assets that are irrevocably designated on initial recognition as at fair value through
profit or loss. – measured at FVPL “by irrevocable designation” or “by option”
4. All debt investments that do not satisfy the requirements for measurement at amortized cost
and at fair value through other comprehensive income. – measured at FVPL “by default”

Irrevocable- not able to be changed, reversed or recovered

Financial Asset is held for Trading if…

 Acquired principally for the purpose of selling or repurchasing it in the near term
 On initial recognition, it is part of a portfolio of identified FAs that are managed together &
evidenced of a recent actual pattern of short-term profit taking.
 It is a derivative, except for a derivative that is a financial guarantee contract or a designated
and an effective hedging instrument.

Trading Securities –are debt and equity securities that are purchased with the intent of selling them in
the “near” or very soon. Normally classified as current assets.

Equity Investment at fair value through OCI

At initial recognition, PFRS 9 Par. 5.7.5, provides an entity may make an irrevocable election to present
in OCI subsequent changes in fair value of an investment in equity instrument that is not held for
trading.

This irrevocable approach designed to impose discipline in accounting for nontrading equity investment.

The amount recognized in OCI is not reclassified to profit or loss under any circumstances.

However, in derecognition, the amount may be transferred to equity or retained earnings.

If the investment in equity is ‘‘held for trading’’, the election to present gain and loss in OCI is not
allowed.

If the investment in equity instrument is held for trading, subsequent changes in fair value are always
included in profit or loss.

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Debt Investment at Amortized Cost

If both ff. conditions are met:

a. The business model is to hold the financial 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.

In other words, the business model is to collect contractual cash flows if the contractual cash flows are
solely payments of principal and interest.

Debt Investment at FV through OCI

FA shall be measured at FV through OCI if both of the ff. conditions are met:

a. The business model is achieved both 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
outstanding.

Note that the business model includes selling the financial asset in addition to collecting contractual
cash flows.

In this case, interest income is recognized using the effective interest method as in amortized cost
measurement.

On derecognition, the cumulative gain & loss recognized in OCI shall be reclassified to profit or loss.

SUMMARY OF MEASUREMENT RULES

Measurement of equity investments

1. Held for trading - at fair value through profit or loss

2. Not held for trading - as a rule, at fair value through profit or loss
3. Not held for trading - at fair value through OCI by irrevocable election.
4. All other investments in quoted equity instruments- at fair value through profit or loss
5. Investments in unquoted equity instruments - at cost
6. Investments of 20% to 50% - equity method of accounting
7. Investments of more than 50% - consolidation method to be taken up in an advanced
accounting course.

Measurement of debt investments

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 1. Held for trading - at fair value through profit or loss
2. Held for collection of contractual cash flows - at amortized cost
3. Held for collection of contractual cash flows - at fair value through profit or loss by irrevocable
designation or fair value option
4. Held for collection of contractual cash flows and for sale of the financial asset - at fair value
through OCI
5. Held for collection of contractual cash flows and for sale of the financial asset - at fair or value
fair value through profit or loss by irrevocable designation or fair value option.

Fair Value (Appendix A of PFRS 9 in conjunction with PFRS 13)

Fair value of an asset is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date.

The best evidence of fair value in descending hierarchy is the quoted price of identical asset in
an active market, the quoted price of similar asset in an active market and the quoted price of identical
and similar asset in an inactive market.

An active market is a market in which transactions take place with sufficient regularity and
volume to provide pricing information on an ongoing basis.

Fair value is simply the price agreed upon by a buyer and a seller in an arm’s length or orderly
transaction.

Quoted Price

Most often, the fair value of securities is the quoted price in the securities market, for example,
the Philippine Exchange Stock.

If the quoted price pertains to a share or equity security, it means pesos per share.

If the quoted price pertains to a bond or debt security, it means percent of the face amount of the
bond.

Gain and Loss – FA at FV

Gain and loss on FA measured at FV shall be presented in profit or loss, except:

a. When the FA is an investment in nontrading equity instrument and the entity has irrevocably
elected to present unrealized gain & loss in OCI
b. When the FA is a debt investment that is measured at FV through OCI

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In other words, unrealized gain & loss on FA held for trading and other FA measured at FV are reported
in the income statement.

Unrealized gain and loss arise from investments that are reported at FV.

In determining FV, no deduction is made for transaction costs that may be incurred on disposal of the
financial asset.

If the FV is higher than carrying amount, the difference is an unrealized gain.

If the FV is lower than carrying amount, the difference is an unrealized loss.

Gain & loss that result from actually selling the investments are known as realized gain and realized loss

Gain and Loss – FA at Amortized Cost

Unrealized gain & loss on FA at amortized cost are not recognized simply because such investments are
not reported at fair value.

PFRS 9, par. 5.7.2, provides that gain & loss on financial asset measured at amortized cost shall be
recognized in profit or loss when the FA is derecognized, sold, impaired or reclassified, and through the
amortization process.

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Financial Instrument

A financial instrument as “any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.”

IFRS 9 distinguishes three different financial instruments, namely debt instruments, derivatives and
equity instruments.

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