FINANCIAL ACCOUNTING & REPORTING 1

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Accounting for Investments in Equity and Debt Instruments

Module 010 Financial assets at Fair value

This topic deals with the following:

1. Definition of investment
2. Examples of investments
3. Statement classification of investments
4. Financial instruments – Financial assets, financial liability, and equity
instruments
5. Classifications of financial assets
6. Measurement of financial assets
7. Reclassification of a financial asset from fair value to the amortized cost
8. Reclassification of the financial asset from amortized cost to fair value
9. Impairment of financial assets at fair value and at amortized cost
At the end of this module, you will be able to:
1. Define and classify investments
2. Define and classify financial assets
3. Understand the accounting for investment at fair value
The common application of the lessons that are under this module consists of
understanding different investments and account for investments in fair
value.

Definition of investment
The International Accounting Standards Board defines investment as follows:
"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.
Specifically, investments include the following:
1. Trading securities or FVPL.
2. Financial assets at fair value through other comprehensive income (FVOCI).
3. Investment in equity securities
4. Investment in bonds or financial assets at amortized cost
5. Investment in associate
6. Investment property
7. Investment in a fund
8. Investment in the joint venture

Purposes of investments
a. For accretion of wealth or regular income through interest, dividends, royalties,
and rentals.

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 b. For capital appreciation, as in the case of investments in land and real estate held
for appreciation and direct investments in gold, diamonds, and other precious
commodities.
c. For ownership control, as in the case of investments in subsidiaries and
associates.
d. For meeting business requirements, as in the case of the sinking fund, preference
share redemption fund, plant expansion fund, and other noncurrent funds.
e. For protection, as in the case of interest in a life insurance contract in the form of
cash surrender value.
Statement classification
Investments are classified either as current or noncurrent assets.
Current investments are investments that are by their very nature readily
realizable and are intended to be held for not more than one year. For example,
trading securities are normally classified as current assets because these
investments are expected to be realized within twelve months after the end of the
reporting period.
Noncurrent or long-term investments are investments other than current
investments. This residual definition means that the noncurrent investments are
intended to be held for more than one year or are not expected to be realized within
twelve months after the end of the reporting period.
Definition
• Financial Asset is any asset that is:
✓ Cash
✓ A contractual right to receive cash or another financial asset from another entity
✓ A contractual right to exchange financial instruments with another entity under
conditions that are potentially favorable
✓ An equity instrument of another entity
• Financial Liability is any liability that is a contractual obligation:
✓ To deliver cash or other financial assets to another entity
✓ To exchange financial instruments with another entity under conditions that are
potentially unfavorable
• An equity Instrument is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities.
Classification of Financial Assets
Under PFRS 9, paragraph 4.1.1, an entity shall classify financial assets into three, namely:
1. Financial Assets at Fair Value through profit or loss
- Include both equity securities and debt securities
2. Financial Assets at Fair Value through other comprehensive income
- Include both equity securities and debt securities
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Accounting for Investments in Equity and Debt Instruments

3. Financial Assets at Amortized Cost

- Include debt securities only
Recognition
PFRS 9, paragraph 3.1.1 states that an entity shall recognize a financial asset or a financial
liability in its statement of financial position when, and only when, the entity becomes a
party to the contractual provisions of the instrument.

Initial Measurement of Financial Assets

PFRS 9, paragraph 5.1.1 states that an entity shall measure a financial asset at its fair value
plus, in the case of a financial asset not at fair value through profit or loss, transaction costs
that are directly attributable to the acquisition of the financial asset.
Subsequent Measurement of Financial Assets
PFRS 9, paragraph 5.2.1 provides that after initial recognition, an entity shall measure a
financial asset either at:
1. Fair Value Through Profit or Loss (FVPL)
2. Fair Value Though other Comprehensive Income (FVOCI)
3. Amortized Cost
Financial asset at fair value through profit or loss
The following shall be measured at FVPL:
1. Financial assets held for trading/Trading securities
Appendix A of PFRS 9 provides that a financial asset is held for training if:
• Acquired principally for the purpose of selling or repurchasing it in the near
term.
• On initial recognition, it is part of the 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.
• It is a derivative, except for a derivative that is a financial guarantee contract or a
designated and effective hedging instrument.
2. All other investments in quoted equity instruments
3. Financial assets that are irrevocably designated on initial recognition as FVPL.
4. All debt investments that do not satisfy the requirement for measurement at amortized
cost and at FVOCI.

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Equity investments at fair value through OCI
At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an
irrevocable election to present in other comprehensive income or OCI subsequent
changes in fair value of an investment in an equity instrument that is not held for
trading.
The amount recognized in other comprehensive income is not reclassified as profit
or loss under any circumstances. However, on derecognition, the amount may be
transferred to equity or retained earnings.
If the investment in an equity instrument is "held for trading," the election to
present the gain and loss on other comprehensive income is not allowed.
If the investment in an equity instrument is held for trading, subsequent changes in
fair value are always included in profit or loss.
Debt investments at fair value through OCI
PFRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair
value through other comprehensive income if both of the following 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.
Financial assets at amortized cost
PFRS 9, paragraph 4.1.2 provides that a financial asset shall be measured at
amortized cost if both of the following conditions are met:
a. The financial asset is held within a business model whose objective is to hold
financial assets in order to collect contractual cash flows; and
b. The contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount
standing.
Summary of measurement rules
Equity investments
1. Held for trading- at FVPL
2. Not held for trading- as a rule, at FVPL
3. Not held for trading- at FVOCI by irrevocable election
4. All other investments in quoted equity instruments- at FVPL
5. Investments in unquoted equity instruments- at cost
Debt investments
1. Held for trading- at FVPL
2. Held for collection of contractual cash flows- at amortized cost
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Accounting for Investments in Equity and Debt Instruments

3. Held for collection of contractual cash flows- at FVPL by irrevocable designation or

fair value option
4. Held for collection of contractual cash flows and for sale of a financial asset- at
FVOCI
5. Held for collection of contractual cash flows and for sale of the financial asset- FVPL
by irrevocable designation or fair value option.
Gain and Loss on Financial Asset at Fair Value
Under PFRS 9, paragraph 5.7.1, gain and loss on financial assets measured at fair value
shall be presented in profit or loss unless:
a. It is part of a hedging relationship
b. It is an investment in an equity instrument, and the entity has elected present gain or
losses on that investment in other comprehensive income.
c. It is a financial asset measured at fair value through other comprehensive income,
and the entity is required to recognize some changes in fair value in other
comprehensive income.

• If the fair value is higher than the carrying amount, the difference is
unrealized gain.
• If the fair value is lower than the carrying amount, the difference is an
unrealized loss.
• Gain and loss that result from actually selling the investments are known as
realized gain and realized loss.
Gain and Loss on Financial Asset at Amortized Cost
PFRS 9, paragraph 5.7.2, provides that a gain or loss on a financial asset that is
measured at amortized cost and is not part of a hedging relationship shall be
recognized in profit or loss when the financial asset is derecognized, sold, impaired,
and through the amortization process.
Illustration-Trading securities
On January 1, 2016, an entity purchased marketable equity securities for
P500,000.00. The equity securities qualify as a financial asset held for trading. The
entity also paid P5,000.00 as commission to the broker.
The entry to record the transaction would be:
Trading Securities or Financial Assets – FVPL 500,000
Commission Expense 5,000
Cash 505,000
Note that the commission paid is not capitalized but treated as an outright expense.
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 Assume that on December 31, 2016, the trading securities have a fair value of
P600,000.00. The increase in fair value is recorded as follows:
Trading Securities or Financial Assets – FVPL 100,000
Unrealized Gain 100,000
The financial position on December 31, 2016, will show the trading securities at the
fair value of P600,000.00 with a disclosure of the cost of P500,000.00.
On the other hand, the unrealized gain is classified as other income in the income
statement.
On December 31, 2016, the trading securities had a fair value of P450,000.00. The
decrease in the fair value is recorded as follows:
Unrealized loss – Trading Securities 150,000
Trading Securities or Financial Assets – FVPL 150,000
Note that the unrealized loss is presented as another expense in the income
statement. On the other hand, the trading securities will be presented in the
statement of financial position on December 31, 2016, at P450,000.00 with
disclosure of its cost of P500,000.00
Now, assume that on December 31, 2017, the trading securities were sold for
P520,000.00. The sale of the securities will be recorded as follows:
Cash 520,000
Trading Securities 450,000
Gain on sale of trading securities 70,000
Note that on disposal, the difference between the carrying amount of the financial
asset and the consideration received is recognized as gain or loss to be reported in
the income statement.
Derecognition – Financial Asset – FVPL
PFRS 9, paragraph 3.2.12, provides that on derecognition of a financial asset in its
entirety, the difference between the carrying amount (measured at the date of
derecognition) and the consideration received (including any new asset obtained
less any new liabilities assumed shall be recognized in profit or loss.
PFRS 9, paragraph 3.2.13 provides further that if the transferred asset is part of a
larger financial asset and the transfer qualifies as derecognition in its entirety, the
previous carrying amount of the larger financial asset shall be allocated between the
part that continues to be recognized and the part that is derecognized, on the basis
of their fair value on the date of transfer.
Illustration – Financial Asset – FVOCI
On January 1, 2016, an entity purchased marketable equity securities for
P100,000.00, and the company made an irrevocable election to present unrealized
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Accounting for Investments in Equity and Debt Instruments

gain and loss in other comprehensive income. The entity paid commission and taxes
of P10,000.00.
The journal entry to record the acquisition is:
Financial Asset – FVOCI 110,000.00
Cash 110,000.00
Note that the commission and taxes paid in the amount of P10,000.00 are
capitalizable as the cost of the investment.
Now, further assume that on December 31, 2016, the securities had a market value
of P130,000.00. The increase in the fair value is recorded as:
Financial Asset – FVOCI 20,000
Unrealized gain – OCI 20,000
The financial asset – FVOCI, on December 31, 2016, is reported at the market value
of P130,000.00 with disclosure of its cost of P110,000.00.
Note that financial asset – OCI is normally classified as a noncurrent asset in the
statement of financial position.
Now, further assume that on December 31, 2017, the securities had a market value
of P160,000.00. The increase in fair value is recorded as follows:
Financial Asset – OCI 30,000.00
Unrealized Gain – OCI 30,000.00
At December 31, 2017, the financial asset is carried at P160, 000.00 which is the
market value on such date. The total unrealized gain is P50,000.00 (20,000 plus
30,000). Out of this, P30,000.00 will appear in the 2017 statement of comprehensive
income, and P50,000.00 will appear in the statement of changes in equity.
Derecognition – Financial Asset – FVOCI
Assume that on July 1, 2018, the securities were sold for P200,000.00. The journal
entry to record the transaction is:
Cash 200,000
Financial Asset – FVOCI 160,000
Retained earnings 40,000
Under PFRS 9, paragraph 5.7.1B, gain or loss on disposal of equity investment
measured at fair value through other comprehensive income is recognized in
retained earnings. Moreover, under PFRS 9, paragraph 5.7.1, the cumulative gain or
loss recognized in other comprehensive income is transferred to retained earnings.
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 Thus, the cumulative gain or loss in the amount of 50,000.00 will be transferred to
retained earnings with the journal entry as follows:
Unrealized gain – OCI 50,000
Retained earnings 50,000
Note that the amount recognized in other comprehensive income is not reclassified
as profit or loss under any circumstance.
Accounting for reclassification of financial assets
Under PFRS 9, paragraph 4.4.1, the entity shall reclassify financial assets when, and
only when, an entity changes its business model for managing its financial assets.
Further, under PFRS 9, paragraph 5.6.1, if an entity reclassifies financial assets, it
shall apply the reclassification prospectively from the reclassification date. For this
purpose, Appendix A of PFRS 9 defined the reclassification date as the first day of
the reporting period following the change in the business model that resulted in an
entity reclassifying financial assets.
Hence, for instance, the change in business model is in 2016, and the reclassification
date is January 1, 2017, the first day of reporting period following the change in the
business model.
Reclassification from FVPL to the amortized cost
Under PFRS 9, paragraph 5.6.3, if an entity reclassifies a financial asset out of the fair
value through the profit or loss measurement category and into the amortized cost
measurement category, its fair value at the reclassification date becomes its new
gross carrying amount.
The difference between the new carrying amount of the financial asset at amortized
cost and the face value of the financial asset shall be amortized through profit or loss
over the remaining life of the financial asset using the effective interest method.
Illustration (Reclassification from FVPL to amortized cost)
On January 1, 2016, an entity purchased a portfolio of bonds in accordance with the
business model of managing financial assets by selling the bonds in the short term
or in order to realize fair value changes. The acquisition cost is P6,000,000, and the
face value of the bonds is P5,000,000. The journal entry to record the acquisition is:
Financial asset-FVPL 6,000,000
Cash 6,000,000
In 2016, no securities were sold, and on December 31, 2016, the fair value of the
bonds was P5,500,000. The decrease in fair value is recorded as follows:
Unrealized loss 500,000
Financial assets-FVPL 500,000
The unrealized loss is a component of profit or loss and therefore reported in the
2016 income statement.
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Reclassification from amortized cost to FVPL

PFRS 9, paragraph 5.6.2, provides that when an entity reclassification a financial
asset from amortized cost to fair value through profit or loss, the fair value is
determined at the reclassification date. Any gain or loss arising from the difference
between the previous amortized cost and the financial asset at fair value is
recognized in profit or loss.
Illustration (Reclassification from amortized cost to FVPL )
On January 1, 2016, an entity purchased P5,000,000 face value bonds for P4,500,000
in accordance with the business model of managing financial assets by collecting
contractual cash flows. The bonds pay interest annually on December 31. The
journal entry to record the acquisition of the bonds is:
Investment in bonds 4,500,000
Cash 4,500,000
In December 2016, the objective of the entity's business model for managing the
bonds changed from collecting contractual cash flows to realizing gains.
On December 31, 2016, assume the carrying amount of the bond investment is
P4,700,000 after recording the effective amortization of the discount of P200,000.
The reclassification date is January 1, 2017. On such a date, the fair value of the bond
investment is P5,500,000 or an increase of P800,000 from the carrying amount of
P4,700,000. The journal entry to recognize the increase in fair value on January 1,
2017, is:
Investment in bonds 800,000
Gain on reclassification of financial asset 800,000
The journal entry to record the reclassification from amortized cost to fair value
through profit or loss is:
Financial asset-FVPL 5,500,000
Investment in bonds 5,500,000
Reclassification from amortized cost to FVOCI
PFRS 9, paragraph 5.6.4, provides that if an entity reclassifies a financial asset at
amortized cost measurement category to fair value through another comprehensive
income measurement category, the fair value is measured at the reclassification
date. Any gain or loss arising from the difference between the amortized cost
carrying amount and fair value is recognized in other comprehensive income. The
effective interest rate and the measurement of expected credit losses are not
adjusted as a result of the reclassification.
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Reclassification from FVOCI to Amortized Cost
PFRS 9, paragraph 5.6.5 provides that if an entity reclassifies a financial asset from
fair value through other comprehensive income to amortized cost, the fair value at
the reclassification date becomes the new amortized cost carrying amount.
However, the cumulative gain or loss previously recognized in other comprehensive
is removed from equity and adjusted against the fair value at the reclassification
date. As a result, a financial asset is measured at the reclassification date as if it has
always been measured at amortized cost. This adjustment affects other
comprehensive income but does not affect profit or loss.

Reclassification from FVOCI to FVPL

PFRS 9, paragraph 5.6.7, provides that if an entity reclassifies a financial asset from
fair value through comprehensive income to fair value through profit or loss, the
financial asset continues to be measured at fair value. The fair value at the
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 the reclassification date.

Impairment- Financial assets at fair value

For financial assets measured at fair value, all gains and losses are either presented
in profit or loss or in other comprehensive income, depending on whether the
election to present gains and losses on equity investments in other comprehensive
income is taken or not. Therefore, it is not necessary to assess financial assets
measured at fair value through profit or loss and equity investments measured at
fair value through other comprehensive income for impairment.

Impairment-Financial assets at amortized cost

PFRS 9, paragraph 5.5.1 provides that an entity shall recognize a loss allowance for
expected credit losses on:
a. Debt investment measured at amortized cost
b. Debt investment is measured at fair value through other comprehensive income
It also provides that an entity shall measure the loss allowance for a financial
instrument at an amount equal to the lifetime expected credit losses if the credit risk
on that financial instrument has increased significantly since initial recognition.
Credit losses are the present value of all cash shortfalls.
Expected credit losses are an estimate of credit losses over the life of the financial
instrument.
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Accounting for Investments in Equity and Debt Instruments

Measurement of impairment
When measuring expected credit losses, an entity should consider:
a. The probability-weighted outcome
b. The estimate should reflect the possibility that a credit loss occurs and the
possibility that no credit loss occurs.
c. The time value of money
d. The expected credit losses should be discounted
e. Reasonable and supportable information that is available without undue cost or
effort.
PFRS 9 does not prescribe a particular method of measuring expected credit losses.

Glossary
Investment: An asset that is purchased with the expectation that this asset will be
beneficial in the near future
Current investment: Intended to be held for not more than one year
Noncurrent investment: Intended to be held for more than one year

References and Supplementary Materials

Books and Journals
1. Cabrera, M. B., & Ocampo, R. R. (n.d.). Financial Accounting & Reporting - Standards &
Application (2014-2015 ed., Vol. 2). Manila, Philippines.
2. Robles, N. S., & Empleo, P. M. (2014). Intermediate Accounting (2014 ed., Vol. 1).
Manila, Philippines.
3. Valix, C. T., Peralta, J. F., & Valix, C. M. (2017). Financial Accounting (2017 ed., Vol.
2).Manila, Philippines.
4. IFRS 9, Financial Instruments
5. IAS 39, Financial Instruments: Recognition and Measurement
6. IAS 32 Financial Instruments: Presentation
Online Supplementary Reading Materials
1. IFRS 9 — Financial Instruments; http://www.ifrs.org/issued-standards/list-of-
standards/ifrs-9-financial-instruments/; October 23, 2017
2. IAS 39 — Financial Instruments: Recognition and Measurement;
http://www.ifrs.org/issued-standards/list-of-standards/ias-39-financial-
instruments-recognition-and-measurement/; October 23, 2017
Online Instructional Videos
Not applicable.

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