Apptiod Aucoag ‘SUMMARY OF INVESTMENT IN EQUITY AND DEBT SECURITIES Definition Tavesiments ave assets that are not directly Identified with the operating activities on the entity but ere acquired by the entity for any of the following purposes: for other sources of income; to acquire control or significant influence over another entity; to accumulate funds for future use; or for appreciation in value, Tnvestmeats in equity securities Tavestmenis in equity securities are investments in ownership shares and potential ownership shares. Based on the intention of the holding entity and the level of influence acquired, investinent in equity securities are classified either as financial assets at fair value through profit or loss (otherwise known as trading securities), financial assets at fair value | through other comprehensive income, investment in associate, or investment in subsidiary. Financial Assets at Fair Value through Profit or Loss (FAFVPL) ere | bought and held primarify for the purpose of selling or repurchasing in the | near term or are part of a portfolio of identified financial instruments that | are managed together and for which there is evidence of a recent actual | pattern of short-term profit-taking, Financial Assets at Fair Value through Other Comprehensive Tacome (FAFVOCD are not intended for immicdiate trading nor give the holders significant influence or control aver operating and financial policies. 1 © Both financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income range from 1% to 19% ownership of the voting stock of | the iavestee company. Investment in associate gives the holders of the securities the power to participate in (but not to govern) the financial and operating policy decisions of the investee or if the entity has significant influence to the investee company that ranges from 20% to 50% ownership of the voting stock of the investee company. Investment in subsidiaries gives the holders the power to gavema the financial and operating policies of an entity so as to obtain benefits from its activities or if the entity acquired control over the acquired entity. « Control means more than 50% ownership of the voting stock of the investee company, Investment in debt securities Tnvestinent in debt securities are classified under any of the Tollowing: financial assets at fair value through profit or loss (otherwise known as trading securities) and amortized cost. Amortized Cost - Classification is based on business model andAusht of vestments the contractual cash flow characteristies Investments are recognized when the following conditions are met! ‘* It is probable that the future economic benefits associated with investments will flow to the entorprise. * Ithas a value or cost that can be measured reliably. Tnitéal Measurement/ Valuation Financial Assets at Fair Value through Profit or Loss is initially recognized 4 purchase price, excluding transaction costs, while Financial Assets at Fait Value through Other Comprehensive income and Amortized Cost are initially recognized at purchase price plus transaction costs. Subsequent ‘Valuation After initial recognition, equity securities - Financial Assets at Fair Value through Profit or Loss and Pair Value through Other Comprehensive Income - are valued at fair market value and affected by dividends, share split and stock rights. Cash and property dividends received or recsivable by an investor are recognized in profit or loss as dividend revenue. Share dividend, share split and stock rights are taken up by adjusting the cost or assigned amount ‘of the original shares held and transferring that portion to the new shares received as share dividends share split or the stock rights received. ‘The main difference in accounting for debt securities as wading securities - Financial Assots at Fair Value through Profit or Loss and Amortized Cost fies in the amortization of premium or discount. No amortization of | discount and premium is required if the debt securities are classified as Finanoial Assets at Fair Value through Profit or Loss, whoreas disconnt and premium should be amortized using effective interest method if debt Securities are classified as Amortized Cost. Financial Assets at Fair Value through Profit or Loss are presented as ‘current assets in the statement of financial position and measured at fair values, with unrealized holding gains and losses recognized in the profit or loss. Fair Value through Other Comprehensive Income ate generally Presented as-non-current assets measured after initial recognition at fair values, with changes in unrealized gains and Josses recognized as part of other comprehensive income, The cumulative balance of Net Unrealized Gains/Losses on Fair Value through Other Comprehensive Income is Presented as part of shareholders” equity (an addition, if credit balance or a reduction, if debit balance), forming part of other reserves. Amortized Cost is measured in the statement of financial position, at amortized cost using the effective interest method. Investment in associates is accounted for using equity method, unless theApplied Auatiag Tnvestment is held exclusively for disposal within twelve months from acquisition date. Under the equity method, the carrying amount of the investment is increased or decreased to recognize the investor's share of | the profit or loss of the investee after the date of acquisition. The investor's share in the associate's profit or loss is recognized in profit or loss, Distributions received or receivable from an investee reduce the carrying amount of the investment. The investment in associate is classified 5 @ non-current agset in the statement of financial position at carrying amount based on equity methiod (unless the enterprise falls under the exceptions provided in TAS 28) using separate line presentation. Income from associate is likewise presented separately in profit ot loss on the face of the statement of comprehensive income. temporary account subject to elimination since in the parent aud subsidiary relationship a consolidation is required, meaning after consolidation the | investment in subsidiary account should be zero, A thorough discussion of | this topic was discussed in Advanced Accounting and Reporting - Part 2. | Tnwestment in subsidiary is carried at cost using cost method. This is @ | | Notes and Disclosures Regqnirements: | TFRS requires certain disclosures to be preseated by category of instrument | based on the IAS 39 measurement categories, Certain other disclosures are | required by class of financial instrument. For those disclosures an entity | must group its financial instruments into classes of similar instruments as appropriate to the nature of the information presented. ‘The two main categories of disclosures required by IFRS 7 are: 1. information about the significance of financial instruments, 2. information about the nature and extent of risks arising from financial instruments Information about the significance of financial instruments Balance Sheet + Disclose the significance of financial instruments for an entity's financial position and performance. This Includes disclosures for each Of the following categories: + financial assets measured at fair valuc through profit and loss, showing separately those held for trading and those designated at initial recognition held-to-maturity investments, loans and receivables available-for-salo assets financial liabilities at fair value through profit and loss, showing separately those held for trading and those designated at initia recognition + financial liabilities measured at amortized cost + Other balance sheet-rclated disclosures + _ special disclosures about financial assets and financial‘Aust of avostments Tabilities designated to be measured at fair value through profit and loss, including disclosures about credit risk and market risk, changes in fair values attributable to these risks and the methods of measurement. ‘+ reclassifications of financial instruments from one category 10 another (¢.g. from fair value to amortized cost ar vice versa) + information about financial assets pledged as coffateral and about financial or non-financial assets held as collateral ‘= reconciliation of the allowance account for credit losses (bad debts) by class of financial assets © information about compound financial instruments with multiple embedded derivatives ‘+ breaches of terms of foan agreements Income Statement and Equity 1 items of income, expense, gains, and losses, with separate disclosure of gains and losses from: ‘© financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition held-to-maturity investments loans and receivables available-for-sale assets financial liabilities measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition ‘© _ financial liabilities measured at amortized cost + Other income statement-related disclosures: : + fotal interest inceme and total interest expense for those financial instruments fhat are not measured at fair value through profit and loss fee income and expense amount of impairment losses by class of financial assets ‘+ interest income on impaired financial assets (Other Disclosures + accounting policies for financial instruments ‘information about the fair values of each class of financial asset and financial tiability, along with: ‘© comparable carrying amounts ‘© description of how fair valuc was determined ‘© the level of inputs used in determining fait value # reconciliations of movements between levels of fair value measurement hierarchy additional disclosures for financial instruments whose fair value is determined using level 3 inputs including impacts on profit and loss, other comprehensive income and sensitivity analysis «information if fair value cannot be reliably measured70. Applied Auaiting Tavestinent in associates: = fair value of investment in associatss for which there are published price quotations ‘summarized financial information of associates, including the aggregated amounts of assets, liabilities, revenues, and profit or toss = explanations when investments of iess than 20% are accounted for by the equity method or when investments of more than 20% are not accounted for by the equity method = use of a reporting date of the financial statements of an associate that is different from that of the investor + nature and extent of any significant restrictions on the ability of associates to transfer funds to the investor in the form of cash dividends, of repayment of loans or advances = unrecognized share of losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate + explanation of any associate that is not accounted for using the equity method : + summarized financial information of associates, ether individually of | in groups that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues, and profit or loss. | | Heed Investment in subsidiary: * Identify significant subsidiaries by name, country, proportion of i ownership, and proportion of voting power held i + Reasons for not consolidating a subsidiary «Explanation of the relationship if the parent controls but does not own more than half of the voting power of a consolidated subsidiary + Explanation of the relationship if the parent owns more than half of the voting power but does not control * The effect of acquisitions aud disposals of subsidiaries during the period + Inthe parent's separate financial statements, a description of its method of accounting for subsidiaries, Overall disclosure requirements: * Basis for valuation of investments; ® Allowances for decline in value; * Breakdown of the security portfolio and investment income classification; "Material individual security holdings and holding securities of related parties; + Details of any liens or pledges as collateral and any restrictions or. sales.Audit of investments Effectivity COMPARISON BETWEEN PFRS 8 AND PAS 39 PAS 39, Financlal Instruments: PERS 9, Financial instruments Recognition and Measurement | Currently effective i IFRS 9 was originally issued with | mandatory effective date on January 11,2033. On December #6, 2011, | the IASB issued an amendment to | JERS 9 changing its mandatory | effective date for annual periods { beginning on or after January 1, 1 2015. These amendments were | adopted by the SEC as part of | Philippine Financial Reporting | Standards (PFRS) on May 24, 2012. Per www.ifrs.org, the IASB decided | that a mandatory date of 1 January | 2015 would not allow sufficient time | for entities to prepare to apply the new Standard because the | impairment phase of the IFRS 9 } Project has not yet been completed. | Accordingly, the JASB decided that anew date should be decided upon | when the entire IFRS 9 project is | eloser to completion. The ; amendments made to IFRS 9 in | November 2013 remove the | mandatory effective date from IFRS | 9. However, ets may still choose | 0 apply IFRS 9 immediately. | However per SEC Memorandum | Circular No 3 Series of 2013, _ Covered companies shall conduct a | Study every second quarter of the Poca yar 102014 onthe impact ' ofan early adoption of PERS 9.0n | their financial statements (FS). The + assessment shall use as basis the ‘company's audited financial | information as of the most recently- | completed fiscal year2 Applied Auli PAS 39, Financial Insiraments: PERS 9, Financial Instruments Recognition and Measurement Scope | Only Financial assets included. | Financial Liabilities including _—_| Presently the standard does not ) hedge accounting | include Financial liabilities, | derecognition of financial | Debt instruments | classification Equity instruments classification Measurement - Debt Instruments + Pair Value Through Profit & Loss (FVPL) | ™ Available-for-sale (AFS) | Held-to-maturity (HTM) | Loan and Receivable (L&R) || «Fair Value Through Profit & | Loss (FPL) |» Available-for-sale (AFS) | \ » Intention to hold until matarity, + trading for short term profits, | * derivative, * loan or receivable, | * intentional designation subject to certain restrictions. = Measured at amortized cost if classified as held-to-maturity or | astoan or receivable. | * Other classifications are | measured at fair value. _|__ through profit or loss ( | instruments, impairment and hedge | accounting, «= Fair Vatue Through Profit & Loss (EVPL) | # Amortized Cost (AC) | © Fair Value Through Profit & Loss | YPL) | = Fair Value Through Other ‘Comprehensive tacome (FVOCI) * Classification based on business ‘model and the contractual cash flow characteristics ‘Measured at emortized cost (AC) if business model objective is to collect the contractual cash flows and the contractual cash flows represent solely payment of principal and interest on the principal amount outstanding Debt instruments mecting the above criteria can still be measured at fair value through profit or loss (FVPL) if such dcsignation would eliminate or reduce accounting mismateb, |= Ifnot, measured at fair valueAudit of vestments 7 PAS 39, Financial Instruments: PERS 9, Financial Instruments: Recognition and Measurement 1 Measurement | * Generally, fair value, | § Measured at fair valve through ~ Equity ia Unquoted equity investments are ! profit or loss. Instruments | measured at cost where fair j* An entity can irrevocably | valuation is not sufficiently | designate at initial recognition as | reliable. ! fair value through other | comprehensive income, provided the equity investment is not hetd Embedded * Embedded derivatives are separated from the hybrid ‘contract and are moasured at FVPL. = No bifurcation of asset. The financial asset is assessed in its entirety as to the contractual cash flows and if any of its cash flows do not represent either ‘payments of principal ot interest then the whole asset is measured at FVPL. | « Bifurcation of other hybrid 4. i Fair-value option ! An entity can designate a financial | A financial asset can be designated asset to be measured at fair value on , as FVPL on initial recognition only initial recognition. | if that designation eliminates or | significantly reduces an accounting ; mismatch had the financial asset | been measured at amortized cost. Reclassifications = Reclassification between the | » If entity’s business model = Debt various four categories allowed objective changes, reclassification instruments under specific.circumstances | _is permitted between FVPL and with the guin/loss being treated | AC or vice versa. Such changes ‘movement between the external parties and are expected classifications. to be very infrequent. * Reclassification from held-to- | maturity (HFM) is viewed | seriously if does not fall within {the permitted exceptions. ! | differently depending upon the | should be demonstrable tm t ! i |214 Appited Auditing PERS 9, Financial Instruments ignition and Measurement Reclassfications + Reclassification is permited out | * Reclassification berween FVPL = Equity | of FVPL to AFS. | and FVOCT not permitted as instruments -_* When transferred fromFVPL to | FVOCI classification is dove at | _AFS, no reversal of gainfloss the irrevocable designation of the | recognized as unrealized is eatity as such. permitted. * Oniy dividend income is + However all yain/loss on recognized in P&L of assets disposal of AFS are recognized designated as FVOCI. in P&L by transfer from equity. * Even on disposal of such assets, the gain/loss is not transferred from equity, but remains petmanently in equity