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1.

INVESTMENTS AT FAIR VALUE (Equity securities, less than 20% of voting power)
FAIR VALUE THROUGH PROFIT FAIR VALUE THROUGH OTHER
OR LOSS COMPREHENSIVE INCOME
A.) Initial recognition Purchase price xx Purchase price xx
Less: Dividends-on* (xx) Add: Transaction costs xx
Note: Items with no available Cost of investment xx Total xx
fair value data are Less: Dividends-on (xx)
appropriately classified as *Dividends that have accrued Cost of investment xx
nonmarketable securities, on the investment because the
having the same initial purchase of the same was Examples of transaction costs
recognition as FA-OCI. made between the date of are brokerage fees and
declaration and date of record. commission expenses.

B.) Subsequent recognition


Fair value, with changes in fair Fair value, with changes in fair
Note: For nonmarketable or
value charged to profit or loss. value charged to OCI (equity)
unquoted securities, the
subsequent recognition is still
The income from investment is The income from investment is
at its cost.
only dividend income. only dividend income.
C.) Disposal*
- Difference between the
transaction price (net selling
Profit or loss (recognize a gain
price or value of the asset Directly to retained earnings
or loss)
exchanged) and the carrying
amount is charged to:

*Notes on disposal:
- For FA-OCI, the gain or loss on disposal shall be charged directly to RE. Furthermore, the related
unrealized gain or loss previously recognized in OCI shall also be charged or credited to RE, as the
case may be. Recall that the unrealized gain or loss presented in OCI is the net amount. Suppose
that the total investments of the company has a net unrealized gain, but for a specific investment,
the corresponding change is an unrealized loss. If such specific investment shall be disposed of,
the related loss now becomes realized, and accordingly, a debit to RE is necessary. However, since
an unrealized gain was presented in the OCI, the same shall be credited, and not unrealized loss.

- Disposal of these financial assets may be through:


1.) Sale
- The selling price must be net of any expenses incurred on such sale. This is debited to cash.
- The carrying amount shall be the fair value as of the last reporting date. If only some of the
shares are sold, it shall be prorated accordingly.

2.) Exchange
- The initial valuation of the asset received (or debited) shall be, in order of priority:
a.) Fair value of the asset given up, plus any cash payment
b.) Fair value of the asset received, minus any cash payment
c.) Carrying amount of the asset received
- So, if the shares were exchanged for, say, a land, the land shall be valued at the fair value of
the shares (the asset given up) at the time of exchange, if available.

3.) Conversion (e.g. convertible preference shares)


- There is only a reclassification of investment.
Fair value of ordinary shares xx
Less: Carrying amount of the converted pref. shares xx
Gain or loss on exchange xx

TRADE VS. SETTLEMENT ACCOUNTING


- Applicable when company commits to purchase or sell investments on one date and pays or receives
cash on a different date

1. Purchase transaction: On December 1, 2016, the company committed to purchase investment


worth 10 000. Its fair value at year-end is 10 200, while on January 5, 2016, settlement date, 10 400.
TRADE DATE ACCOUNTING SETTLEMENT DATE ACCOUNTING
Date of commitment Investment 10 000 No entry
A/P-others 10 000
Year-end (recognize Investment 200 A/R-others 200
changes in fair value) UG P/L or OCI 200 UG P/L or OCI 200
Settlement date Investment 100 Investment 10 300
A/P-others 10 000 A/R-others 200
Cash 10 000 Cash 10 000
UG P/L or OCI 100 UG P/L or OCI 100
Notes:
- Under trade date accounting, the investment is recorded at commitment date, while under
settlement date accounting, it is recognized only on the settlement date.

- In the settlement date, the investment must be valued at the fair value on such date. Thus,
under trade accounting, the change in fair value must be accounted for, while under settlement
date accounting, the investment is directly credited to its fair value. Regardless of the method
used, the cash paid must be fixed at its cost on the date of commitment.

- If the investment is a financial asset at amortized cost, then no changes in fair value must be
accounted for and the purchase is recorded in the usual manner (i.e. recorded at commitment
date under trade date accounting as a payable, and at settlement date under settlement date
accounting as direct cash payment)

2. Sale transaction: On December 1, 2016, the company committed to sell investment worth 10 000.
Its fair value on the commitment date is 10 100, at year-end, 10 200, while on January 5, 2016,
settlement date, 10 400.

TRADE DATE ACCOUNTING SETTLEMENT DATE ACCOUNTING


Date of commitment A/R-others 10 100 Investment 100
Investment 10 000 Gain on sale or RE 100
Gain on sale or RE 100
Year-end No entry No entry
Settlement date Cash 10 100 Cash 10 100
A/R-others 10 100 Investment 10 100
Notes:
- Recall that in disposal of assets, FVTPL and FVTOCI differ on the treatment of the gain on sale.
While in the former, the gain is charged to profit or loss as gain on sale, in the latter, the gain is
directly charged to retained earnings.

- Watch out on investments at FVTOCI! Upon disposal, its related unrealized gain or loss shall be
credited or charged to retained earnings.

- For investments at amortized cost, the sale is recorded in the usual manner, depending on the
method used (i.e. recorded at commitment date under trade date accounting as receivable, and at
settlement date under settlement date accounting as direct cash received)

SPECIAL ITEMS TO CONSIDER SUBSEQUENT TO ACQUISITION

DIVIDENDS
1.) Dividends out of earnings
a. Share or stock dividends
- If the shares received as dividends are of the same class with the shares owned, then this is
recorded as a memorandum entry only. Total cost remains the same, but unit cost decreases
while the number of shares increases.

- If the shares received as dividends are of a different class with the shares owned, then the
shares dividends of a different class will be valued using the relative fair value method. The
cost of the investment owned is prorated using the fraction from the fair values of both the
shares owned and share dividends. This is basically a reclassification from the class of the
shares owned to the class of the shares received as dividends.

b.) Cash dividends


- Recorded as receivable and dividend income at the date of declaration.

c.) Property dividends


- Recorded as receivable and dividend income at the date of declaration, based on the fair
value of the property during such date. Changes in the fair value are ignored!

d.) Scrip dividends


- Recorded as receivable and dividend income at the date of declaration. The date of payment
or redemption necessitates a credit to interest income for the interest earned from the date of
declaration to the date of redemption. This is a deferred cash dividend.

e.) Cash received in lieu of share dividends


- This is accounted for using the as-if sale method (as if the share dividends were sold)

Net selling price (total cash received in lieu of share dividends) xx


Less: Carrying amount (unit cost x share dividends received and sold)* xx
Gain on sale xx
*The unit cost shall be computed as follows: Cost of the investments owned divided by the
number of shares after receiving the share dividends. The carrying amount shall be the
amount credited to the investment account.

f.) Shares received in lieu of cash


- Recorded as receivable and dividend income at the date of declaration. On the date of
payment, when the investee company opted to give shares instead, the shares shall be valued
at their value and the receivable is derecognized, with the difference charged to dividend
income. SO, the total dividend income is from that recognized at the date of declaration and at
the date of settlement

2.) Dividends out of capital


- This can regularly be done only by a wasting asset corporation. This is a return on investment,
thus a debit to cash and credit to investment are appropriate.

- If the corporation is not a wasting asset company, then one-time liquidation should be done.
Upon receipt of cash from the investee company, the entire investment is derecognized and a gain
or loss on liquidation is recognized.

STOCK SPLIT
- A memorandum entry is sufficient

SPECIAL ASSESSMENT
- These are additional capital contribution of the shareholders. Accordingly, this needs a debit to
investment and credit to cash. The cost of the investment is increased but the number of shares
remains the same. It follows that cost per share also increases.

STOCK RIGHT
Fair value thru P/L Fair value thru OCI
Accounting Not accounted for separately, Accounted for separately
treatment
Issuance Memorandum entry Stock rights are recognized thru debit
to stock rights and credit to the
investment account*
Upon exercise Debit investment and credit cash, The total investment to be debited
(credit to cash is valued at the subscription price shall be the subscription price paid
the same) and the cost of stock rights exercised
Upon expiration No entry Debit loss on stock rights and credit
stock rights

*Note that the cost of the investment account shall be decreased by the value of the stock rights
issued. The valuation of the stock rights upon their issuance shall be dependent on the following info:
1.) If the market value per right is given, use it!
2.) If no market value per right is available, use the theoretical value of the rights.
a.) When the stock is selling right-on (between the date of declaration or approval of the
issuance of the stock rights and the date of record or the actual issuance of the stock rights)

Value of one right = Market value of stock right-on minus subscription price
Number of rights to purchase one share PLUS 1

b.) When the stock is selling ex-right (between the date of record or the actual issuance of the
stock rights and the date of their expiration)

Value of one right = Market value of stock right-on minus subscription price
Number of rights to purchase one share

2. INVESTMENT IN ASSOCIATE (Equity securities, More than 20% but less than 50%)

Default presumption: Investors holding 20% or more of the voting power of the investee company are
deemed to have significant influence, and their investments shall be accounted for under the equity
method of accounting.

A. At acquisition (debit investment in associate, credit cash)


Cost of the investment xx
Less: SHARE in the fair value of net assets* xx
Implied goodwill xx

*The fair value of the net assets of the investee company shall be multiplied by the
percentage ownership of the investor to get the share of the latter in the fair value. The
goodwill and any under- or overvalued items are not recognized separately.
Note: If the cost of the investment is less than the share in the fair value of the net assets,
the resulting negative goodwill shall be treated as excess of net fair value over cost, which
shall be accounted for as an increase in both the investment account and the investment
income for the period (i.e. debit investment, credit investment income)

B. Subsequent to acquisition
Note: Formulas labelled with share imply that the overall amount of the item is multiplied by the
applicable percentage ownership of the investor.

NET INCOME OF THE INVESTEE xx


Less: Amortization of undervalued depreciable assets (xx)
Add: Amortization of overvalued depreciable assets xx
Less: Total undervaluation of non-depreciable assets UPON SALE (xx)
Add: Total overvaluation of non-depreciable assets UPON SALE xx
ADJUSTED NET INCOME OF INVESTEE xx

Less: Preference share dividends (xx)


NET INCOME TO ORDINARY SHAREHOLDERS xx

Multiply by: Percentage ownership (figure assumed) 20%


INVESTMENT INCOME xx

Add: Excess of net fair value over cost xx


Less: Impairment of goodwill acquired (xx)
NET INVESTMENT INCOME xx

Notes:
1.) Adjustments to net income of investee
- For depreciable assets, the under- or overvaluation, not the entire fair value, shall be
amortized over the remaining useful life of the asset, or liability.
- Inventory is assumed to have been sold within the year, and thus, the entire under- or over-
valuation is deducted or added, respectively, from net income.
- For non-depreciable items (e.g. land), the entire under- or over-valuation shall only be
deducted or added from net income when they are sold to third parties. Note that the related
gain or loss on sale is ignored since it was already considered in the computation of net
income of the associate/investee.

2.) Preference share dividends


- If the preference shares are treated as an equity, its cumulative or non-cumulative nature is
relevant in determining the deductibility of the related dividends.
a. Cumulative Deduct the fixed dividends for one year only, whether declared or not
declared (Fixed rate x preference share capital x 1 year)
b. Non-cumulative Deduct the dividends only when declared. Thus, the dividends
deducted shall be the actual dividends, not the fixed dividends

- If the preference shares are treated as a financial liability (as in the case of redeemable
preference shares), the related dividends are NOT ANYMORE deducted from net income, since
it is already deducted as interest expense.

INVESTMENT IN ASSOCIATE, at cost xx


Add: Net investment income xx
Less: SHARE in dividends (xx)
BALANCE xx

Add: Excess of net fair value over cost xx


Less: Impairment of goodwill (xx)
Add/Less: SHARE in increase/decrease in OCI xx
INVESTMENT IN ASSOCIATE, ending balance xx

Notes:
1.) Common adjustments
- The net investment computed above shall be added to the cost of the investment.
- Dividends are viewed as a return of investment, and thus it decreases the investment
account. Note that the dividends attributable to the investor shall be deducted.

2.) Special adjustments


- Again, the excess of fair value over cost increases the investment account.
- The impairment of goodwill decreases the investment account.
- Any changes in the OCI of the associate shall be multiplied by the applicable percentage
ownership. Example of OCI items are: (a) revaluation surplus, (b) translation gain or loss, (c)
effective portion of cash flow hedge, (d) actuarial gain or loss and (e) unrealized gains or loss
OCI.
C. Upstream sales
NET INCOME TO ORDINARY SHAREHOLDERS xx
Less: Unrealized profit on U-sale of inventory (xx)
Add: Realized profit on U-sale of inventory xx

Less: Unrealized gain on U-sale of PPE (xx)


Add: Realized gain on U-sale of PPE xx
ADJUSTED NET INCOME xx

Multiply by: Percentage ownership (figure assumed) 20%


NET INVESTMENT INCOME xx
Notes:
1.) Inventory
A.) Unrealized profit: The unrealized profit refers to inventory sold by associate to investor
which remains to be unsold to third parties at year-end. Basic formula is: Profit x % unsold.
B.) Realized profit: The realized profit refers to inventory sold by associate to investor which
are sold to third parties during the year. Basically, this is just the unrealized profit of the
previous year.

2.) PPE
A.) Unrealized gain: This is the entire difference between the cost on the books of the seller
and the selling price. The unrealized gain shall only affect net income on the year when the
upstream sale happened. On subsequent years, this unrealized gain is now irrelevant, and
does not affect the net income anymore. This is applicable both to depreciable and non-
depreciable assets.
B.) Realized gain: This is the portion of the unrealized gain which is amortized.
- Depreciable assets: Unrealized gain is amortized over the remaining useful life of the
asset sold. This affects net income throughout the useful life of the asset, compared to
unrealized gain which affects net income only on the year of sale.
- Non-depreciable assets: The entire unrealized gain is realized only when this is sold to
third parties. This is not amortized. As long as this remains in the ownership of the
purchaser, this does not affect the net income of the subsequent years.

D. Special cases

1.) Investment in associate achieved in stages (e.g. investor initially purchases 10% of the voting
power of the investee, and then purchases another 20% interest. Since the total interest is 30%, it
should now be accounted for under equity method)

The change can either be cost-to-equity or fair-value-to-equity.


A. Upon purchase of the additional interest: Investment in associate is directly recognized.
B. Upon remeasurement: The original investment, whether under cost or fair value method, shall
be adjusted to its fair value on the date of purchase, with the change charged to gain or loss on
remeasurement.
C. Upon reclassification: The original investment is then reclassified to investment in associate,
and is now accounted for under the equity method.

Note: Upon reclassification, the excess of cost over book value (attributed to under- or overvalued
assets and goodwill) is computed as follows:
Fair value of the original investment (e.g. 10%) xx
Cost of the additional investment (e.g. 20%) xx
Total investment in associate xx
Less: Book value of the net assets acquired (e.g. at 30%) (xx)
Excess attributable to under- or overvalued assets and goodwill xx

2.) Discontinuance of the equity method


- This happens when the interest becomes less than 20% after a sale of a portion of the investment

Important formulas to consider:


Net selling price (debit to cash) xx
Less: Carrying amount of the investment sold (xx)
GAIN OR LOSS ON SALE xx

Fair value of the investment retained xx


Less: Carrying amount of the investment retained (xx)
GAIN OR LOSS ON RECLASSIFICATION xx

Notes:
- The investment in associate must be updated as of the date of sale. Accordingly, all net
income accrued and the amortization of the excess (which are prorated) shall be adjusted to the
carrying amount of the investment.
- If there is no available market value on the securities, then the remaining investment shall
be accounted for under the cost method. Accordingly, the reclassification shall yield NO gain or
loss on reclassification. Changes in fair value are ignored!

3.) Associates having heavy losses


- The total loss (throughout the indefinite life of the associate) to be recorded by the investor as his
own share shall not exceed the total interest of the investor in the investee. The composition of the
interest of the investor in the associate is as follows:
Investment in associate xx
Investment in preference shares associate xx
Long-term unsecured receivables and loans (e.g. advances) xx
TOTAL INTEREST OF THE INVESTOR IN THE ASSOCIATE xx

- Exhaust first the balance of the investment in associate, and then the investment in preference
shares, and lastly the long-term unsecured receivables. Charge share in the net loss to loss from
investment account.

- Suppose that the share of the investor of the loss for the period is 300 000, but the remaining
interest is only 100 000, then the loss recorded shall only be for 100 000, and the remainder shall be
disclosed as an unrecorded loss. This unrecorded loss shall be accumulated until such time that the
investor will report any profits.

- If the associate subsequently reports profits, then the investor resumes recognizing its share of the
profits, only after deducting all unrecorded loss from the share in profit. The first amount to be
recovered (i.e. account to be debited concurrent with the credit to investment income) shall be the
last amount deducted when there was a share in the net loss: (a) first to long-term receivables, (b)
then investment in preference shares, (c) and lastly investment in associate.

C. INVESTMENT IN DEBT SECURITIES

Debt securities can be accounted for thru fair value thru profit or loss or at amortized cost.

1.) AT FAIR VALUE THRU P/L (e.g. trading bond investments, or irrevocably designated at FVTPL)
Salient points to remember.
- Investment in bonds may be acquired (a) on or (b) between interest dates.
(a) On interest date: the bonds are recorded initially at its quoted price (usually shown as a
percentage of the face amount, e.g. 98 or 102)
(b) Between interest date: the bonds are recorded at its quoted price LESS any accrued
interest income from the date when interest are paid to the date when the bonds are acquired.

Note: Under both dates, the cash received shall always be equal to the quoted price.
Suppose on April 1, 12% bonds w/ face amount of 10 000 were acquired at 120. Interest is
paid annually on Dec. 31. The accrued interest on the date of acquisition may be debited as:

Upon purchase of bonds When interest is received


a.) interest receivable Investment 11 700 Cash 1 200
Int. receivable 300 Int. receivable 300
Cash 12 000 Int. income 900
b.) interest income Investment 11 700 Cash 1 200
Int. income 300 Int. income 1 200
Cash 12 000
The end goal must be to arrive at an interest income of 900, and a cash payment of 1 200.
The second method (debit interest income) is preferred since, the journal entry to record the
receipt of interest is easier.

- Transaction costs are outright expensed


- Changes in fair value are recognized in profit or loss
- The interest income on the bonds is based on the nominal rate and the face amount of the
bonds, not the carrying amount.
- When this investment in bonds is sold, the following formula is of considerable import:
Consideration received xx
Less: Interest receivable or income* (xx)
Less: Transaction costs to sell (xx)
Net selling price (Debit to cash) xx
Less: Carrying amount of the investment (xx)
Gain or loss on sale xx

*If the investment is sold in between interest dates (there is an accrual of interest
income), this shall be deducted from the consideration received, and is separately
recognized as a credit to interest income or receivable in the journal entry. Suppose,
interest payment is made at year-end. If the investment is sold during the year, say on
July 1, interest income from January to June should be recognized.
2.) AT AMORTIZED COST

Under PFRS 9, bond investments shall be classified as financial assets at amortized cost using the
effective interest method.

Term bonds
Date Int. received Int. income Amortization Carrying amount
1/1 This is nominal This is the This is the If this is lower than the face
rate multiplied by effective rate difference (i.e. discount), amortization
the face of the multiplied by the between interest increases the value. If greater
bonds carrying amount received and (i.e. premium), amortization
investment. of the bonds. interest income. decreases the value.

Technique: Nominal rate: 10%, Effective rate: 12%. To arrive at the carrying amount of the next
period: [Carrying amount current period x 1.12 (Face amount x 0.10) (Principal collection, for
serial bonds)]. This is applicable whether the acquisition resulted to a bond discount or bond premium.

A. Initial recognition (debit investment credit cash)


- On interest date:
a.) For term bonds (bonds with single maturity date) Basically, the carrying amount of the
investment shall be the sum of the present values (using the effective rate) of the face
amount and the interest based on the nominal rate.

b.) For serial bonds (bonds payable in installment) The total collection per year (principal
and interest, which is decreasing since principal is decreasing) shall be discounted using the
effective interest rate

- In between interest date:


Suppose the interest date is Dec. 31 and the date of purchase is March 1. Construct the tale
as if the purchase was made on Jan. 1. The standard entry for this is as follows:
Investment in bonds xx
Interest income xx
Cash xx
Notes:
a.) Debit to investment in bonds: This shall be the carrying amount on March 1. Compute
first for the carrying amount on Jan. 1. Construct the table above and compute for the
amortization. The amortization shall be prorated (2/12) and is added if discount or
deducted if premium to the carrying amount on Jan. 1.
b.) Debit to interest income: This is the accrued interest, based on the nominal interest
rate x face value of the bond x 2/12.
c.) Credit to cash: This is the purchase price. This is the sum of the carrying amount on
March 1 and the accrued interest as of March 1. To solve for this separately, the prorated
interest income based on the constructed table, is added, whether discount or premium, to
arrive at the purchase price.

- Other items to consider:


a.) Transaction costs are capitalized, and are added to the present value of investment
b.) For investment acquired together with warrants (i.e. stock rights), the stock rights are
accounted for separately. The cash proceeds shall be prorated between the fair value of the
investment without warrants and the fair value of the stock rights to arrive at the amounts
debited to both accounts. (For 1 000 bonds, there are also 1 000 stock rights)

B. Subsequent recognition
- Construct the table above for ease and convenience in computing this. The entries to record interest
income may be compounded as follows:

DISOCUNT PREMIUM
Cash xx Cash xx
Investment in bonds xx Interest income xx
Interest income xx Investment in bonds xx
Notes:
- Refer always to the table. The cash is debited based on the amount of interest received. The
interest income is credited based on the interest income. The debit or credit to investment in bonds is
the amortization, or simply, a balancing figure.

C. Sale of investment in bonds


Investment can be sold at: (a) quoted price, plus accrued interest or (b) quoted price, including
accrued interest. If silent, the quoted price is assumed to be exclusive of the accrued interest. Under
both kind of sale, the related gain or loss on sale of bonds and the debit to cash are different, so be
vigilant! Char. The gain on sale shall be computed as follows:
Total consideration (based on quoted price) xx
Less: Accrued interest, if sold at quoted price including interest (xx)
Net selling price xx
Less: Carrying value of the bonds sold* (xx)
Gain or loss on sale xx

*The carrying value of the bonds sold shall be updated as of the date of the sale. Thus, the
related amortization shall be prorated and is added if discount or deducted if premium on the
carrying amount as of the last interest date (i.e. date of payment of interest).

COMPREHENSIVE ILLUSTRATION
Jan. 1, 2016: 5 000 000 face value. 6% nominal interest, 8% effective yield. Carrying amount on Jan.
1 is 4 742 000.
Dec. 31, 2016: The bonds are quoted at 105.
October 1, 2017: 1/2 of the investment were sold at 110 plus accrued interest.
Dec. 31, 2017: The bonds are quoted at 112.

REQUIRED: Prepare journal entries for 2016, 2017, and 2018.

Date Int. received Int. income Amortization Carrying value


1/1/16 4 742 000
12/31/16 300 000 379 360 79 360 4 821 360
12/31/17 300 000 385 709 85 709 4 907 069

1/1/16 Investment in bonds 4 742 000


Cash 4 742 000

12/31/16 Cash 300 000 The quoted price at year-end


Investment in bonds 79 360 is irrelevant since this is not
Interest income 379 360 the fair value model.

10/1/17 Investment in bonds 32 141


Interest income 32 141

PLUS accrued interest INCLUDING accrued interest


Cash 2 862 500 2 750 000
Investment in bonds 2 442 821 2 442 821
Interest income 112 500 112 500
Gain on sale 307 179 194 679

Notes on 10/1/17 sale:


1.) First update the amortization of the investment sold. The 85 709 pertains to the entire
investment, so the portion related to the investment sold is 42 855. Since, it has only been
amortized up to October 1, the 42 855 shall be prorated accordingly (9/12), to get the 32 141
figure.

2.) To record the derecognition of the investment of bonds sold:


a.) Debit to cash: If exclusive of interest, quoted price plus accrued interest. If inclusive of
interest, only the quoted price.
b.) Credit to interest income: The accrued interest pertinent to the ones sold as of the date of
the sale. (2 500 000 x 6% x 9/12)
c.) Credit to investment in bonds: Carrying value as of the last interest date (i.e. 12/31/16)
divided by 2 to get 2 410 680. This is the carrying value of the investment sold as of
12/31/16. Add the amortization of 32 141 to update it to the CV as of 10/1/17.
d.) Credit to gain: Balancing figure

Notice that the differences between the plus and the including are the figures for cash and gain
or loss on sale. Nothing more, nothing less!

12/31/17 Cash 150 000 This refers only to the


Investment in bonds 42 855 investments that were
Interest income 192 855 retained after the sale.

D. Impairment and gain on reversal of bonds

Important formulas to consider:


Carrying amount, as of the date of impairment xx
Less: PV of expected cash flows discounted at original effective rate (xx)
Impairment loss for the year (credit to investment in bonds) xx
PV of expected cash flows discounted at original effective rate xx
VERSUS Carrying amount had there been no impairment xx
Lower amount between the two xx
Less: Carrying amount, based on the PV when impairment happened (xx)
Gain on reversal of impairment xx

3.) AT FAIR VALUE THRU OCI


In order for a bond investment to be accounted for under FVTOCI, all two must concur: (a) The
business model is achieved both by collecting contractual cash flows AND by selling the financial asset,
AND (b) The contractual cash flows are solely payments of principal and interest on the principal
outstanding.

Illustration. Date of sale, Jan. 1, 2016. Face amount, 5 000 000. Selling price, 4 760 000, including
transaction costs of 160 000. Term, 3 years. Nominal rate, 10%. Effective rate, 12%. Interest is paid
every Dec. 31. The bonds are quoted at 102 and 105 on Dec. 31, 2016 and 2017. The bonds are sold
on June 30, 2018 at 110.

Date Int. received Int. income Amortization Carrying value


1/1 4 760 000
12/31 500 000 571 200 71 200 4 831 200
12/31 500 000 579 744 79 744 4 910 944
12/31 500 000 589 056 89 056 5 000 000

1/1/16 FA-FVTOCI 4 760 000 Note: Transaction costs are always capitalized under
Cash 4 760 000 fair value thru other comprehensive income.

12/31/16 Cash 500 000 Note: Interest income under FVTOCI shall be
FA-FVTOCI 71 200 recognized using the effective interest method.
Int. income 571 200 After, the change in fair value shall also be
accounted for.
FA-FVTOCI 268 800 FV, 12/31/16 5 100 000
UG OCI 268 800 CA, 12/31/16 4 831 200
Unrealized gain 268 800

12/31/17 Cash 500 000 Note: Even with the change in the carrying amount
FA-FVTOCI 79 744 of the bonds to 5.1M, the amortization shall still be
Int. income 579 744 based on the table originally constructed.
FV, 12/31/17 5 250 000
FA-FVTOCI 70 526 CA per table 4 910 944
UG OCI 70 526 Cumulative UG 339 056
Less: UG last year 268 800
Unrealized gain 70 526

6/30/18 FA-FVTOCI 44 528 Notes:


Int. income 44 528 (1) First entry The amortization from Jan. 1 to
Jun. 30, based on the table above, must be recorded
Cash 5 750 000 in order to update the balance of the investment.
UG OCI 339 056
FA-FVTOCI 5 294 528 (2) Second entry
Int. income 250 000 a. Debit to cash: Since the problem is silent, the
Gain on sale 544 528 quoted price of 110 excludes the interest received

b. Debit to UG-OCI: This is the balance as of


12/31/17. On derecognition of debt investment
measured FVTOCI, the cumulative unrealized gain or
loss shall be reclassified thru profit or loss, as gain
on sale.

c. Credit to FA-FVTOCI: This is the balance of the


bonds as of the date of sale. The carrying amount at
12/31/17, 5 250 000, plus amortization of 44 528.

d. Credit to interest income: Nominal interest

e. Credit to gain on sale:


Selling price 5 500 000
CA per table* 4 955 472
Gain on sale 544 528
*In the context of investment measured at
amortized cost, the carrying amount is
4 910 944 plus the amortization of 44 528.