Classification and Measurement of Financial 7/21/2013

Assets (BA 219 – Valderrama)

Classification and Measurement of

Financial Assets
PFRS 9 (effective 01.01.15)

Financial Asset

PAS 32 para 11

Common Examples of FA

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Classification and Measurement of Financial 7/21/2013
Assets (BA 219 – Valderrama)

Global Losses from FA: The US

Financial Crisis of 2007

Price or Fair Value of a Debt

Instrument

Cash flows for interest and principal

Prevailing market interest rate

Term or time to maturity of the instrument

Frequency of payment

The Price of a Bond

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Classification and Measurement of Financial 7/21/2013
Assets (BA 219 – Valderrama)

Price of a Bond
Q: What is the price of a 3-year, 10% bond with
face value of P5M when the prevailing market
interest rate is 12%?

A:
(500,000 x 0.893)+(500,000 x 0.797) + (5,500,000
x 0.712) = P4,759,817

Note: The bond sold at a discount (i.e., less than

par value) because its coupon rate is less than
the market interest rate.

Bond Sold at a Premium

Q: What is the price of a 5-year, 10% P5M bond
paying annual interest every December 31 when
the annual market interest rate is 8%?

A: P5,399,271.00

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Classification and Measurement of Financial 7/21/2013
Assets (BA 219 – Valderrama)

FA Classification and Basis

Classification

Amortized cost

Fair value

Basis for Classification
(1) The entity’s business model for managing the
financial assets; and
(2) The contractual cash flow characteristics of the
financial asset

Classification: Specific Requirements

FA at Fair Value
Where Changes in Fair Value are Recognized:
1. In profit or loss (FVPL)
2. In equity (OCI)

Financial Assets at Fair Value Through P&L

1. Held for trading
2. Designated as such on initial recognition
3. Investments in quoted equity instruments

Financial Assets at Fair Value Through OCI

Allowed only for equity instruments not held for
trading; must be irrevocably designated as such at initial
recognition

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Classification and Measurement of Financial 7/21/2013
Assets (BA 219 – Valderrama)

Amortized Cost: Definition

Price of a Bond
Q: What is the price of a 3-year, 10% bond with face
value of P5M when the prevailing market interest
rate is 12%?

A:
(500,000 x 0.893)+(500,000 x 0.797) + (5,500,000 x
0.712) = P4,759,817

Note: The bond sold at a discount (i.e., less than par

value) because its coupon rate is less than the
market interest rate.

The Amortized Cost of a Bond

Investment
interest interest Amortized
Date received revenue amortization cost

1/1/2008 4,759,816.87

12/31/2008 500,000.00 571,178.02 71,178.02 4,830,994.90

12/31/2009 500,000.00 579,719.39 79,719.39 4,910,714.29

12/31/2010 500,000.00 589,285.71 89,285.71 5,000,000.00

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Classification and Measurement of Financial 7/21/2013
Assets (BA 219 – Valderrama)

The Amortized Cost of a Bond

Acquired at a Premium
date interest recd interest rev amortizn cv

1/1/2005 5,399,271.00

12/31/2005 500,000.00 431,941.68 (68,058.32) 5,331,212.68

12/31/2006 500,000.00 426,497.01 (73,502.99) 5,257,709.70

12/31/2007 500,000.00 420,616.78 (79,383.22) 5,178,326.47

12/31/2008 500,000.00 414,266.12 (85,733.88) 5,092,592.59

12/31/2009 500,000.00 407,407.41 (92,592.59) 5,000,000.00

Initial and Subsequent Measurement

Gains and Losses

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Classification and Measurement of Financial 7/21/2013
Assets (BA 219 – Valderrama)

Impairment

Impairment Reversal

Reclassification