Financial Accounting and Reporting Lecture Notes

PFRS 9: Financial instrument – Equity Instrument of Another Entity

 Investment in equity securities – Representing ownership interest in an equity (e.g. Ordinary shares or
Preference shares or the right to acquire ownership interest (e.g. Share option, Shares warrants and etc.) This term however
does not encompass callable or redeemable preference share, treasury share and convertible bonds
 Classification of equity securities
1. Investment in Subsidiary – When the ownership interest is more than 50%
2. Investment in Associate – When the Investor has significant influence over the investee in the absence
of evidence to the contrary, significant influence should be presumed when the investor hold 20% or more
but not exceed 50% of the investee’s voting stocks
3. Other Equity Securities (PFRS 9 Financial Instrument) – Are investment in the investee’s equity
without controlling interest or significant influence. They are normally classified as:
I. Marketable – Equity securities with readily determinable market value (e.g. Trading
Securities(FVPL) and Available for Sale(FVOCI)).
II. Non – Marketable – Equity securities without readily determinable market value

In Summary:
Holding of less than 20% Holding of 20% to 50% Holding of more than 50%
Level of Influence Little or more Significant Influence Control
Valuation Method Fair value Method Equity Method Consolidation Method

 Designation of Investment in Equity Securities (PFRS 9)

1. Investment Security to Profit and Loss ( FVPL) – These are equity securities that are acquired
principally for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin
2. Investment Security to Other Comprehensive Income(FVOCI) – Are those Financial assets that are
not (a) loans and receivables originated by the enterprises (b) financial asset for trading

In Summary PFRS 9
Trading Securities/FA- FVPL Available for Sales/FA-FVOCI
Quoted Yes No
Unquoted* Yes* No
Held for Trading Yes No
Nott Held for Trading Yes Yes**
*PAS 39 at Cost (if not determinable)
**Irrevocable designation

 Accounting for Financial asset – Equity Securities (PFRS 9)

Transaction Cost Expense Capitalized

Dividends Income Income
SNI/SNL/SOCI N/A N/A
Carrying Value at BS Date Fair Value Fair Value
Unrealized Gain/Loss* Profit or loss OCI net of tax
Cummulative UG/UL or Accum OCI N/A Equity Section of SFP
Rafael A. Bautista, CPA Financial Accounting and Reporting
University of Caloocan City
College of Business and Accountancy
 *Unrealized Gain/loss
Statement of Comprehensive income (For the period) Statement of Financial Position (As of)
 
Change in fair value during the current period Fair Value. XXX
Less: Original Cost. (XXX)
=Accumulated UG/UL(Equity). XXX

Note: Fair value Adjustment Account – Dr/Cr

1. Debit =  Fair value (Unrealized Gain)
2. Credit = Fair Value (Unrealized Loss)

 Sale/Disposal of Financial Instrument

 Trading Securities/ FVPL  Net Selling Price XXX
Less: CV(FV). (XXX)
= Gain or loss (PL) XXX

 Available for Sale/FVOCI  PAS 39 (Old Standard)

Net Selling Price XXX
Less: CV(FV) (XXX)
= Gain or loss XXX

 PFRS 9 (New Standard)

Selling Price*. XXX
Less: CV(FV). (XXX)
=Retained Earnings. XXX

*Not deducted cost to sell(Separate Account)

Note: Any accumulated Unrealized Gain or loss should be closed to
Retained Earnings upon disposal of financial assets

 Dividends
 Cash Dividend
Upon Declaration Cash/Dividend Receivable XXX
Dividend Income XXX
 Property Dividend (FV@ Declaration Date)
Upon Declaration Non-Cash Asset/Dividend Receivable XXX
Dividend Income XXX
 Share/Bonus Issue/Stock dividend
I. Same  Memo Entry
II. Different  FV Shares received
PAS 39  Investment – New XXX
Investment – Old XXX
PFRS 9 Investment – New XXX
Dividend Income XXX
Rafael A. Bautista, CPA Financial Accounting and Reporting
University of Caloocan City
College of Business and Accountancy
 Note: As if Approach
 Share received in lieu of Cash Dividend (As if Purchase of Investment)
 Dividend Income
Priority 1. Fair of shares received
Priority 2. Cash Dividend that would have been received
Entry:
Financial Asset – FVPL/FVOCI XXX
Dividend Income XXX

 Cash Received in Lieu of share Dividend (As if Sales of Investment)

Gain or loss is recognized
Entry:
Cash XXX
Loss on Investment XXX
Financial Asset- FVPL/FVOCI XXX
Or
Cash XXX
Financial asset- FVPL/FVOCI XXX
Gain on Investment XXX

 Stock rights – is a form of financial assets.

are recognized as embedded derivatives but not a “Stand-alone” derivatives
stock rights are normally classified as current assets if the rights are accounted for separately.
 Accounting for Stock rights
A. Accounted for Separately
I. Receipts of Stock rights ( measured at Fair value)
Stock Rights XXX
Investment in Equity Securities(FA) XXX
II. Exercise of Stock rights
Investment in Equity Securities (FA) XXX
Cash XXX
Stock Rights XXX
III. Sale of Stock rights
Cash XXX
Stock Rights XXX
Gain on Sale of Stock rights XXX
IV. Expiration of Stock rights
Loss on Stock rights XXX
Stock Rights XXX

Rafael A. Bautista, CPA Financial Accounting and Reporting

University of Caloocan City
College of Business and Accountancy
 Note:
If the stock rights do not have a market value, the theoretical or parity value of the stock rights is used in the
measuring the fair value of the stock rights.
Computation of theoretical or Parity Value

1. When the share is selling Right-on

Market value of shares right-on minus subscription price
Number of rights to purchase one shares plus 1

2. When the share is Selling ex-right

Market value of shares right-ex minus subscription price
Number of rights to purchase one shares

B. Not Accounted for Separately

V. Receipts of Stock Rights
Memo Entry

VI. To record the exercise of the Stock Rights

Investment in Equity Securities XXX
Cash XXX
VII. If the stock rights are not exercise but expired
Memo Entry

Rafael A. Bautista, CPA Financial Accounting and Reporting

University of Caloocan City
College of Business and Accountancy
 PFRS 9: Financial Instrument – Investment in Debt Instrument

 Investment in Debt Securities- represent creditor’s claim with fixed amount and usually some interest
obligation(e.g. government securities, corporate bonds, convertible bonds, commercial paper, etc.)
 Classification of debt securities
an entity shall classify financial assets as subsequent measured at amortized cost, fair value through profit or loss or
fair value through other comprehensive income on the basis of both
(a) the entity business model for managing the financial assets
(b) the contractual cash flow characteristics of the financial assets
 Designation of Financial Instrument – Debt Instrument
1. Amortized Cost (if both of the following condition are met)
(a) The financial assets is held within a business model whose objective is to hold financial asset in order to collect
(b) The contractual terms of the financial asset give rise on specified dates to cash flow that are solely payments of
principal and interest on the principal amount outstanding
2. Fair value through other comprehensive income (if both of the following conditions are met)
(a) The financial assets is held within a business model whose objective is achieved by both collecting contractual
cash flow and selling financial assets and
(b) The contractual terms of the financial asset give rise on specified dates to cash flow that are solely payments of
principal and interest on the principal amount outstanding
3.Financial asset shall be measured at fair value through profit or loss unless it is measured at amortized
cost or at fair value through other comprehensive income

Summary:
FVPL IAC FVOCI
Held for trading (to sell) Yes No No
Held for collection of Yes (irrevocable Yes No
contractual cash flow(to designation)
collect)
Held for contractual Yes(irrevocable No Yes
cash flow and for sale( designation)
to sell & to collect)

 Accounting for financial Instrument - Investment in Debt Instrument (PFRS 9)

FVPL FVOCI IAC
Transaction cost Expense Capitalized Capitalized
Interest income Face amount x Stated Amortized Cost x Effective Amortized Cost x Effective
Interest Rate(SIR) Interest Rate(EIR) Interest Rate(EIR)
Amortization N/A Yes Yes
Carrying Value at BS date Fair Value Fair Value Amortized Cost
Unrealized Gain or Profit or loss (PL) Other Comprehensive N/A
loss(Change in Fair value) Income (OCI)
Cummulative Unrealized N/A Equity Section of N/A
Gain or loss Statement of financial
Position
Impairment No Yes Yes

Notes:
Accrued Interest Income ( Face value x Stated interest rate(SIR)
Interest payment dates is not equal to
Rafael A. Bautista, CPA Financial Accounting and Reporting
University of Caloocan City
College of Business and Accountancy
 1. Dates of purchase – Include = Cash paid
Exclude = Initial Cost
2. Date of sale – Include = Cash received
Exclude = Gain/ loss on sale
3. Balance sheet date  Interest Receivable XXX
Interest Income XXX

Journal entries:
1. Normal interest  Cash/Interest Receivable XXX
Interest Income XXX

2. Amortization  I. Premium
Interest Income XXX
Investment in Debt securities XXX
II. Discount
Investment in Debt securities XXX
Interest Income XXX

 Sale/Disposal of Investment Impairment of Investment

Net Selling Price* XXX CV of Investment XXX
Less: CV** (XXX) Present Value of future Cash inflow (XXX)
Gain or loss(P/L) XXX Impairment loss (P/L) CV> PV XXX
*Exclude Accrued Interest Income
**FVPL Fair Value
FVOCI Amortized Cost
AC Amortized Cost

 Reclassification

Reclassification Initial Carrying Value Changes in AC to FV Cummulative Unrealized

(Reclassification date) Gain or loss – Equity
Section
FVPL to FVOCI Fair Value
FVPL to IAC Fair Value
IAC to FVPL Fair Value Profit or loss(P/L)
IAC to FVOCI Fair Value Other Comprehensive
Income(OCI)
FVOCI to FVPL Fair Value Profit or loss(P/L)
FVOCI to IAC Amortized Cost Adjustment to Fair Value
(Back to Amortized cost or
Deduct)

Note:
Reclassification date – Start/ Beginning of the next accounting period following the change in business model and
cashflow characteristics.

PAS 39 – Ability intention to hold Investment

PFRS 9 – Business model contract cashflow characteristics.

Rafael A. Bautista, CPA Financial Accounting and Reporting

University of Caloocan City
College of Business and Accountancy
 PAS 28: Investment in Associate

Associate – Is an entity, including an un-incorporated entity such as partnership, over which the investor has significant
influence and that is neither nor an interest in a joint venture

Significant influence – Is the power to participate in the financial and operating policy decision of the investee but is not
control or joint control over those policies.
FVPL
Investment in ordinary Shares FVOCI
Investment in Associate

FVPL
Investment in Preference Share
FVOCI

 Measurement of Investment in Associate (SME)

Cost Method Equity Method(Full PFRS) Fair Value Method
Transaction Cost Capitalized Capitalized Expense
Dividend Income Decrease CV Income
SNI/SNL/SOCI N/A Increase CV N/A
Impairment Loss RA<CV RA<CV N/A
CV @ BS Date Cost – Impairment CV- Impairment Fair value
Unrealized Gain or loss N/A N/A Taken to P/L
(Change in FV)

 Comparison of Cost method, Fair value method, Equity method

Cost Method Equity Method(Full PFRS) Fair Value Method
Acquisition Investment in Assoc. xx Investment in Assoc. xx Investment in Assoc. xx
Cash xx Cash xx Cash xx
Amortization of Investment income xx
undervaluation/overvaluation Investment in Assoc. xx
of asset (other than No Entry Or No Entry
goodwill) Investment in Assoc. xx
Investment income. xx
Share in the net income of No Entry Investment in Assoc. xx No Entry
associate (P/L) Investment income. xx
Share in increase in OCI No Entry Investment income xx No Entry
component of associate Investment in Assoc. xx
Or
Investment in Assoc. xx
Investment income. xx
Dividend received Cash/ Cash xx Cash/NCA xx Cash xx
Non Cash Dividend Income. xx Investment in Assoc. xx Dividend Income. xx
Share Dividend Memo Entry Memo Entry Memo Entry
Impairment of Investment in Impairment loss xx Impairment loss xx N/A
Associate Investment in Assoc. xx Investment in Assoc. xx
Rafael A. Bautista, CPA Financial Accounting and Reporting
University of Caloocan City
College of Business and Accountancy
 Note: Other Comprehensive Income component
1. Revaluation Surplus
2. Translation Gain or loss
3. Effective portion gain or loss
4. Actuarial gain or loss
5. Unrealized gain or loss on FVOCI

 Computation of Goodwill Another approach

Acquisition Cost(Purchase price) XXX Acquisition Cost(Purchase price) XX
Less: Book Value of the Net asset Acquired (XXX) Less: FV of Net Asset (XX)
Excess of Cost over book value XXX Goodwill(if Negative, Gain on Bargain Purchase). XX
Less: Undervaluation of Assets (XXX)
Add: Overvaluation of Assets XXX
Goodwill (if Negative, Gain on Bargain Purchase). XXX

20% to 50% ownership

Investment in Associate Significant Influence

Equity Method

INCREASE DECREASE
1. Share in Adjusted Net Income 1. Share in Adjusted Net Loss
2. Share in OCI Gain 2. Share in OCI loss
3. Dividend if Associate having
Outstanding Preference share
Note 1: Computation of Adjusted Net income/loss 1. Cummulative - Deduct whether
Unadjusted Net income/loss XXX declare or not
Less: Amortization of excess of FV over
Carrying of Depreciable asset & Inventories (XXX) 2. Non-Cummulative – Deduct when
= Adjusted Net income/Loss XXX declared

Note 2: Computation of Share in Net income

Adjusted Net income x % of ownership XXX
Less: Unrealized profit on upstream sales x % of ownership (XXX)
Add: Realized profit on upstream sale x % of ownership XXX
Less: Unrealized profit on downstream sale (XXX)
Add: Realized Profit on downstream sale XXX
Share in the Net income XXX

Rafael A. Bautista, CPA Financial Accounting and Reporting

University of Caloocan City
College of Business and Accountancy
  Associate Having Heavy Losses
Share in losses of associate is recognized up to the amount of the” interest in the associate” the interest in an
associate is the carrying amount of the investment in the associate under equity method together with any long term
interest that in substance, form part of the investor net income in the associate. The total interest includes the
following:
1. Carrying amount of investment in Associate
2. Investment in preference shares
3. Unsecured long term receivables or loans

The interest does not include the following

1. Trade receivables
2. Trade Payables
3. Any long term receivables for which adequate collateral exist, such as secured loans.

Therefore the share in the loss of the associate shall be recorded as follow: (order of priority)
1. Carrying amount of investment in Associate
2. Investment in preference shares
3. Unsecured long term receivables or loans
In case of recovery of losses of the associate shall be recoded as follow
1. Unsecured long term receivables or loans
2. Investment in preference shares
3.Carrying amount of investment in Associate

Example:
Jopay Company is an associate of Zorro company before adjustment, as of December 31, 2017 are the following
Trade receivable – Jopay 150,000
Trade Payable – Jopay 500,000
Advances from Associate – Jopay 400,000
Advance to Associate – Jopay 350,000
Loan receivable – Jopay Due January 1, 2018 secured 1,000,000
Investment in Preference Shares – Jopay 1,000,000
Investment in associate – Jopay 30% interest 275,000

Result of Jopay operation are as follows

Year Net income(loss)
2017 (3,000,000)
2018 (2,000,000)
2019 (1,000,000)
2020 2,800,000
Note: 2019 175,000 unrecorded loss shall be disclosed to notes to financial statement
Unless if there an obligation to pay, record liability and loss

 Step Acquisition
1. Fair Value Approach: 2. Catch up Adjustment Approach:
Previous interest to FV XXX - As if equity method from the beginning
Add: Additional investment (XXX)
Initial Cost of Investment in Associate XXX

Rafael A. Bautista, CPA Financial Accounting and Reporting

University of Caloocan City
College of Business and Accountancy
  Dilution

Share in Proceeds XXX. % ownership after dilution x proceeds

Less: CV of Investment Deemed Sold. (XXX)
=Dilution Gain/ loss Before Recycling x% of dilution / % before dilution x CV of Investment
of OCI ( CV) XXX
Less: Recycling of OCI (XXX)
Total dilution Gain or loss(P/L) XXX
Unrealized Gain XX
Realized Gain XX

Realized loss XX
Unrealized loss XX

Example:
On January 2, 2018, A company acquired a 30% interest in B Company at a cost of P2,000,000. Investor A Company
has significant influence over B Company. During the year ended December 31, 2018. B company reported a post-tax
profit of P800,000 and paid Dividend of P72,000. B Company also recognized foreign exchange losses of P160,000
and unrealized gain equity investment of P200,000 in other comprehensive income. On January 2, 2019, B Company
has right issue that investor A Company does not participate in. The right issue brings additional P700,000 in cash
dilutes investor A company Interest in B company to 25%.

2018
Investment in associate 01/01/18 P2,000,000
Share in NI(P/L) (800,000 x .30%) 240,000
Share in OCI loss (160,000 x .30%) (48,000)
Share in OCI gain ( 200,000 x. 30%) 60,000
Share in Dividend (72,000 x. 30%) (21,600)
Investment in associate 12/31/18 P2,230,400

2019
Share in Proceeds ( 700,000 x 25%). P175,000
CV of investment Deemed sold (2,230,4000 x 5/30) (371,733)
Dilution loss before recycling of OCI (196,733)
Recycling of OCI loss 8,000
Recycling of Gain (10,000)
Dilution gain or loss(P/L) (194,733)

Entry of Dilution:

Dilution loss (P/L) 194,733

Realized loss (OCI) 8,000
Unrealized Gain(OCI) 10,000
Investment in Associate P194,733
Realized Gain(OCI) 10,000
Unrealized loss(OCI). 8,000

Rafael A. Bautista, CPA Financial Accounting and Reporting

University of Caloocan City
College of Business and Accountancy
  Cessation – Loss of Significant influence
Total Fair value of Investment XXX
Less: Total CA of Investment (XXX) Sold Realized
Total Cessation Gain or loss XXX Reclassified/Unreliazed

Example: Bloom Corporation Acquired 30% of Gloom Company 100,000 voting stock of January 2, 2018 for
P2,000,000 when the asset of Gloom was P6,000,000. Gloom earned P1,000,000 and P1,500,000 In 2018 and 2019
respectively. Gloom Company Paid dividend of P300,000 in 2018 and P500,000 in 2019. Market value of Gloom
ordinary share is P80 and P90 on December 31, 2019. On January 2, 2019, Bloom Company Sold 40% of its
investment at the Prevailing market value of Glooms shares.

Computation of Carrying Value of investment in Assoc

2018
Investment in associate 01/02/18 P2,000,000
Share in NI (1,000,000 x 30%) 300,000
Share In dividend (300,000 x 30%) (90,000)
Investment in associate 12/31/18 P2, 210,000

FV of investment or RA 12/31/18 ( 30,000 x 80 ) P2,400,000

No impairment loss on 2018 Because RA > CA

2019
January Sale of investment
Total shares 30,000 x 40% = no. shares sold 12,000

Total shares 30,000

Less: No, shares sold (12,000)
No. Remaining shares 18,000 / 100,000 = 18% percentage of ownership loss of significant influence

Proceeds (12,000 x 80) P960,000

CA of Investment (12,000/30,000 x 2,210,000) (884,000)
Cessation Gain or loss realized or Gain on Sale 76,0000

CV of Remaining investment 01/02/19 (18,000/30,000 x 2,210,000) P1,326,000

FV of Remaining investment 01/02/19 ( 18,000 x 80) (1,440,000)
Unrealized Gain or loss change in FV P 114,000

Or

Total Fair value P 2,400,000

Less: Total CA investment ( 2,210,000) % of sold 40% realized portion P76,000
Total cessation Gain or loss P190,0000
% of remaining 60% unrealized portion P114,000

Rafael A. Bautista, CPA Financial Accounting and Reporting

University of Caloocan City
College of Business and Accountancy