CHAPTER 31

FINANCIAL ASSET AT FAIR VALUE

QUESTION 31-1

What are the classifications of financial assets?

ANSWER 31-1

Under PFRS 9, paragraph 4.1.1, financial assets are classified into three, namely:

1. Financial assets at fair value through profit or loss

2. Financial assets at fair value through other comprehensive income
3. Financial assets at amortized cost

Financial assets at fair value through profit or loss and through other comprehensive income include both
equity securities and debt securities.

Financial assets at amortized cost include only debt securities.

The classification depends on the business model for managing financial assets which may be:

a. To hold investments in order to realize fair value changes

b. To hold investments in order to collect contractual cash flows.

QUESTION 31-2

What financial assets are measured at fair value through

profit or loss or FVPL?

ANSWER 31-2

1. Financial assets held for trading or popularly known as "trading securities". These financial assets
are measured at fair value through profit or loss "by requirement," meaning, required by the
standard.
2. All other investments in quoted equity instruments. These financial assets are measured at fair
value through profit or loss "“by consequence" in accordance with Application Guidance B5.1.14
of PFRS 9.
3. Financial assets that are irrevocably designated on initial recognition as at fair value through
profit or loss. These financial assets are measured at fair value through profit or loss "by
irrevocable designation" or "by option. This fair value option is applicable to investments in
bonds and other debt instruments which can be irrevocably designated as at fair value through
profit or loss even if the financial assets satisfy the amortized cost measurement. This designation
is the fair value option allowed in accordance with Paragraph 4.1.5 of PFRS 9.
4. All debt investments that do not satisfy the requirements for measurement at amortized cost and
at fair value through other comprehensive income. These financial assets are measured at fair
value through profit or loss "by default" in accordance with PFRS 9, paragraph 4.1.4.

QUESTION 31-3
Define financial asset held for trading.

ANSWER 31-3

Appendix A of PFRS 9 provides that a financial asset is held for trading when:

a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a 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.
c. It is a derivative, except for a derivative that is a financial guarantee contract or a designated and
an effective hedging instrument.

QUESTION 31-4

Explain the measurement of equity investment "at fair value through other comprehensive income" or
FVOCI.

ANSWER 31-4

At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an irrevocable election
to present in other comprehensive income subsequent changes in fair value of an investment in equity
instrument that is not held for trading.

The irrevocable approach is to impose discipline in accounting for nontrading equity investment.

The amount recognized in other comprehensive income is not reclassified to profit or loss under any
circumstances.

However, on derecognition, the amount may be transferred to equity or retained earnings.

If the investment in equity instrument is “held for trading”, the election to present unrealized gains and
losses in other comprehensive income is not allowed.

If the investment in equity instrument is held for trading, subsequent changes in fair value are always
included in profit or loss.

QUESTION 31-5.

Explain the measurement of debt investment at fair value through other comprehensive income.

ANSWER 31-5

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.

Note that the business model includes selling the financial asset in addition to collecting contractual
cash flows.

In this case, interest income is recognized using the effective interest method as in amortized cost
measurement.

On derecognition, the cumulative gains and losses recognized in other comprehensive income are
reclassified to profit or loss.

QUESTION 31-6

Explain the measurement of debt investment at amortized cost.

ANSWER 31-6

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 business model is to hold the financial asset in order to collect contractual cash flows on
specified date.
b. The contractual cash flows are solely payments principal and interest on the principal amount
outstanding.

In other words, the business model is to collect contractual cash flows if the contractual cash flows
are solely payments of principal and interest.

In such a case, the financial asset shall be measured amortized cost.

QUESTION 31-7

What are the simple rules on the measurement of financial assets?

ANSWER 31-7

Measurement of equity investments

1. Held for trading - at fair value through profit or loss

2. Not held the trading – as a rule, at fair value through profit or loss
3. Not held for trading - at fair value through other comprehensive income by irrevocable election
4. All other investments in quoted equity instruments – at fair value through profit or loss
5. Investments in unquoted equity instruments - at cost
6. Investments of 20% to 50% – equity method of accounting
7. Investments of more than 50% – consolidation method to be taken up in an advanced accounting
course

Measurement of debt investments

1. Held for trading – at fair value through profit or loss

2. Held for collection of contractual cash flows - at amortized cost
3. Held for collection of contractual cash flows- at fair value through profit or loss by irrevocable
designation or fair value option
 4. Held for collection of contractual cash flows and for sale of the financial asset - at fair value
through other comprehensive income
5. Held for collection of contractual cash flows and for sale of the financial asset - at fair value
through profit or loss by irrevocable designation or fair value option

QUESTION 31-8

Explain reclassification of financial assets.

ANSWER 31-8

PFRS 9, paragraph 4.4.1, provides that an entity shall reclassify financial assets only when it changes its
business model for managing the financial assets

Only debt investments can be reclassified because the change in business model applies appropriately to
debt investments

However, debt investments measured at FVPL by irrevocable election cannot be reclassified simply
because the election is irrevocable.

All equity investments cannot be reclassified.

Equity investment held for trading or measured at FVPL cannot be reclassified by reason of the
consequential requirement of PFRS 9.

Equity investment measured at FVOCI by irrevocable election cannot be reclassified simply because the
election is irrevocable.

Where reclassification occurs, Paragraph 5.6.1 provides that an entity shall apply the reclassification
prospectively from the reclassification date.

As defined in Appendix A of PFRS 9, the "reclassification date" is the first day of the reporting period
following the change in business model that results in an entity reclassifying financial asset.

This means that if the change in business model is in 2019, the reclassification date is January 1, 2020,
the first day of the next reporting period.

However, the entity must disclose the change in business model in the 2019 financial statements because
the change in the entity's business model is a significant and demonstrable event.

QUESTION 31-9

Explain the reclassification of financial asset from FVPL to amortized cost.

ANSWER 31-9

PFRS 9, paragraph 5.6.3, provides the following when an entity reclassifies a financial asset at fair value
through profit or loss to financial asset at amortized cost:

a. The fair value at the reclassification date becomes the new gross carrying amount of the financial
asset at amortized cost.
 b. The difference between the new gross carrying amount of the financial asset at amortized cost
and the face amount of the financial asset shall be amortized through profit or loss over the
remaining life of the financial asset using the effective interest method.
c. A new effective rate must be determined based on the fair value reclassification date.

QUESTION 31-10

Explain reclassification of financial asset from amortized cost to FVPL.

ANSWER 31-10

PFRS 9, paragraph 5.6.2, provides the following when an entity reclassifies a financial asset at amortized
cost to financial asset at fair value through profit or loss:

a. The financial asset is measured at fair value on reclassification date.

b. The difference between the previous carrying amount and fair value on reclassification date is
recognized in profit or loss.

QUESTION 31-11

Explain the reclassification of financial asset from amortized cost to FVOCI.

ANSWER 31-11

PFRS 9, paragraph 5.6.2,. provides the following if a financial asset is reclassified from amortized cost to
FVOCI:

a. The financial asset is measured at fair value at reclassification date.

b. The difference between the amortized cost carrying amount and the fair value at reclassification
date is recognized in other comprehensive income.
c. The original effective interest rate is not adjusted.

QUESTION 31-12

Explain the reclassification of financial asset from FVOCI to amortized cost.

ANSWER 31-12

PFRS 9, paragraph 5.6.5, provides the following if a financial asset is reclassified from FVOCI to
amortized cost:

a. The fair value at reclassification date becomes the new amortized cost carrying amount.
b. The cumulative gain or loss previously recognized in other comprehensive income is eliminated
and adjusted against the fair value at reclassification date. As a result, the investment is reverted
back to amortized cost measurement.
c. The original effective rate is not adjusted.
QUESTION 31-13

Explain the reclassification of financial asset from FVPL to FVOCI.

ANSWER 31-13

PFRS 9, paragraph 5.6.6, provides the following if a financial asset is reclassified from FVPL to FVOCI:

a. The financial asset continues to be measured at fair value.

b. The fair value at reclassification date becomes the new carrying amount.
c. A new effective interest rate must be determined based on the fair value at reclassification date.

QUESTION 31-14

Explain the reclassification of financial asset from FVOCI to FVPL.

ANSWER 31-14

PFRS 9, paragraph 5.6.7, provides the following if a financial asset is reclassified from FVOCI to FVPL:

a. The financial asset continues to be measured at fair value.

b. The fair value at reclassification date becomes the new carrying amount.
c. The cumulative gain or loss previously recognized in other comprehensive income is reclassified
to profit or loss at reclassification date.

QUESTION 31-15

Explain impairment of equity investments at fair value

ANSWER 31-15

For financial assets measured at fair value, all gains and losses are either presented in profit or loss or in
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 at fair value through other comprehensive income for impairment.

QUESTION 31-16

Explain impairment of debt investment at amortized cost and debt investment at fair value through other
comprehensive income.

ANSWER 31-16

PFRS 9, paragraph 5.5.1, provides that an entity shall recognize a loss allowance for expected credit
losses on:

a. Financial asset measured at amortized cost

b. Debt investment measured at fair value through other comprehensive income
 Paragraph 5.5.3 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.

QUESTION 31-17 Multiple Choice (PFRS 9)

1. Depending on the business model for managing financial assets, an entity shall classify financial
assets subsequent to initial recognition at
a. Fair value through profit or loss
b. Amortized cost
c. Fair value through other comprehensive income
d. All of these are used in measuring financial assets
2. How does the standard distinguish between the measurement methods to be used?
a. By reviewing the business model and the risks and rewards of the transaction.
b. By reviewing the business model and the contractual cash flow characteristics of the
instrument.
c. By reviewing the realizability and the contractual cash flow characteristics of the
instrument.
d. By reviewing the realizability of the instrument and risks and rewards of ownership.
3. Which of the following is not a characteristic of a financial asset held for trading?
a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a portfolio of financial assets that are managed together
and for which there is evidence of a recent actual pattern of short-term profit taking.
c. It is a derivative that is not designated as an effective hedging instrument.
d. It is a derivative that is designated as an effective hedging instrument.
4. All of the following financial assets shall be measured at fair value through profit or loss, except
a. Financial assets held for trading
b. Financial assets designated on initial recognition as at fair value through profit or loss
c. Investments in quoted equity instruments
d. Financial assets at amortized cost
5. A debt investment shall be measured subsequently at amortized cost
a. By irrevocable election
b. When the debt investment is managed and evaluated on a document risk-management
strategy.
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that are solely payments of
principal and interest.
6. The irrevocable election to present subsequent changes in fair value in other comprehensive
income is applicable only to
a. Investment in equity instrument that is not held for trading.
b. Investment in equity instrument that is held for trading.
c. Financial asset measured at amortized cost.
d. Financial asset measured at fair value.
7. A debt investment shall be measured at fair value through other comprehensive income
a. When the debt investment is held for trading.
b. When the debt investment is not held for trading.
 c. By irrevocable designation
d. When the business model is to collect contractual cash flows that are solely payments of
principal and interest and also to sell the financial asset
8. Which is not a category of financial assets?
a. Financial assets at fair value through profit or loss
b. Financial assets at fair value through other comprehensive income
c. Financial assets at amortized cost
d. Financial assets held for sale

QUESTION 31-18 Multiple Choice (IAA)

1. Under IFRS, the presumption is that equity investments are

a. Held for trading
b. Held to profit from price changes
c. Held for trading and held to profit from price changes
d. Held as financial assets at fair value through other comprehensive income
2. Entities are required to measure financial asset based on all of the following, except
a. The business model for managing financial asset.
b. Whether the financial asset is a debt or an equity investment.
c. The contractual cash flow characteristics of the financial asset.
d. All of the choices are required.
3. Debt investments that meet the business model and contractual cash flow tests are reported at
a. Net realizable value
b. Fair value
c. Amortized cost
d. The lower of amortized cost and fair value
4. Debt investments not held for collection are reported at
a. Amortized cost
b. Fair value
c. The lower of amortized cost and fair value
d. Net realizable value
5. Debt investments reported at amortized cost are
a. Managed and evaluated based on a documented risk management strategy
b. Trading debt investments
c. Held for collection debt investments
d. All of these are correct
6. Equity investments irrevocably accounted for at FVOCI are
a. Nontrading investments of less than 20%.
b. Trading investments of less than 20%.
c. Investments of between 20% and 50%.
d. Investments of more than 50%.
7. What financial assets are assessed for impairment?
a. Equity investments at FVPL
b. Equity investments at FVOCI
c. Debt investments at FVPL
d. Debt investments at amortized cost and debt investments at FVOCI
8. Impairments of debt investments at amortized cost are
a. Based on discounted contractual cash flows.
b. Recognized as component of OCI.
c. Based on fair value for nontrading investments.
d. Evaluated at each reporting date.
 9. An impairment loss is the excess of the carrying amount of the debt investment over
a. Expected cash flows
b. Present value of the expected cash flows
c. Contractual cash flows
d. Present value of the contractual cash flows
10. Under IFRS, an entity
a. Should evaluate every investment for impairment.
b. Accounts for an impairment as component of OCI.
c. Calculates the impairment loss on debt investment as the excess of carrying amount over
the expected discounted future cash flow.
d. All of the choices are correct.

QUESTION 31-19 Multiple choice (IFRS)

1. Reclassifications of investments between categories are accounted for

a. Prospectively, at the end of the period after the change in the business model.
b. Prospectively, at the beginning of the period after the change in the business model.
c. Retrospectively, at the end of the period after the change in the business model.
d. Retrospectively, at the beginning of the period after the change in the business model.
2. Transfers of investments between categories
a. Result in omitting recognition of fair value in the year of the transfer.
b. Are accounted for at fair value for all transfers.
c. Are not recognized if investments are transferred from held for collection to fair value.
d. Should always affect net income.
3. When a debt investment at amortized cost is reclassified to FVPL, the difference between the
previous carrying amount and fair value at reclassification date is
a. Recognized in profit or loss
b. Not recognized
c. Recognized in other comprehensive income
d. Included in retained earnings
4. When a debt investment at FVPL is reclassified to amortized cost, what is the new carrying
amount at amortized cost?
a. Fair value at reclassification date
b. Face amount of the debt investment
c. Present value of the contractual cash flows
d. Original carrying amount of the debt investment
5. Which statement is true when a debt investment amortized cost is reclassified to FVOCI?
a. The debt investment is measured at fair value at reclassification date.
b. The difference between the previous carrying amount and fair value at reclassification
date is recognized in other comprehensive income.
c. The original effective rate is not adjusted.
d. All of these statements are true.
6. Which statement is true when a debt investment at FVOCI is reclassified to amortized cost?
a. The fair value at reclassification date becomes the new carrying amount.
b. The cumulative gain or loss previously recognized in OCI is removed from equity and
adjusted against the fair value at reclassification date.
c. The original effective rate is not adjusted.
d. All of these statements are true.
7. When a financial asset at FVPL is reclassified to FVOCI, the new carrying amount is equal to
 a. Fair value at reclassification date
b. Original carrying amount
c. Present value of contractual cash flows
d. Present value of contractual cash flows representing principal
8. Which statement is true when a financial asset at FVOCI is reclassified to FVPL?
a. The financial asset continues to be measured at fair value.
b. The fair value at reclassification date becomes the new carrying amount.
c. The cumulative gain or loss previously recognized in OCI is reclassified to profit or loss.
d. All of these statements are true.

QUESTION 31-20 Multiple Choice (PFRS 15)

1. Fair value of an asset should be based upon

a. The replacement cost of an asset.
b. The price that would be received to sell the asset at the measurement date.
c. The original cost of the asset.
d. The price that would be paid to acquire the asset.
2. Which of the following describes a principal market for establishing fair value of an asset?
a. The market that has the greatest volume and level of activity for the asset
b. Any broker or dealer market
c. The most observable market
d. The market in which the amount received would be maximized
3. Which statement is true for measuring an asset at fair value?
a. The price of the asset should be adjusted for transaction cost.
b. The fair value of the asset should be adjusted for cost of disposal.
c. The fair value is based upon an entry price to purchase the asset.
d. The price should be adjusted for cost to transport the asset to the principal market.
4. Which of the following is an assumption used in fair value measurement?
a. The asset must be in-use
b. The asset must be considered in-exchange
c. The most conservative estimate must be used
d. The asset is in the highest and best use
5. Which of the following would meet the qualifications a market participants?
a. A liquidation market in which sellers are compelled to sell.
b. A subsidiary of the reporting unit interested in purchasing assets similar to those being
valued.
c. An independent entity that is knowledgeable about the asset.
d. A broker or dealer that wishes to establish new market for the asset.
6. The fair value at initial recognition is
a. The price paid to acquire the asset.
b. The price paid to acquire the asset less transaction cost.
c. The price paid to transfer or sell the asset.
d. The carrying amount of the asset acquired.
7. Which of the following is not a valuation technique used in fair value measurement?
a. Income approach
b. Residual value approach
c. Market approach
d. Cost approach
8. Valuation techniques for fair válue that include the Black-Scholes formula, a binomial model, or
discounted cash flow are examples of which valuation technique?
a. Income approach
 b. Market approach
c. Cost approach
d. Exit value approach
9. The market approach for measuring fair value requires which of the following?
a. Present value of future cash flows
b. Prices and other relevant information of transactions from identical or comparable assets
c. The price to replace the service capacity of the asset
d. The weighted average of the present value of future cash flows

10. Which of the following would be considered a Level 2 input for fair value measurement?
a. Quoted market price on a stock exchange for an identical asset
b. Quoted market price available from a business broker for a similar asset
c. Historical performance and return on the investment
d. All of these would be considered Level 2 input for fair value measurement

QUESTION 31-21 Multiple Choice (ACP)

1. It is the date on which the stock and transfer book of s entity is closed for registration.
a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing the dividend check
2. At which of the following dates has the shareholder theoretically realized income from dividend?
a. The date the dividend is declared
b. The date of record
c. The date the dividend check is mailed by the entity
d. The date the dividend check is received
3. Property dividends are recorded
a. As dividend income at carrying amount of the property
b. As dividend income at fair value of the property
c. As return of investment
d. By means of memorandum only
4. Liquidating dividends are credited to
a. Income
b. Retained earnings
c. Investment account
d. Share capital
5. An investor that owns 10% of the ordinary shares has the right to
a. Be paid 10% of the investee's profit in cash each year.
b. Receive dividend equal to 10% of the par each year.
c. Receive dividend equal to 10% of the total dividend paid by the investee for the year to
shareholders.
d. Keep investee from issuing any new shares unless the investor is willing to buy 10% of
the new shares.
6. What is the effect of share dividend of the same class?
a. Increase in investment and increase in cost per share
b. Decrease in investment and decrease in cost per share
c. No effect on investment but decrease in cost per share
 d. No effect on investment but increase in cost per share
7. When share dividends of different class are received
a. No formal entry is made but only a memorandum
b. Cash is debited and dividend income is credited
c. A new investment account is debited and dividend income is credited
d. A new investment account is debited and the original investment account is credited
8. Shares received in lieu of cash dividend are recorded as
a. Income at fair value of the shares received
b. Income at par value of the shares received
c. Income at the cash dividend that would have been received
d. Share dividends
9. Cash received in lieu of share dividends is recorded as
a. Dividend income
b. Return of investment
c. Partly income and partly return of investment
d. If the share dividends are received and subsequently sold at the cash received and gain or
loss is recognized
10. What is the effect of share split up?
a. Increase in number of shares and increase in cost per share
b. Decrease in number of shares and decrease in cost per share
c. Increase in number of shares and decrease in cost per share
d. Decrease in number of shares and increase in cost per share