Debt Investments 2021

LECTURE NOTES A financial asset shall be measured at fair value unless it is measured at
What is a debt instrument?
Debt instrument is a contract that enables the issuing party to raise funds
by promising to repay a lender in accordance with terms of a contract. A
debt security represents creditor’s claim on the entity’s assets. Types of
debt instruments include notes, bonds, certificates, mortgages, leases or
other agreements between a lender and a borrower.
An investment in debt security is a financial asset since it represents a
contractual right to receive cash or another financial asset from another
entity.
amortized cost.
Option to designate a financial asset at FVTPL
An entity may, at initial recognition, irrevocably designate a financial asset
as measured at fair value through profit or loss if doing so eliminates or
significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an ‘accounting mismatch’) that would otherwise
arise from measuring assets or liabilities or recognising the gains and losses
on them on different bases.
Initial Recognition

Classification of Financial Assets (PFRS 9) An entity shall recognize a financial asset in its statement of financial
position when, and only when, the entity becomes a party to the
An entity shall classify financial assets as subsequently measured at either contractual provisions of the instrument, subject to the provisions in
amortized cost or fair value on the basis of both: respect of regular way purchases.
(a) the entity’s business model for managing the financial assets and
(b) the contractual cash flow characteristics of the financial asset.
Classific Initial Subsequent
Business model
A financial asset shall be measured at amortized cost if both of the following ation measurement measurement
conditions are met: Collection of contractual
@ AC FV + TC AC
(a) The asset is held within a business model whose objective is to hold cash flow (SPPI)
assets in order to collect contractual cash flows. Collection of contractual
cash flow (SPPI) & @ FVOCI FV + TC FV
(b) The contractual terms of the financial asset give rise on specified dates
Trading (Selling for profit)
to cash flows that are solely payments of principal and interest on the
Trading (Selling for profit) @ FVPL FV FV
principal amount outstanding.

Interest is consideration for the time value of money and for the credit risk
associated with the principal amount outstanding during a particular period
of time.

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APPLICATION

Problem: On April 1, 2019, Purefoods Company purchased as a short-term

investment a P1,000,000 face value 8% bond for P910,000 including
accrued interest and commission. The commission to acquire the bonds
was P5,000. The bonds are classified as held for trading. The bonds are
dated January 1, 2019 and mature on January 1, 2024, and pay interest
semi-annually on January 1 and July 1. On December 31, 2019, the bonds
had a market value of P920,000. On April 1, 2020, Purefoods sold the
bonds for a total consideration of P950,000.

1. What amount should Purefoods report as unrealized gain in its 2019

profit or loss?

2. How much is the gain from the sale of investment in debt securities
on April 1, 2020?

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Problem: On January 1, 2020, Alaska Corporation purchased P1,000,000 5. If the entity sold the investment on 31 December 2020 at fair value
10% bonds for P1,051,510 (including broker’s commission of P20,000). and bonds are classified as FA@FVTOCI, the entity will report a
Interest is payable annually every December 31. The bonds mature on ‘reclassification adjustment’ of
December 31, 2022. The prevailing market rate for the bonds is 9% at
December 31, 2020. (Round off present value factors to four decimal
places)

1. If the bonds are classified as FA@FVTPL, the amount to be recognized

as fair value adjustment loss in its 2020 profit or loss is

2. If the bonds are classified as FA@AC, the amount to be reported on

the entity’s December 31, 2020 statement of financial position is

3. Investment in debt instrumentsclassified as FA@FVTOCI

recognizes which of the following in OCI?
a. Changes in fair value
b. Impairment gains and losses
c. Interest calculated using the effective interest method.
d. All of the above.

4. Which statement is correct if the bonds are classified as FA@FVTOCI?

a. The amount to be recognized in 2020 profit or loss is P100,000.
b. The amount to be recognized in 2020 other comprehensive
income is P33,900.
c. The amount to be reported on the entity’s December 31, 2020
statement of financial position is P1,035,630.
d. None of the above.

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Problem: On July 1, 2020, Morales Corp. acquired P4,000,000 face value

of X Corporation bonds with a nominal rate of interest of 4%. The bonds
mature on July 1, 2025 and pay interest semi-annually each July 1 and
January 1, with the first interest payment due on January 1, 2021. The
bonds are held for collection. At the date of issuance, the bonds had a
market rate of interest of 6%. On December 31, 2020, the market value of
the bonds was P3,700,000. The amount to be recognized in 2020 profit or
loss related to the bond investment is

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Problem: On January 1, 2019, YOU TOO Corporation purchased

P1,000,000 10% bonds classified as FA@AC. The bonds were purchased to
yield 12%. Interest is payable annually every December 31. The bonds
mature on December 31, 2023. On December 31, 2019 the bonds were
selling at 99. On December 31, 2020, YOU TOO sold P500,000 face value
bonds at 101. The bonds were selling at 103 on December 31, 2021.
1. How much is the gain on sale of the investment in bonds in 2020?
2. If the entity reclassified the bonds as FA@FVTPL after the sale, how
much should be recognized in profit or loss on reclassification date?
3. If the entity reclassified the bonds as FA@FVTOCI after the sale, how
much should be reported as separate component of equity at
December 31, 2020?
4. If the entity reclassified the bonds as FA@FVTOCI after the sale, how
much should be reported as separate component of equity at
December 31, 2021?

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THEORIES b. A non-derivative debt instrument

c. A non-derivative equity instrument
1. Investments in debt instruments are financial assets because they d. All of the above
are
a. Cash equivalents. 5. Which of the following may be measured subsequently at amortized
b. Equity instruments of another entity. cost?
c. Contractual rights to receive cash or another financial asset from a. A derivative
another entity. b. A non-derivative equity instrument
d. All of the above. c. A non-derivative debt instrument
d. None of the above
2. PFRS 9 requires entities to measure their financial assets based on
a. The contractual cash flow characteristics of the financial asset. 6. Under what circumstances under PFRS 9 can an entity classify
b. The company’s business model for managing its financial assets. financial assets that meet the amortized cost criteria as at FVTPL?
c. Both a and b. a. Where the instrument is held to maturity.
d. Neither a nor b. b. Where the business model approach is adopted.
c. Where the financial asset passes the contractual cash flow
3. Which of the following returns is consistent with contractual cash characteristics test.
flows that are SPPI? d. If doing so eliminates or reduces an accounting mismatch.
I. Return for passage of time.
II. Return for the risk that one party to a financial instrument will 7. Which of the following is correct regarding the classification of
cause a financial loss for the other party by failing to discharge investment in debt instruments as financial asset at fair value
an obligation. through OCI?
III. Return for the risk that an entity will encounter difficulty in a. This classification is not allowed for investment in debt
meeting obligations associated with financial liabilities that are instruments.
settled by delivering cash or another financial asset. b. An entity may make an irrevocable election to classify investment
IV. Return for amounts to cover expenses and a profit margin. in a debt instrument that is not ‘held for trading’ as such.
a. I, II, III and IV c. I and IV only c. In order to be classified as such, a debt instrument needs to both
b. I, II and III only d. II and III only have simple principal and interest cash flows and be held in a
business model in which both holding and selling financial assets
4. Which of the following may be classified as a financial asset at fair are integral to meeting management’s objectives.
value through profit or loss? d. All of the above.
a. A derivative

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8. All financial assets are initially measured at fair value plus
transaction costs, except
a. Fair value through profit and loss
b. Fair value through OCI
c. Amortized cost
d. None of the above
9. Investment in debt instruments classified as FA@FVTOCI recognizes
which of the following in OCI?
a. Changes in fair value
b. Impairment gains and losses
c. Interest calculated using the effective interest method.
d. All of the above.
10. Which statement is correct if the bonds are classified as FA@FVTOCI?
a. The amount to be recognized in 2020 profit or loss is P100,000.
b. The amount to be recognized in 2020 other comprehensive
income is P33,900.
c. The amount to be reported on the entity’s December 31, 2020
statement of financial position is P1,035,630.
d. None of the above.
11. Which statement is incorrect regarding reclassification of financial
assets?
a. Reclassifications are only permitted on the change of an entity's
business model and are expected to occur only infrequently.
b. An entity shall account for transfers between categories
prospectively, at the beginning of the period after the change in
the business model.
c. An entity shall restate any previously recognized gains, losses
(including impairment gains or losses) or interest.
d. None of the above.
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Debt Investments 2021
12. Which statement is incorrect regarding reclassification of financial
assets?
a. Reclassifications to FVTPL measurement category result to
amounts recognized in profit or loss.
b. The effective interest rate is determined on the basis of the fair
value of the asset at the reclassification date when an entity
reclassifies a financial asset out of FVTPL measurement
category.
c. The effective interest rate and the measurement of expected
credit losses are not adjusted as a result of the reclassification
from AC measurement category to FVTOCI and vice versa.
d. All reclassifications out of FVTOCI measurement category result
in ‘reclassification adjustment’.
13. Which statement is incorrect regarding presentation and
disclosure of financial assets?
a. The carrying amounts each category of financial assets shall be
disclosed either in the statement of financial position or in the
notes.
b. FA@FVTPL are usually presented as current.
c. FA@FVTOCI are either current or noncurrent.
d. FA@AC shall be presented as noncurrent.
14. In accordance with PAS 1, the profit or loss section or the
statement of profit or loss shall include line item for gains and
losses from derecognition of
a. Financial assets measured at fair value through profit or loss.
b. Financial assets measured at fair value through other
comprehensive income.
c. Financial assets measured at amortized cost.
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15. PFRS 7 requires entities to provide disclosures in their

financial statements that enable users to evaluate
a. The significance of financial instruments for the entity’s
financial position and performance.
b. The nature and extent of risks arising from financial
instruments to which the entity is exposed during the period
and at the end of the reporting period, and how the entity
manages those risks.
c. Both a and b.
d. Neither a nor b.

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 Debt Investments 2021

Do-It-Yourself Solution:

Situation 1
Compute for the total amount paid to purchase the bonds under the following independent
situations: (Round off present value factors to four decimal places) PV of P (P1,000,000 x 0.7118) P711,800
PV of I (P1,000,000 x 10% x 2.4018) 240,180
Situation 1 Purchase price/amount paid P951,980

Face value P1,000,000 Situation 2

Date of bonds January 1, 2019
Date of maturity January 1, 2022 PV of P (P1,000,000 x 0.7462) P 746,200
Acquisition date January 1, 2019 PV of I (P1,000,000 x 6% x 5.0757) 304,542
Nominal rate 10% Purchase price/ amount paid P1,050,742
Effective rate 12%
Interest payment date January 1 Situation 3
PV of P (P1,000,000 x 0.7050) P705,000
Situation 2 PV of I (P1,000,000 x 5% x 4.9173) 245,865
Face value P1,000,000 Purchase price, 1/1/12 950,865
Date of bonds January 1, 2019 Add discount amort. 1/1/ - 3/1:
Date of maturity January 1, 2022 EI (PV on 1/1 x 6% x 2/6) P19,017
Acquisition date January 1, 2019 NI (P1M x 5% x 2/6) ( 16,667) 2,350
Nominal rate 12% Purchase price, 3/1/12 953,215
Effective rate 10% Add accrued interest (P1M x 5% x 2/6) 16,667
Interest payment dates January 1 and July 1 Total amount paid P969,882

Situation 3 Situation 4

Face value P1,000,000 Principal Int. PVF@

Date of bonds January 1, 2019 Date @10% Total 12% PV, 1/1/12
Date of maturity January 1, 2022 12/31/12 1M .3M 1.3M 0.8929 1,160,770
Acquisition date March 1, 2019 12/31/13 1M .2M 1.2M 0.7972 956,640
Nominal rate 10% 12/31/14 1M .1M 1.1M 0.7118 782,980
Effective rate 12% Total 3M 2,900,390
Interest payment dates January 1 and July 1

Situation 4
Face value P3,000,000
Date of bonds January 1, 2019
Date of maturity P1,000,000 annually starting
December 31, 2019
Acquisition date January 1, 2019
Nominal rate 10%
Effective rate 12%
Interest payment December 31

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