Classification of Investments in the Financial Statement
CHAPTER 15:
FINANCIAL ASSET
AT FAIR VALUE
Investments
 Assets held by an entity for the accretion of wealth
through distribution such as interest, royalties,
dividends, and rentals, for capital appreciation or
for other benefits to the investing entity such as
those obtained through trading relationships
 They are not directly identified with the operating
activities of an entity and occupy only an auxiliary
relationship to the central revenue producing
activities of the entity
Purposes of Investments
 Accretion of wealth – through interest, dividends,
royalties, and rentals
 Capital Appreciation – as in the case of land and
real estate held for appreciation and direct
investments in gold, diamonds, and other precious
commodities
 Ownership Control – as in the case of investments
in subsidiaries and associates
 Protection- as in the case of interest in life
insurance contract in the form of cash surrender
value
Examples of Investments
 Trading securities or financial asset at fair value
through profit of loss (FA-FVPL)
 Financial asset at fair value through other
comprehensive income (FA-FVOCI)
 Investment in nontrading equity securities
 Investment in bonds or financial asset at amortized
cost
 Investment in associate
 Investment in subsidiary
 Investment property
 Investment in fund
 Investment in joint venture
 Current Asset – investments that are by their very
nature readily realizable and are intended to be held
for not more than one year
 Noncurrent Asset – investments that are not
expected to be realized within twelve months after
the end of the reporting period
Definition of Financial Asset
 Cash
 A contractual right to receive cash or another
financial asset from another entity
 A contractual right to exchange financial
instrument with another entity under conditions
that are potentially favorable
 An equity instrument of another entity
Examples of Financial Assets
 Cash or Currency – it represents the medium of
exchange
 Deposit of Cash with a Bank or Similar Financial
Institution – it represents the contractual right of
the depositor to obtain cash from the bank or to
draw a check against the balance in favor of a
creditor in payment of a financial liability
 Financial assets representing the right to receive
contractual cash flows:
a. Trade accounts receivable
b. Notes receivable
c. Loans receivable
 Exchange with favorable conditions:
a. Purchase of shares of another entity at less
than market price
 Investment in shares or other equity instruments
a. Trading securities
Not Considered a Financial Asset
 Gold bullion deposited in a bank – it is a
commodity
 Intangible Assets - no present right to receive
cashflows
 Physical assets (PPE and Inventory) – no present
right to receive cashflows
 Prepaid expenses – there is a future economic
benefit in the form of receipt of goods and services
but not the right to received cash or another
financial asset
 Leased assets – control of such assets does not give
rise to a present right to receive cash or another
financial asset
Classification of Financial Assets:
 Financial Assets at Fair Value through Profit or
Loss – includes equity and debt securities
 Financial Assets at Fair Value through Other
Comprehensive Income – includes equity and debt
securities
 Financial Assets at Amortized Cost – debt
securities only
Business Models Used as Basis for the Classification of
Financial Assets
 To hold investments in order to realize fair value
changes
 To hold investments in order to collect contractual
cash flows
 To hold investments in order to collect contractual
cash flows and sell the investment
Equity Security
 Any instrument representing ownership shares and
right, warrants or options to acquire or dispose of
ownership shares at a fixed or determinable price
 Simple definition = ownership interest in an entity
 Includes:
a. Ordinary Shares
b. Preference Shares
c. Rights or Options
 Shareholders – owners of equity securities
 Share – is the ownership interest or right of a
shareholder in an entity
 Share Certificate – evidence for owning shares of
another entity
 Does not include:
a. Redeemable preference shares
b. Treasury Shares
c. Convertible Debt
Debt Security
 Any security that represents a creditor relationship
with an entity
 Has a maturity date and a maturity value
 Examples:
a. Corporate bonds
b. BSP treasury bills
c. Government securities
d. Commercial papers
e. Preference shares with mandatory
redemption date or are redeemable
Initial Measurement of Financial Assets
 General Measurement: Fair Value + Transaction
Cost
 Except FVPL: Fair Value
 Transaction costs incurred in acquiring trading
securities are considered outright expense
 Not considered transaction costs:
a. Debt premiums or discounts
b. Financing costs
c. Internal or administrative or holding costs
Subsequent Measurement
 Fair Value through Profit and Loss (FVPL)
 Fair Value through Other Comprehensive Income
(FVOCI)
 Amortized Cost
Financial Assets at Fair Value through Profit or Loss
 Financial assets held for trading or trading
securities – measured at FVPL by requirement (it is
required by the standard)
 All Other Investments in Quotes Equity
Instruments – measured at FVPL by consequence
 Financial Assets that are irrevocably designated on
initial recognition as at fair value through profit of
loss – measured at FVPL by irrevocable decision
or by option
 All debt investments that do not satisfy the
requirements for measurement at amortized cost
and at FVOCI – measured at FVPL by default
Financial Asset held for Trading (Debt and Equity
Securities)
 If acquired with the purpose of selling or
repurchasing it in the near term
 It is part of a portfolio that shows evidence of a
recent actual pattern of short-term profit making
 It is a derivative but not a derivative hedging
instrument
Equity Investment at Fair Value through Other
Comprehensive Income (FVOCI)
 Securities are classified as FVOCI through
irrevocable decision
 Not held for trading
 Irrevocable Approach – it is designed to impose
discipline in accounting for nontrading equity
investment
 The amount recognized in OCI is not reclassified
to profit or loss unless the related security is
Debt Investment at Amortized Cost
 A debt investment shall be measured at amortized
cost if it meets BOTH conditions:
1. The business model is to hold the financial
asset to collect contractual cash flows on
specified date
2. The contractual cash flows are solely
payments of principal and interest
 Simple Definition – A debt investment is to be
measured at amortized cost when the entity holds
the investment to receive contractual cash flows
and that the cashflows received are principal and
interest payments only.
Debt Investment at Fair Value through OCI
 A debt investment shall be measured at fair value
through OCI if both conditions are met:
1. The business model is achieved by both
collecting contractual cash flows and by
selling the financial asset
2. The contractual cash flows are solely
payments of principal and interest
 Simple Definition – A debt investment is to be
measured at FVOCI when it is held by the entity to
receive contractual cash flows provided that the
cash flows received are interest and principal
payments and that the entity intends to sell the debt
investment.
 During the derecognition of the asset, the
cumulative gain or loss in the debt investment is to
be reclassified to profit or loss
Summary of Measurement Rules:
 Equity Investments
1. Trading Securities – FVPL
2. Not for Trading Securities – FVPL - rule
3. Not for Trading Securities – FVOCI –
through irrevocable decisions
4. Quoted Equity Instruments – FVPL
5. Investments of 20% to 50% - Equity
Method of Accounting
6. Investment of more than 50% -
Consolidation method
 Debt Investments
2. Held for Trading – FVPL
3. Held to collect contractual cash flows –
Amortized Cost
4. Held to collect contractual cash flows –
FVPL through irrevocable decision
1. Held to collect contractual cash flows and
to sell the financial asset – FVPL through
irrevocable decision or designation
Fair Value
 the price that would be received to sell an asset in
an orderly transaction between market participants
at the measurement date
 Simple Definition – the price agreed upon by a
buyer and a seller in an arm’s length or orderly
transaction. The buyer and seller must not be
forced or not compelled to enter into the
transaction
Evidence of Fair Value Hierarchy:
 Quoted price of identical asset in an active market
 Quoted price of similar asset in an active market
 Quotes price of identical and similar asset in an
active market
Active Market – a market in which transactions take place
with sufficient regularity and volume to provide pricing
information on an ongoing basis
Quoted Price
 Quoted price – the fair value of securities in the
securities market
 Quotes price in reference to a share or equity
securities – pesos per share
 Quotes price in bond or debt security – percent of
the face amount of the bond
Gain or Loss – Financial Asset at Fair Value
 Gain or loss in securities held at FVPL are
presented in profit or loss, except:
1. If the investment is a nontrading security
and it has been irrevocably elected that the
unrealized gain or loss is to be presented in
other comprehensive income (OCI)
2. When the debt investment is measured at
FVOCI
 Fair value is higher than carrying amount –
unrealized gain
 Fair value is lower than carrying amount –
unrealized loss
 Realized gain or loss – gain or loss as a result from
the actual selling of the investments
Gain or Loss – Financial Asset at Amortized Cost
 Unrealized gain or loss in financial assets measured
at amortized cost is not recognized because these
financial assets are not reported it at fair value
 The gain or loss in financial assets measured at
amortized cost shall be classified to FVPL when it
is sold or derecognized

Impairment – Equity Investments at Fair Value

 It is not necessary to test equity investments
measured through FVPL or FVOCI for impairment

Impairment – Debt Investments

 The entity shall recognize expected credit loss in
case of impairment. Expected credit loss is an
estimate of credit loss over the life of the financial
instrument
 Credit Loss – present value of all cash shortfalls
 Impairment Loss = Carrying Amount less Present
Value of Estimated Future Cash Flows discounted
at the original effective rate
