Cañaveral, Rhia Pixie T.

2nd Yr. BS Accountancy

Assignment no.2
Intermediate Accounting 1

Financial assets at amortized cost (bond investment)

Definition of a bond
 Is a formal unconditional promise made under seal to pay a specified sum of money
at a determinable future date, and to make periodic interest payments at a stated rate
until the principal sum is paid.
Initial measurement of bond investment
 In accordance with PFRS 9, paragraph 5.1.1, bond investments are recognized initially
at fair value plus transaction costs that are directly attributable to the acquisition.
However, transaction costs attributable to the acquisition of bond investments held
for trading or at fair value through profit or loss are expensed immediately.
Amortization of premium or discount
 Investment in bonds shall be measured subsequently at amortized cost. This means
that any premium or discount on the acquisition of long-term investment in bonds
must be amortized. Bond premium or discount is amortized over the remaining life of
the bonds from the date of acquisition to the date of maturity. Amortization may be
made on interest dates or at the end of the reporting period. It is more convenient to
record amortization at the end of the reporting period.
Straight line method of amortization
 Provides for an equal amount of premium or discount amortization each accounting
period. Following the straight line method, the annual amortization of discount and
premium as simply computed by dividing the amount of discount and premium by the
life of the bonds.
Bond outstanding method of amortization
 Applicable to serial bonds and provides for a decreasing amount of amortization.

Effective interest method

Nominal interest rate
 Is the coupon rate or stated rate appearing on the face of the bond.
 Refers to the interest rate before taking inflation into account. Nominal can also refer
to the advertised or stated interest rate on a loam, without taking into account any
fees or compounding of interest.
Effective interest rate
 Effective interest or scientific method simply requires the comparison between the
interest earned or interest income and the interest received.
 Interest rate on a loan or financial product restated from the nominal interest rate and
expressed as the equivalent interest if compound interest was payable annually in
arrears.
Effective interest method of amortization
 Is an accounting practice used to discount a bond. This method is used for bonds sold
at a discount or premium; the amount of the bond discount or premium is amortized
to interest expense over the bond’s life.
Bond investment - FVOCI
 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 or trading the financial asset.
b. The contractual cash flows are solely payments of principal and interest on
the principal outstanding.
Fair value option
  PRFS 9, paragraph 4.1.5, provides that an entity at initial recognition may irrevocably
designate a financial asset as measured at fair value through profit or loss even if the
financial asset satisfies the amortized cost or FVOCI measurement.
Market price of bonds
 The market price of bonds is equal to the present value of the principal plus the
present value of future interest payments using the effective rate.
 The present value of an ordinary annuity of 1 us determined for the number of
interest periods using the effective rate.

Reclassification of financial asset

Requirement for reclassification
 PFRS 9, paragraph 4.4.1, provides that an entity shall reclassify financial assets only
when it changes the business model for managing the financial assets. Where
reclassification occurs, paragraph 5.6.1 provides that an entity shall apply the
reclassification prospectively from the reclassification date. The entity shall not restate
any previously recognized gains, losses and interest.
Exemptions from reclassification
a) Equity investment held for trading or measured at FVPL cannot be reclassified by
reason of the consequential requirement of PFRS 9.
All equity investment cannot be classified.
b) Equity investment measured at FVOCI by irrevocable election cannot be reclassified
simply because the election is irrevocable.
c) Only debt investment can be reclassified because the change in business model
applies appropriately to debt investment. However, debt investment measured at
FVPL by irrevocable election cannot be reclassified simply because the election is
irrevocable.
Reclassification from FVPL to amortized cost
 PFRS 9, paragraph 5.6.3, provides the following if a financial asset is reclassified from FVPL
to amortized cost:
a. The fair value at the reclassification date becomes the new carrying
amount of the financial asset at amortized cost.
b. The difference between the new 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 interest rate must be determined based on the new
carrying amount or fair value at reclassification.
Reclassification from amortized cost to FVPL
 PFRS 9, paragraph 5.6.2, provides that when an entity reclassifies a financial asset from
amortized cost to fair value through profit or loss, the fair value is determined at
reclassification date. The difference between the previous carrying amount and fair value is
recognized in profit or loss.
Reclassification from FVOCI to amortized cost
 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.
Reclassification from FVPL to FVOCI
 PFRS 9, paragraph 5.6.6, provides the following if a financial asset is reclassified from FVPL
to FVOCI:
a. The financial asset continued to be measured at fair value.
 b. The fair value at reclassification date becomes the new carrying
amount.
c. A new effective rate must be determined based on the new carrying
amount or fair value at reclassification date.
Reclassification from FVOCI to FVPL
 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.