SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 14
Subject:

INTERMEDIATE ACCOUNTING 1 (AE15-IA1)

AISAT COLLEGE – DASMARIÑAS, INC.

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INFORMATION SHEET PR-14.1.1

 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |2

“FINANCIAL ASSET AT FAIR VALUE”

Definition of investments

The International Accounting Standards Board defines investments as follows:

Investments are 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.

Actually, investments are assets 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
Investments are held for diverse reasons such as:

a. For accretion of wealth or regular income through interest, dividends, royalties and rentals.

b. For capital appreciation as in the case of investments in land and real estate held for appreciation and
direct investments in gold, diamonds and other precious commodities.

c. For ownership control as in the case of investments in subsidiaries and associates.

d. For meeting business requirements as in the case of sinking fund, preference share redemption fund,
plant expansion fund and other noncurrent fund.

e. For protection as in the case of interest in life insurance contract in the form of cash surrender value.

Examples of investments
Specifically, investments include the following:
1. Trading securities or financial asset at fair value through profit or loss.
2. Financial asset at fair value through other comprehensive income.
3. Investment in nontrading equity securities
4. Investment in bonds or financial asset at amortized cost
5. Investment in associate
6. Investment in subsidiary
7. Investment in property
8. Investment on fund
9. Investment in joint venture

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |3

Definition of financial asset

A financial asset is any asset that is:

a. Cash
b. A contractual right to receive cash or another financial asset from another entity.
c. A contractual right to exchange financial instrument with another entity under conditions that
are potentially favorable.
d. An entity instrument of another entity.

Examples of financial assets

Cash or currency is a financial asset because the medium of exchange and is therefore the basis on
which all transactions are measured and recognized in financial statements.

A deposit of cash with a bank or similar financial institution is a financial asset because 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 lability.

But a gold bullion deposited in bank is not a financial asset because although it is very precious the gold
is a commodity.

Not considered financial assets

Intangible assets are not financial assets.

Physical assets, such as inventory and property, plant and equipment are not also financial assets.

Control of such physical and intangible assets creates an opportunity to generate an inflow of cash or
another financial asset, but it does not give rise to a present right to receive cash or another financial
asset.

Prepaid expenses for which the future economic benefit is the receipt of goods or services rather than
the right to receive cash or another financial asset are not also financial assets.

Leased assets are not also financial assets because control of such assets does not give rise to a present
right to receive cash or another financial asset.

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |4

Classification of financial assets

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

1. Financial assets at fair value through profit or loss — include both equity securities and debt
securities.

2. Financial assets at fair value through other comprehensive income — include both equity securities
and debt securities.

3. 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.
c. To hold investments in order to collect contractual cash flows and sell an investment.

What is an equity security?

The term “equity security” encompasses any instrument representing ownership shares and right,
warrants or options to acquire or dispose of ownership shares at a fixed or determinable price.

In simple language, equity securities represent an ownership interest in an entity.

What is a debt security?

A debt security is any security that represents a creditor relationship with an entity.

A debt security has a maturity date and a maturity value.

Examples of debt securities include the following:

a. Corporate bonds
b. BSP treasury bills
c. Government securities
d. Commercial papers

e. Preference shares with mandatory redemption date or are redeemable at the option of the
holder.

Initial measurement of financial asset

SUBJECT TEACHER: APPROVED FOR
14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |5

PFRS, paragraph 5.1.1, provides that at initial recognition, an entity shall measure a financial asset at fair
value plus, in the case of financial asset not at fair value through profit or loss, transaction costs that
are directly attributable to the acquisition of the financial asset.

Subsequent measurement
PFRS, paragraph 5.2.1, provides that after initial recognition, an entity shall measure a financial asset at:
a. Fair value through profit or loss (FVPL)
b. Fair value through other comprehensive income (FVOCI)
c. Amortized cost

Financial assets at fair value through profit or loss

The following financial assets shall be measured at “fair value” through profit or loss”:

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 or fair value through other comprehensive income measurement.

This irrevocable designation is the fair value option allowed in accordance with Paragraph 4.1.5
of PFRS 9.

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |6

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.

Financial asset held for trading

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

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.

In other words, trading securities are debt and equity securities that are purchased with the
intent of selling them in the "near term" or very soon.

Trading securities are normally classified as current assets.

Equity investment at fair value through OCI

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

This irrevocable approach is designed 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.

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |7

If the investment in equity instrument is “held for trading”, the election to present gain and loss
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.

Debt investment at amortized cost

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 of 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 at amortized cost.

Debt investment at fair value through OCI

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 gain and loss recognized in other comprehensive income shall
be reclassified to profit or loss:

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |8

Fair value

Appendix A of PFRS 9 in conjunction with PFRS 13 provides a new definition of fair value.

Fair value of an asset is the price that would be received to sell asset in an orderly transaction
between market participants at the measurement date.

The best evidence of fair value in descending hierarchy is the quoted price of identical asset in
an active market, the quoted price of similar asset in an active market and the quoted price of
identical and similar asset in an inactive market.

An active market is a market in which transactions take place with sufficient regularity and
volume to provide pricing information or an ongoing basis.

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |9

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 10

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 11

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 12

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 13

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module “FINANCIAL ASSET AT FAIR VALUE”
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 14

References:

Intermediate Accounting – 2020 Edition Volume 1

Author: Conrado T. Valix; Jose F. Peralta; Christian Aris M. Valix

SUBJECT TEACHER: APPROVED FOR

14th IMPLEMENTATION:
MODUL
FINAL MS. MARY JOY F. LABAJO
E 14 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director