Financial Instruments (PFRS 9

and PFRS 32 – FI Presentation)

Prepared by: Jasmin G. Gura, CPA, MBA
Financial Instrument

 PAS 32, paragraph 11, defines a financial instrument as any

contract that gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity

 Components: asset, liability and equity

Characteristics of a financial instrument

A.There must be a contract

B. There are at least two parties to the contract
C.The contract shall give rise to a financial asset of one
party and financial liability or equity instrument of another
party
A. Bank Deposit

Co x(financial asset) Bank (financial liability)

Cash in Bank 100,000 Cash 100,000
Cash on hand 100,000 Deposit Liability 100,000

B. Acquisition of Shares
Co x (financial asset) PLDT (Equity Instrument)
Investment in PLDT Shares 100,000 Cash 100,000
Cash 100,000 Common Stock 100,000

C. Acquisition of Bonds
Co x (financial asset) Meralco (financial liability)
Investment in Bonds 100,000 Cash 100,000
Cash 100,000 Bonds Payable 100,000
Financial Asset

Cash
Equity Instrument of another entity
Contractual right to receive cash or another financial
asset from another entity
Contractual right to exchange financial instrument with
another entity under conditions that are potentially
favorable
Examples of financial assets

 Cash or currency – it represents the medium of exchange and is therefore the basis in
which the all transactions are measured and recognized in financial statements.
 Deposit of cash with a bank of similar financial institutions – 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 a contractual right to receive cash in the future:
a. Trade accounts receivable
b. Notes receivable
c. Loans receivable
d. Bonds receivable
Non-financial Assets

A. Physical assets – inventory and property, plant and equipment

B. Intangible assets – patents, trademark
C.Prepaid Expenses – future economic benefit is the receipt of goods
or services, rather than the right to receive cash of another financial
asset.
D. Right to use asset of leased asset – not a financial asset because
control of the underlying asset does not give rise to a present right
to receive cash of another financial asset.
Financial liability

 Any liability that is contractual obligation:

a. To deliver cash or other financial asset to another entity
b. To exchange financial instruments with another entity under
conditions that are potentially unfavorable
Examples of financial liabilities

A. Trade accounts payable

B. Note payable
C.Loans payable
D. Bonds payable
Nonfinancial liabilities

A. Deferred revenue and warranty obligations are not financial liabilities because the outflow
of economic benefits is the delivery of goods and services rather than a contractual
obligation to pay cash.
B. Income Tax Payable is not a financial liability because it is imposed by law and
noncontractual
C. Constructive obligations are not financial liabilities because the obligations do not arise
from contract.
Equity Instrument

Any contract that evidences a residual interest in an asset of an entity

after deducting all of its liabilities.

minus equal
Asset
Liabilities Equity
Classification of Financial Asset

1. Amortized Cost
2. Fair value through other comprehensive income (FVOCI)
3. Fair value through profit or Loss (FVPL)
The classification depends on business model
for managing financial assets which may be:

 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 flow and
sell the investment
Classification of Financial Asset

1. Amortized Cost – hold to collect, solely payts of principal

and interest
2. FVOCI – hold to collect and sell, solely payts of principal
and interest
3. FVPL – held for trading securities
Classification of Financial Asset

1. Amortized Cost – hold to collect, solely payts of principal

and interest (Debt Securities)
2. FVOCI – hold to collect and sell, solely payts of principal
and interest (Debt and Equity Securities)
3. FVPL – held for trading securities (Debt and Equity
Securities)
 Contractual
Cash Flow Initial Subsequent
Classification Business model Character Test Debt Securities Equity Securities Measurement Measurement  

**effective interest
Hold to collect solely payt for method; interest is
Amortized (not to sell principal and FV +Transaction recorded in
Cost them) interest yes no Cost amortized cost P&L/Income Statement

changes thru other

solely payt for comprehensive
Hold to collect principal and FV +Transaction income; debt equity
FVOCI and sell interest yes yes Cost MTM or FV subject to amortization

changes thru P&L; debt

Held for trading equity not subject to
FVPL (sell) not defined yes yes FV MTM or FV amortization

(Transaction
Cost - expenses
          outright)    
Exceptions: Once choose these options;
irrevocable

1. Equity security (not on trading) – by default FVPL

- by election FVOCI; the effect during sale of the security
- any gain or loss will be charged to Retained Earnings and
not in P and L / Income Statement (no recycling)
2. Financial assets qualifies amortized cost or FVOCI – entity has an option to measure it as
FVPL (by designation, or FV Option)
- if there is an accounting mismatch
Debt Security

 A debt security is any security that represents a creditor relationship with an entity.
 A debt security has a maturity value and a maturity date.
Examples:
a. Corporate Bonds
b. BSP Treasury Bonds
c. Government securities
d. Commercial papers
e. Preference shares with mandatory redemption date or are redeemable at the option of
the holder
Equity Security

 The term “equity security” encompasses any instrument representing ownership shares and
right, warrants and options to acquire or dispose of ownership shares at a fixed or
determinable price.
 Equity securities represent an ownership interest in an entity
 The owners of equity securities are legally known as shareholders.
 A share is the ownership interest or right of a shareholder in an entity. The share is an
evidence by an instrument called share certificate
Initial Measurement

 PRFS 9, 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.
 In other words, a financial asset is recognized initially at fair value.
 As a rule, transaction costs that are directly attributable to the acquisition of the financial
asset shall be capitalized as cost of the financial asset.
 However, if the financial asset is held for trading or if the financial asset is measured at fair
value through profit or loss, transaction costs are expensed outright.
Fair Value

Fair Value of an asset is the price that would be received to sell an 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 in which the transactions take place with sufficient regularity and volume to
provide pricing information on an ongoing basis.
Simply stated, fair value is the price agreed upon by a buyer and a seller in an arm’s length or
orderly transaction.
Quoted Price

Most often, the fair value of securities is the quoted price in the securities market, for example,
the Philippine Stock Exchange.
If the quoted price pertains to a share or equity security, it means pesos per share.
Example: If the investments in 10,000 shares of an entity costing P800,000 is quoted at 90, the
market value thereof is P900,000, computed by multiplying 10,000 shares by P90 per share.
Quoted Price

If the quoted price pertains to bond or debt security, it means percent of the face amount of
the bond.
Example: If the investment in bond with face amount of P2,000,000 costing P1,700,000 is
quoted at 90, the market value is P1,800,000 computed by multiplying the face amount of
P2,000,000 by 90%.