PAS 32 Financial Instruments : Presentation

EXAMPLES OF FINANCIAL INSTRUMENTS

1. Currency (Cash)

a. Cash in Bank
- financial asset of the depositor and financial
liability of the depository bank.
b. Cash in the form of notes and coins
- financial asset of the holder or bearer and a
financial liability of the issuing government
 PAS 32 Financial Instruments : Presentation

EXAMPLES OF FINANCIAL INSTRUMENTS

Financial Asset Financial Liability

2. Accounts Receivable Accounts Payable

3. Notes Receivable Notes Payable

4. Loans Receivable Loans Payable

5. Bonds Receivable Bonds Payable

 Illustrative Example: Initial Recognition
(Financial Assets)
PROBLEM:
ENTITY acquired equity securities worth P
1,000,000 face amount, dated January 1, 2022.
Transaction cost directly attributable to the
acquisition was P 5,000.

REQUIRED: Record the transaction above assuming:

1. The entity classifies these securities as trading
2. The entity classifies these securities as available for sale.
 Illustrative Example: Initial Recognition
(Financial Assets)
SOLUTION:

1. Dr. Financial Assets Held for Trading P 1,000,000

Dr. Fees and Commission Expenses 5,000
Cr. Cash - LCCA P 1,005,000
To record acquisition of trading securities.

2. Dr. Available for Sale P 1,005,000

Cr. Cash - LCCA P 1,005,000
To record acquisition of available for sale securities.
Illustrative Example: Effective Interest Method
(Financial Asset)

PROBLEM:
ENTITY acquired P 1,000,000 face amount
bonds, dated January 1, 2020. The bonds
mature in 3 years and bear 12% interest
payable annually every December 31. The
bonds were acquired for P 1,049,740, a price
which will yield an effective interest of 10%.

REQUIRED:
Prepare the amortization table for the bonds and the necessary
journal entries.
SOLUTION:

Term of the bond 3 years

Bond Principal P 1,000,000
Bond Carrying Amount (1/1/2020) P 1,049,740
Nominal Interest Rate 12%
Effective Interest Rate 10%

Bond Principal P 1,000,000

Bond Carrying Amount (1/1/2016) P 1,049,740
UNAMORTIZED BOND PREMIUM P 49,740

There is a bond premium to be amortized because the effective

rate is lower than the nominal rate.
 AMORTIZATION TABLE
Date Interest Interest Income Premium Carrying
Received Amortization Amount
January 1, 2020
1,049,740
December 31, 2020
120,000 104,974 15,026 1,034,714

December 31, 2021

120,000 103,471 16,529 1,018,185

December 31, 2022

120,000 101,815 18,185 1,000,000

Interest Received = Principal x Nominal rate (12%)

Interest Income = Carrying Amount x Effective rate (10%)
Illustrative Journal Entries

The following are the necessary journal entries

to recognize the bond investment.
JANUARY 1, 2020
Account Title DEBIT CREDIT

Investment in Bonds - Local 1,000,000

Premium on Investments in Bonds 49,470

Cash in Bank 1,049,740

To record the acquisition of bond investment.

Illustrative Journal Entries

December 31, 2020

Account Title DEBIT CREDIT

Cash in Bank 120,000

Interest Income 120,000

To record the receipt of the interest for 2020.
Illustrative Journal Entries

December 31, 2020

Account Title DEBIT CREDIT

Interest Income 15,026

Premium on Investments in Bonds 15,026

To record the amortization of the bond premium for 2020.

Illustrative Journal Entries

December 31, 2022

Account Title DEBIT CREDIT

Cash in Bank 1,000,000

Investments in Bonds - Local 1,000,000

To record the redemption of the bond at the end of the bond term.
 Subsequent Measurement

Financial Instruments
Profit or Loss Available for Sale Held to Maturity Loans and Receivables

Subsequent Fair Value Fair Value Amortized Cost Amortized Cost

Measurement less impaiment loss less impaiment loss

Changes in Profit or Loss Other Comprehensive N/A N/A

Fair Value Income
Illustrative Example: Subsequent Measurement
(Financial Assets)
PROBLEM:
ENTITY acquired equity securities worth P
1,000,000 face amount, dated January 1, 2022.
At year-end, the market value of these
securities amounts to P 1,050,000.

REQUIRED: Record the transaction at year-end above assuming:

1. The entity classifies these securities as trading
2. The entity classifies these securities as available for sale.
Illustrative Example: Subsequent Measurement
(Financial Assets)
SOLUTION:

1. Dr. Financial Assets Held for Trading P 50,000

Cr. Gain from Changes in Fair Value of Financial Instruments P 50,000
To adjust the value of trading securities at year end.

2. Dr. Available for Sale P 50,000

Cr. Cumulative Changes in Fair Value P 50,000
To adjust the value of available for sale securities at year end.
PAS 39 Financial Instruments : Recognition
and Measurement
Hedge Accounting

Recognizes the offsetting effects on

surplus or deficit of changes in the fair
values of the hedging instrument and
the hedged item.
 PAS 39 Financial Instruments : Recognition and
Measurement

HEDGING
HEDGED ITEM
INSTRUMENT

Whenever the
Is an asset, liability,
The hedging
Is a designated financial
hedged item
commitment, highly probable
instrument whose fair value or
transaction, or investment in a instrument
related cash flows should offset
changes
foreign operation its fair
that exposes
changes in the fair value or cash
an entity to changes in fair value SHOULD offset
flows of a designated hedged
value
or cash oriscash
flows, and designated
as being hedged. the change.item.
flows,
PAS 39 Financial Instruments : Recognition
and Measurement
DERIVATIVES

▪ Its value changes in response to a

change in a specified “underlying” item
▪ It requires little or no initial net
investment
▪ It is settled at a future date
PAS 39 Financial Instruments : Recognition
and Measurement
Hedge Effectiveness
-Is the degree to which the changes in the fair
value or cash flows of the hedged item that are
attributable to a hedged risk are offset by
changes in fair value or cash flows of the
hedging instrument.

PERFECT if the hedge eliminates the risk of

subsequent movement of price.
PAS 39 Financial Instruments : Recognition
and Measurement
Options
-gives the owner the right but not the
obligation, to buy or sell an asset at a specified
price any time during a specified period in the
future.
PAS 39 Financial Instruments : Recognition
and Measurement
Swaps
-a contract where two parties agree to
exchange payments in the future based on the
movement of some agreed-upon price or rate.

Example: Interest rate swap - two parties

agree to exchange future interest payments on
a given loan amount.
PAS 39 Financial Instruments : Recognition
and Measurement
Forwards
-an agreement between two parties to
exchange a specified amount of a commodity,
security, or foreign exchange at a specified
date in the future with the price or exchange
rate being set now.
PAS 39 Financial Instruments : Recognition
and Measurement
Futures
-a contract traded on an exchange, that allows
a company to buy or sell a specified quantity of
a commodity or a financial security at a
specified price on a specified future date.
 PAS 39 Financial Instruments : Recognition
and Measurement

Source : IFRS Box