INVESTMENT

NATURE
-asset held by an entity for the accretion of wealth
through distribution such as interest, royalties,
dividends and rentals for capital appreciation and for
other benefits to the investing entity such as those
obtained through trading relationship
 FINANCIAL ASSETS
• Cash
• An equity instrument of another entity
• A contractual entity
• A contract that will or may be settled in the
entity’s own equity instruments and is
– A non derivative
– A derivative
 FINANCIAL LIABILITY
• A contractual obligation
• A contract that will or may be settled in the
entity’s own equity instruments and is
– A non derivative
– A derivative
 Examples
Financial Asset Financial Liability
• Cash and cash equivalents • Accounts payable
• Accounts receivable • Utilities payable
• Notes receivable • Cash dividends payable
• Investment in equity • Financial lease liability
securities • Bonds payable
• Cash Surrender Value • Security Deposit
 Financial Asset Categories
• Financial Assets @ FVTPL
• Financial Assets @ FVOCI
• Financial Assets @ Amortized Cost
 Overview of categories
FA @ FVTPL FA @ FVOCI FA @ AC
FINANCIAL EQUITY SEC. & EQUITY SEC. & DEBT SEC.
ASSET DEBT SEC. DEBT SEC
DEBT •Held for •Collect •Collect
SECURITIES trading contractual contractual
•Designated cash flows & cash flows
at FVTPL Sell •Solely
•Solely payments of
payments of principal and
principal and interest
interest

Equity Default Irrevocably

Securities category designated
 FA @ FVTPL FA @ FVOCI FA @ AC
Initial FV FV + FV +
Measurement Transaction Transaction
Cost Cost
Subsequent ANY OF THESE
Measurement
FS
Presentation Current Current Current
Assets Assets / Assets /
Non Current Non Current
Assets Assets
 Equity Instrument
• Evidence of residual interest
• Includes (ordinary shares, certain preference
share, warrants)

% OF OWNERSHIP Preference Share Ordinary Share

1-20% FVTPL or FVOCI FVTPL or FVOCI
21-50% FVTPL or FVOCI Investment in
Associate
51-100% FVTPL or FVOCI Investment in
Subsidiary
 Type Purpose Method Applicable
Standards
Financial Asset Dividend/ FV PAS 32
Speculation PFRS 7
PFRS 9

Investment in Significant Equity Method PAS 28

Associate Influence PFRS 7

Investment in Joint Control Equity Method PAS 28

Joint Venture PFRS 11
PFRS 7

Investment in Control a. Separate FS PAS 27

Subsidiary (Cost or FV) PAS 28
b. Consolidated PFRS 10
FS PFRS 7
 ACCOUNTING TREATMENT OF STOCK
SPLIT
CATEGORY ACCOUNTING TREATMENT

Investment in unqouted equity sec. Memorandum entry only

measured @cost

FA@ FVTPL Dr: FVTPL (@FV)

Cr: Unrealized Gain- P&L

Investment in equity sec. @ FVTOCI Dr: FVTOCI @FV

Cr: Unrealized Gain- OCI
 Accounting for Stock Right
- A Stock right or preemptive right
- First right to buy shares in a new offering
Investment in unqouted FA @ FVTPL Investment in equity
sec. @ Cost designated as FVTOCI

Upon receipt of stock Memo Entry Memo Entry @FV

rights Dr: Stock rights
Cr: Unrealized gain- P&L

Upon exercise Dr: Investment in equity Dr: FA@ FVTPL Dr: Investment in equity-
Cr: Cash Cr: Cash FVTOCI
Cr: Cash & Stock rights

When expired Memo Entry Memo Entry Dr: Loss on stock rights
Cr: Stock rights

When Sold Dr: Cash Dr: Cash Dr: Cash/Loss on sale-

Cr: Investment in equity Cr: FA@FVTPL at the net P&L (if any)
at the net amount amount received. (No Cr: Stock rights/ Gain on
received. (No Gain/Loss) Gain/Loss) sale if any

Classification Accounted for at fair value through profit/loss and are considered as derivative and
presented usually as current assets.
 Theoretical Value of rights
a. When the stock is selling right-on:
Value of one right= Market value of stock right-on – subscription price
No. of rights to purchase one share plus 1

b. When the stock is selling ex-right:

Value of one right= Market value of stock ex-right - subscription price
No. of rights to purchase one share

RECLASSIFICATION OF FVTPL & FVTOCI

- only allows reclassification of debt securities.
 SUMMARY OF RECOGNITION IN A REGULAR
WAY PURCHASE AND SALE OF FINANCIAL
ASSETS:
TRADE DATE SETTLEMENT DATE
1. When to recognize the Commitment date Delivery date
financial asset?
2.When to derecognize the Commitment date Delivery date
financial asset?
3. Do changes in fair value
from trade date to
settlement date(for
financial asset measured @
FV) be recognized?
Purchase Yes Yes
Sale Ignore Ignore
DEBT SECURITIES
 FVTPL FVOCI FVOCI FAAC

INSTRUMENT TYPE Debt, Equity, Debt Equity Debt

Derivatives

G/L on P&L OCI, net of tax OCI, net of tax N/A

Remeasurement

Interest Income Nominal Rate Effective Rate N/A Effective Rate

Dividends P&L N/A P&L N/A

Impairment N/A P&L N/A P&L

Forex P&L N/A P&L

Change in FV P&L R.E. P&L

Derecognition N/A P&L R.E. N/A

INVESTMENT IN ASSOCIATE
T-ACCOUNTS FROM THE JOURNAL ENTRIES

Investment in Associate
Beginning bal./ XX Dividends received
Acquisition cost XX
Share in net income of XX Amortization of excess (excluding
Associate XX goodwill)
Share in increase in OCI* XX XX Impairment loss
XX Share in decrease in OCI*
XX Bal. end
Total =
 Net Investment Income
Amortization of excess
Excluding goodwill XX XX Share in the net income of associate
Impairment loss XX
Balance end XX
Total =

Formula:
Acquisition Cost XX
Less: Book Value (or Purchase Price) (XX)
Excess of cost over book value XX
Less: Undervaluation of Assets (XX)
Add: Overvaluation of Assets XX
Goodwill (gain or bargain purchase) XX
Adjustments for Amortization
Assets Recognition of Amortization
Inventory Upon disposal or sale (as cost of sale)
Land Upon disposal or sale
Depreciable assets (e.g. machine & Every year through depreciation
equipment)
Goodwill When there is impairment
Computation of Share in Net Income
Net Income of the associate XX
Less: Preference share dividend (XX)
Net Income to ordinary share XX
Multiply by: Percentage of ownership – Ordinary Shares %

Share in net income of the associate XX

 Downstream Upstream
Transactions From the investor to From an associate to
an associate the investor
Unrealized gain Eliminate in full Eliminate its share
Realized gain Recognized in full Recognize its share
Unrealized loss Eliminate in full, Eliminate in share,
unless it is an unless it is an evidence
evidence of a of a reduction in the
reduction in the net net realized value of
realized value of the the assets to be sold or
assets to be sold or contributed, or of an
contributed, or of an impairment loss of
impairment loss of those assets
those assets
Realized gain Recognized in full Recognized in share
Basic Formula:
Net Income x percentage of ownership XX
Less: Unrealized profit on upstream sale x percentage of ownership (XX)
Add: Realized profit on upstream sale x percentage of ownership XX
Less: Unrealized profit on downstream sale (XX)
Add: Realized profit on downstream sale XX
Share in Net Income XX
DERIVATIVES
 Derivative
• Is simply a financial instrument that derives its value from the
movement in commodity price, foreign exchange rate and interest
rate of an underlying asset or financial instrument.
• Executory contract – not a transaction but an exchange of promises
about future action.

Purpose of derivatives
• To manage financial risk which originates from sources (change in
commodity price, change in cash flows and foreign currency
exposure).
• Derivative financial instruments create rights and obligations that
have the effect of transferring between the parties to the instrument
the financial risks inherent in an underlying primary financial
instrument
Measurement of Derivatives
An entity shall recognize and measure all derivatives as either
assets or liabilities at fair value.

No hedging designation
Changes in fair value of a derivative that is not designated as a
hedging instrument shall be recognized in profit/loss.
In this case, the derivative can be thought of a speculation.
Cash Flow hedge
A cash flow hedge is a derivative that offsets in whole or in part the
variability in cash flows from a probable forecast transaction.

Fair Value hedge

-that offsets in whole or in part the change in fair value of an asset
or a liability.

a. The derivative or hedging instrument is measured at Fair Value.

b. The hedged item is also measured at fair value in contrast with a
cash flow hedge where the hedged item is not adjusted.
c. The changes in fair value are recognized in P/L.
• Forward contract is a commitment to purchase or sell as
specified commodity on a future date at specified price.

• Futures Contract is a contract to purchase or to sell a

specified commodity at some future date at a specified
price. It is a standard contract traded in a futures exchange
market and one party will never know who is on the other
side of the contract.
• Option is a contract that gives the holder the right to
purchase or sell an asset at a specified price during a
definite period at some future time. It is a right and not an
obligation to purchase or sell.

Call Option- on the part of the buyer. It gives the holder the
right to purchase an asset.
Put Option- on the part of the seller. It gives the holder the
right to sell an asset.
• Embedded derivatives is a component of a hybrid or
combined contract with the effect that some of the cash
flow of the combined contract vary in a way similar to a
stand alone derivative.

Examples:
1. Equity conversion option
2. Redemption option
3. An investment in bond whose interest or principal payment
is linked to the price of gold or silver.