Financial

Financial Assets,
Assets, Financial
Financial
Liabilities
Liabilities &
& Equity
Equity
(ToA.1024B)
(ToA.1024B)

R.
R. M.
M. Valdez/
Valdez/
R.
R. C.
C. Gloria
Gloria
Relevant
Relevant Standards
Standards
Financial Instruments Standards
• PAS 32 – Presentation
• PAS 39 – Recognition and
Measurement
• PFRS 7 – Disclosures

Other Standards
• PAS 1 – Presentation of FS
• PAS 7 – Statement of Cash Flows
Investment
Investment in
in
Associate
Associate
Key
Key Definitions
Definitions
An associate is an entity, including an
unincorporated entity such as a
partnership, over which the
investor has significant influence
and that is neither a subsidiary nor
an interest in a joint venture.

Significant influence is the power to

participate in the financial and
operating policy decisions of the
investee but is not control or joint
control over those policies.
Identification
Identification of
of Associates
Associates
The existence of significant influence by an
investor is usually evidenced in one or
more of the following ways:
• representation on the board of directors
or equivalent governing body of the
investee;
• participation in the policy-making
process;
• material transactions between the
investor and the investee;
• interchange of managerial personnel; or
• provision of essential technical
information.
Currently
Currently Exercisable
Exercisable
Potential
Potential Voting
Voting Rights
Rights
• Considered in determining
existence of significant influence.

• Ignored in determining share of P/L

and of changes in equity of
associate.
Equity
Equity Method
Method
• Investment is initially recognized at
cost

• Adjusted thereafter for the post

acquisition change in the investor’s
share of net assets of the investee

• The profit or loss of the investor

includes the investor's share of the
profit or loss of the investee
Equity
Equity Method
Method
• Distributions received from the
investee reduce the carrying
amount of the investment.
• Adjustments to the carrying amount
may also be necessary for changes
in the investor’s proportionate
interest in the investee arising from
changes in the investee’s other
comprehensive income.
• The investor’s share of those
changes is recognized in OCI and
accumulated in equity of the
investor.
Computation
Computation of
of CA
CA of
of
Investment
Investment inin Associate
Associate
Cost P xx
Share of Profit of Ass. (SOPA) xx
Share of Loss of Ass. (SOLA) ( xx)
Share of OCI – Income xx
Share of OCI – Expense ( xx)
Distributions (Dividends) ( xx)
Carrying amount P xx
Associate’s
Associate’s cumulative
cumulative
preference
preference shares
shares
If an associate has outstanding
cumulative preference shares that are
held by parties other than the investor
and classified as equity, the investor
computes its share of profits or losses
after adjusting for the dividends on
such shares, whether or not the
dividends have been declared.
Implicit
Implicit Goodwill
Goodwill and
and Fair
Fair
Value
Value Adjustments
Adjustments
Implicit
Implicit Goodwill
Goodwill and
and Fair
Fair
Value
Value Adjustments
Adjustments
On acquisition of the investment any
difference between the cost of the
investment and the investor’s share
of the net fair value of the
associate’s identifiable assets,
liabilities and contingent liabilities
is accounted for in accordance with
PFRS 3 Business Combinations.
Implicit
Implicit Goodwill
Goodwill and
and Fair
Fair
Value
Value Adjustments
Adjustments
Illustration

Purchase price P100

Therefore:
FV of net assets acquired ( 120)
(a) goodwill relating to an associate is
Goodwill
included in the carrying (P 20)
amount of
the investment.
(b) negative goodwill is excluded from
the carrying amount of the
Illustration
investment and is instead included
as income
Purchase price in the determination
P100 of
the
FV of netinvestor’s share of the
assets acquired ( 80)
associate’s profit or loss in the
Goodwill P 20
period in which the investment is
acquired.
Transactions
Transactions with
with Associates
Associates
PAS 28, par. 22 - Unrealized profits and
losses resulting from upstream
(associate to investor) and
downstream (investor to associate)
transactions should be eliminated to
the extent of the investor's interest in
the associate. The investor's share in
the associate's profits and losses
resulting from these transactions is
eliminated.
Losses
Losses in
in Excess
Excess of
of
Investment
Investment
• If an investor's share of losses of an
associate equals or exceeds its
"interest in the associate", the
investor discontinues recognizing its
share of further losses.

• The "interest in an associate" is:

- the CA of the investment and
- any long-term interests that, in
substance, form part of the
investor's net investment in the
associate
Losses
Losses in
in Excess
Excess of
of
Investment
Investment
• After the investor's interest is reduced to
zero, additional losses are recognized by a
provision (liability) only to the extent that
the investor has incurred legal or
constructive obligations or made
payments on behalf of the associate

• If the associate subsequently reports

profits, the investor resumes recognizing
its share of those profits only after its
share of the profits equals the share of
losses not recognized.
Discontinuing
Discontinuing Equity
Equity Method
Method
• An investor shall discontinue the use
of the equity method from the date
that it ceases to have significant
influence over an associate
• Account for the investment in
accordance with PAS 39 from that
date, provided the associate does not
become a subsidiary or a joint venture
• The fair value of the investment at the
date that it ceases to be an associate
shall be regarded as its fair value on
initial measurement as a financial
asset in accordance with PAS 39.
Discontinuing
Discontinuing Equity
Equity Method
Method
• On the loss of significant influence, the
investor shall measure at fair value any
investment the investor retains in the
former associate.

• The investor shall recognize in profit or

loss any difference between:
– the fair value of any retained
investment and any proceeds from
disposing of the part interest in the
associate; and
– the carrying amount of the investment
at the date when significant influence is
lost.
Investing
Investing in
in Stages
Stages
• In a business combination achieved in
stages, the acquirer shall remeasure its
previously held equity interest in the
acquiree at its acquisition-date fair value
and recognize the resulting gain or loss, if
any, in profit or loss.
• In prior reporting periods, the acquirer
may have recognized changes in the value
of its equity interest in the acquiree in
other comprehensive income (OCI).
• If so, the amount that was recognized in
OCI shall be recognized on the same basis
as would be required if the acquirer had
disposed directly of the previously held
equity interest.
Investments
Investments in
in Debt
Debt and
and
Equity
Equity
Classification of
financial assets
• Financial assets at fair value
through profit or loss
(FA@FVTPL)
1) Held for trading
2) Designated
• Available-for-sale (AFS)
• Held-to-maturity (HTM)
• Loans and receivables (L&R)
Financial Assets
Classification Summary
Type of
Category Derivative? Instrument Quoted?
FA @ YES or NO Debt or YES or NO
FVTPL equity
AFS NO Debt or YES or NO
equity
HTM NO Debt YES

L&R NO Debt NO
Financial Assets
Measurement Summary
Category Initial Sub- Change in
sequent FV

FA @ FVTPL FV FV P/L

AFS FV + TC FV/Cost/AC OCI

(Equity)
HTM FV + TC AC Ignore

L&R FV + TC AC Ignore
Reclassifications Summary
Transfer Permitted? FV - CA

Into and out of Generally, n/a

FA @ FV TPL NO
Into and out of L&R Generally, n/a
NO
HTM to AFS YES, OCI
sometimes (Equity)
required
AFS to HTM YES, but rare OCI
(Equity)
Reclassification
Reclassification of
of financial
financial
assets
assets (Amendments
(Amendments to to PAS
PAS 39)
39)
• The amendments to PAS 39 permit an entity to:
a) reclassify non-derivative financial assets (other
than those designated at FVTPL by the entity upon
initial recognition) OUT OF the fair value through
profit or loss category if the financial asset is no
longer held for the purpose of selling it in the near
term in particular circumstances.
b) transfer FROM the AFS category TO the L & R
category a financial asset that would have met the
definition of loans and receivables (if the financial
asset had not been designated as AFS), if the
entity has the intention and ability to hold that
financial asset for the foreseeable future.
Computation of Gain or
Loss on Derecognition
Consideration received
or receivable xx
Less: Carrying amount xx
Unrealized loss-equity xx
Unrealized gain-equity (xx) xx
Gain (loss) xx(xx)
Tainting
Tainting Provision
Provision
An entity shall not classify any
financial assets as held to
maturity if the entity has,
during the current financial
year or during the two
preceding financial years, sold
or reclassified more than an
insignificant amount of held-to-
maturity investments before
maturity (more than
insignificant in relation to the
total amount of held-to-
maturity investments).
Tainting
Tainting Provision
Provision -- Exceptions
Exceptions
Sales or reclassifications that:
• are so close to maturity or the financial
asset’s call date (for example, less than
three months before maturity) that
changes in the market rate of interest
would not have a significant effect on the
financial asset’s fair value;
• occur after the entity has collected
substantially all of the financial asset’s
original principal through scheduled
payments or prepayments; or
• are attributable to an isolated event that
is beyond the entity’s control, is non-
recurring and could not have been
reasonably anticipated by the entity.
What
What is
is an
an equity
equity instrument?
instrument?
Equity instrument is any contract that
evidences a residual interest in the
assets of an entity after deducting all
of its liabilities.
Examples:
• Ordinary shares
• Certain preference shares
• Warrants or written call options

An investment in equity security is a

financial asset since it is an equity
instrument of another entity.
Investments
Investments in
in
equity
equity securities
securities
Investments in equity securities are actually
investments in shares of other
companies.

Why invest in other companies’ shares?

• Regular dividend income
• Speculation/trading
• Influence
• Control
• Joint control
Accounting for Investments
in Ordinary Shares Summary
Purpose Method Investment Standard

Dividend/ Fair value/ Financial PAS 39

Speculation Cost asset PAS 32
(No S.I./Control) PFRS 7
(<20%)
Influence Equity Investment PAS 28
(20% - 50%) in Associate

Control Consolidation Investment PAS 27

(>50%) in
Subsidiary
Joint control Proportionate Interest in PAS 31
(agreed) Consolidation Joint
/Equity Venture
NEXT
NEXT TOPICS:
TOPICS:

FINANCIAL LIABILITY
SHAREHOLDERS’ EQUITY
Classification of Financial
Liabilities
PAS 39 recognizes two classes of
financial liabilities:
- Financial liabilities at fair value
through profit or loss (FL@FVTPL)
- Other financial liabilities
measured at amortized cost
using the effective interest
method
Financial liabilities at fair
value through profit or loss
Held for trading - financial liability that is:
• incurred principally for the purpose of
repurchasing it in the near term
• part of a portfolio of identified financial
instruments that are managed together
and for which there is evidence of a
recent actual pattern of short-term
profit-taking; or
• a derivative (except those designated
and effective hedging instruments)
Financial liabilities at fair
value through profit or loss
Designated. A financial liability that is
designated by the entity as a liability at
fair value through profit or loss upon
initial recognition.

Normally, it qualifies for designation as

FL@FVPL if:

1. It reduces accounting mismatch; and

2. The investment portfolio is
monitored/evaluated at fair value.
Financial liabilities
measured at amortized
cost
Default category for financial
liabilities that do not meet the
definition of FL@FVTPL

Examples are accounts payable,

notes payable, issued debt
instruments and deposits from
customers.
Equity
Equity
Equity
Equity Instrument
Instrument
• Any contract that evidences a
residual interest in the assets of an
entity after deducting all of its
liabilities.
Equity
Equity Instrument
Instrument
A financial instrument is an equity instrument
only if (a) the instrument includes no
contractual obligation to deliver cash or
another financial asset to another entity
and (b) if the instrument will or may be
settled in the issuer's own equity
instruments, it is either:
• a non-derivative that includes no
contractual obligation for the issuer to
deliver a variable number of its own equity
instruments; or
• a derivative that will be settled only by the
issuer exchanging a fixed amount of cash
or another financial asset for a fixed
number of its own equity instruments.
Transactions
Transactions Affecting
Affecting RE
RE
• Profit or loss
• Dividends
• Appropriation
• Prior period errors
• Accounting policy changes
• Others
- Realization of RS
- Quasi-reorganization
- Loss on re-issuance of TS
- Loss on retirement of shares