(Intermediate Accounting 1A)

LECTURE AID

2019

ZEUS VERNON B. MILLAN

Chapter 10 INVESTMENTS IN DEBT
SECURITIES
Learning Objectives

• Account for financial assets measured at amortized cost.

• Explain the accounting for discounts and premiums.
• Account for financial assets measured at FVOCI (mandatory).

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Bonds

• Bonds are long-term debt instruments similar to term

loans except that they are usually offered to the public
and sold to many investors.
• Bond indenture is the contractual arrangement between
the issuer and the bondholders. It contains restrictive
covenants intended to prevent the issuer from taking
actions contrary to the interests of the bondholders. A
trustee, often a bank, is appointed to ensure compliance.

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 Types of bonds
• Term bonds – bonds that mature on a single date.
• Serial bonds – bonds that mature in a series of maturity dates.
• Registered bonds – bonds issued in the name of the holder (owner).
Interest payments are sent directly to the holder.
• Coupon (bearer) bonds – bonds that can be freely transferred and have
a detachable coupon for each interest payment.
• Zero-coupon bonds (strip bonds) – bonds that do not pay periodic
interests. Principal and compounded interest are due only at maturity date.
• Callable bonds – bonds containing call provisions giving the issuer
thereof the right to redeem the bonds prior to their maturity date.
• Convertible bonds – bonds giving the holder thereof the option of
exchanging the bonds for shares of stocks of the issuer.
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 Accounting for investments measured at amortized cost

• The accounting for investments in bonds that are measured

at amortized cost is similar to the accounting for notes and
loans receivables, in the sense that it also involves the
following:
a. Present value computations
b. Preparation of amortization table (Effective interest
method)

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Discount vs. Premium
• If the carrying amount is less than the face amount, the
difference represents a discount.
• If the carrying amount is more than the face amount,
the difference represents a premium.
• If there is a discount, the EIR is higher than the NIR.
• If there is a premium, the EIR is lower than the NIR.
• Discount or premium is amortized using the effective
interest method.

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Effect of discount amortization
You have acquired a bond with face amount of ₱5,000 for ₱4,000.
 Would this be favorable or an unfavorable on your part?
 Favorable. Why? --- You will be collecting ₱5,000 (excldg. interest)
while your cash outflow is only ₱4,000.
 On acquisition date, it seems you have earned a “gain” of ₱1,000 right?
 Yes; however, the PFRSs prohibit you from recognizing this “gain”
outright. You need to amortize it over the term of the bond.
 The “gain” represents the discount (Carrying amt. less than Face amt.).
 The effect of the amortization is an increase in interest income.
 Over the term of the bonds, total interest income will be greater than
total collections of interests by ₱1,000.

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Transaction costs

• Transaction costs incurred in the acquisition of bonds to be

measured at amortized cost are included as part of the cost of the
investment.

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Sale of bonds prior to maturity

• When bonds are sold prior to maturity, the difference between the
net disposal proceeds and the carrying amount of the bonds,
adjusted for any discount or premium amortization up to date of
disposal, is recognized as gain or loss in profit or loss.

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Serial bonds

• Serial bonds are bonds with series of maturity dates. Serial bonds
are accounted for similar to term bonds. However, the periodic
collections on serial bonds include not only collections for
interests but also collections for principal.

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Zero-coupon bonds

• Zero-coupon bonds are bonds that do not pay periodic interests.

Both principal and interest are due only at maturity date.

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Financial assets measured at FVOCI (mandatory)

• Initial measurement: Fair value + Transaction costs.

• Subsequent measurement: Fair value
o Changes in fair value are recognized in OCI.
o Impairment losses and gains are recognized in profit or loss.
o Interest revenue is computed using the effective interest method and is
recognized in profit or loss.
• Derecognition: When the asset is derecognized, the cumulative balance of
gains and losses in equity are transferred to profit or loss as a
reclassification adjustment.
• The amounts recognized in profit or loss for a debt instrument measured at
FVOCI are the same as the amounts that would have been recognized in
profit or loss if the debt instrument had been measured at amortized cost.

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 APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM DISCUSSION

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 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

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 END
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