(Intermediate Accounting 1A)

LECTURE AID

2018

WEDDIE MAE S. VILLARIZA, CPA

Chapter 9 INVESTMENTS

Learning Objectives

• Identify financial assets and financial

liabilities.
• State the classifications of financial
assets and their initial and subsequent
measurements.
• Explain how fair value is measured.
• Account for investments in equity
securities.
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Financial instruments

• Financial instrument is “any contract that gives rise to

a financial asset of one entity and a financial liability or
equity instrument of another entity.” (PAS 32)
• Financial instruments include both financial assets and
financial liabilities.
• Financial instruments include equity instruments of
another entity but exclude an entity’s own equity
instruments. An entity’s own equity instruments are
neither assets nor liabilities, but rather equity.
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Financial assets

A financial asset is any asset that is:

a. Cash;
b. Equity instrument of another entity;
c. Contractual right to receive cash or another financial
asset or to exchange financial assets or financial
liabilities with another entity under conditions that are
potentially favorable to the entity

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Financial liabilities

A financial liability is any liability that is:

a. a contractual obligation to deliver cash or another
financial asset to another entity; or
b. a contractual obligation to exchange financial assets
or financial liabilities with another entity under
conditions that are potentially unfavorable to the
entity.

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Initial recognition and Classification
• Financial assets are recognized only when the entity
becomes a party to the contractual provisions of the
instrument.

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Basis of classification

1. The entity’s business model for managing the financial assets;

and
2. The contractual cash flow characteristics of the financial asset.

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Equity vs. Debt instruments

• Only debt instruments can be classified under the

Amortized Cost or FVOCI (mandatory) measurement
categories.
• Equity instruments are measured at FVPL, unless the entity
makes an irrevocable election on initial recognition to
measure them at FVOCI.
• A debt instrument that is not measured at amortized cost or
at FVOCI is measured at FVPL.

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Business models

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Business models

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Business models

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Business models

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Fair Value Measurement
• Fair value is “the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.” (PFRS 13)
• Fair value is based on the market price of the asset in a:
a. principal market; or
b. the most advantageous market (in the absence of a principal
market)
• The market price used in measuring fair value is not adjusted for
any transaction costs, but is adjusted for any transport costs.

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 Fair value hierarchy
Level 1 Observable inputs that reflect quoted  
prices for identical assets or liabilities in Most reliable
active markets.  
 
 
Level 2 Inputs other than quoted prices included  
in Level 1 that are observable for the  
asset or liability either directly or through  
corroboration with observable data.
 

 
Least reliable
Level 3 Unobservable inputs (for example, an
entity’s own data or assumptions).
 

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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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