Dominican College of Tarlac

College of Business and Accountancy

Junior Philippine Institute of Accountants

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TITLE
Reference: Intermediate Accounting
INVESTMENT
Held for the following purposes:
• To earn profit

• To secure certain operating or financing arrangements or beneficial relationship with

another entity

• To meet business requirement

• To serve as protection for possible future loss

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FINANCIAL INSTRUMENTS

• Is any contract that give rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
• Provides an efficient flow and transfer of capital through the investors.

• Is a real or virtual document representing a legal agreement involving any

kind of monetary value.

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Financial Asset

• Cash
• Equity Instrument (Another Entity)
• Contractual right to receive asset
• Contractual right to exchange financial instruments (favorable)
• Contract settled in an entity’s own equity instruments not classified as entity’s own equity instruments

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Financial Liability

• Obligation to deliver cash

• Contractual right to exchange financial instruments (unfavorable)
• Contract settled in an entity’s own equity instruments not classified as
entity’s own equity instruments

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EQUITY INSTRUMENTS

Is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Assets – Liabilities = Equity
EXAMPLES
• Cash and Cash Equivalents
• Receivables
• Investments in equity or debt instruments of other entities
• Sinking Fund Note: Equity instruments of own entity is not classified as financial ASSET but as EQUITY of that entity.

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DEBT INSTRUMENTS

• Is any contract that represents a right upon the holder to receive cash
from the issuer thereof or an obligation upon the issuer to pay cash to the
holder thereof
DEBT SECURITY
• Is a debt instrument that is considered as
an investment on the part of the purchaser
(e.g. investment in bonds)

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EXAMPLES OF FINANCIAL LIABILITIES

• Payables
• Lease liabilities
• Held for trading liabilities and derivative liabilities
• Redeemable preference shares issued
• Security deposit and other returnable deposits
Note: Redeemable preference shares = the issuer is obliged to deliver cash to the
investor on redemption date
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CLASSIFICATION OF FINANCIAL ASSETS

1.Amortized cost
2.Fair Value through Other Comprehensive Income (OCI)
3. Fair Value through profit or loss (FVPL)

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BASIS OF CLASSIFICATION

1. Business Model
2. Contractual Cash Flows

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1. Business Model

• Refers to how an entity manages its financial assets in order to

generate cash flows.
• Hold to collect
• Hold to collect and sell (@ fair value)
• Not an instrument-by-instrument assertion but rather a
management intention.

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Hold To Collect
• Realize cash by collecting payments over the life of the instrument. • Frequency, value and timing of sales in prior
• Reasons for sales
• Expectations about future sales activity

Hold To Collect and Sell

• Applicable when both collecting contractual cash flows and selling financial assets are integral to achieving the
of holding financial assets.
• Greater frequency and value of sales.
• Manage liquidity needs • Manage interest yield profile • Match duration of financial assets to the duration of t
those assets are funding

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2. Contractual Cash Flows

• Solely for payment of principal and interest

payments.

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CLASSIFICATION OF FINANCIAL ASSETS
1. Amortized Cost
• Hold financial assets in order to collect contractual cash flows
• Solely for payments of principal and interest payments
2. . Fair Value through Other Comprehensive Income (OCI)
• Both collecting contractual cash flows and selling financial assets
• Hold to collect and sell
• Payments of principal and interest
3. Fair Value through profit or loss (FVPL)
• Does not meet either the conditions for amortized cost and FV OCI.
• Held for trading
• Acquired for the purpose of selling it in the near term
• Part of a portfolio of financial instruments for which there is evidence of short term profit taking
• A derivative AE-15
Exceptions:

• Investments in equity securities at FVOCI

• The entity may make an irrevocable election at initial recognition to classify an investment in
equity securities as FV OCI.
• Option to designate a financial asset at FVPL
• Irrevocable designation at FVPL if doing so eliminates or reduces a measurement
inconsistency (accounting mismatch) when assets and liabilities or gains and losses are
measured on different bases.
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THINGS TO REMEMBER:

1.Only debt instruments can be classified as amortized cost or FVOCI (mandatory)

2. Equity instruments are classified as FV PL, except when the entity elects FV OCI (election)
3. Debt instruments not classified as amortized cost and FV OCI are classified as FV PL

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 ILLUSTRATION 1: BUSINESS MODEL

1.An entity acquires debt securities that the entity will hold until maturity to collect
cash flows in the form of principal and interests. However, the entity will sell the
securities:
a) If the credit risk becomes high in order to minimize losses
b) When a “stress case” or a “worst case” scenario occurs

Classification:
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An entity acquires debt securities that the entity will hold
until maturity to collect cash flows in the form of principal
and interests. However, the entity will sell the securities:
a) If the credit risk becomes high in order to minimize
losses
b) When a “stress case” or a “worst case” scenario occurs

Classification: Amortized Cost

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ILLUSTRATION 2: BUSINESS MODEL

An entity holds financial assets to meet its everyday liquidity needs and to settle maturing liabilities. The
entity actively manages its liquidity and therefore actively manages the return on the portfolio. Accordingly,
the entity holds financial assets to collect cash flows and sell financial assets to reinvest in higher yielding
financial assets. Also, the entity makes frequent buying and selling of financial asses to better match the
duration of its liabilities.

Classification:

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An entity holds financial assets to meet its everyday liquidity needs and to settle maturing
liabilities. The entity actively manages its liquidity and therefore actively manages the return on the
portfolio. Accordingly, the entity holds financial assets to collect cash flows and sell financial assets
to reinvest in higher yielding financial assets. Also, the entity makes frequent buying and selling of
financial asses to better match the duration of its liabilities.

Classification: FV OCI

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ILLUSTRATION 3: BUSINESS MODEL

An entity holds financial assets with the purpose of selling

them to realize fair value gains.

Classification:

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An entity holds financial assets with the purpose of
selling them to realize fair value gains.

Classification: FV PL

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 INITIAL MEASUREMENT
• Financial assets are initially measured at fair value plus transaction costs, except FV PL.

• For FV PL: transaction costs are expensed immediately.

Note: Transaction costs do not include debt premiums or discounts, financing costs or interna
administrative or holding costs.

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Fair Value vs Transaction Price
Transaction price
• price paid to acquire an asset or price received to assume liability.
• Entry price
•Fair Value
• Price that would be received to sell an asset or paid to transfer a liability.
• Exit price

•Usually, equal but if not, a gain or loss is recognized in P/L.

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Fair Value vs Transaction Price
Transaction price
• price paid to acquire an asset or price received to assume liability.
• Entry price
•Fair Value
• Price that would be received to sell an asset or paid to transfer a liability.
• Exit price

•Usually, equal but if not, a gain or loss is recognized in P/L.

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SUBSEQUENT MEASUREMENT

After initial recognition, financial assets are measured at:

1. Amortized Cost
2. FV OCI
3. FV PL
Fair Value – Profit and Loss
• Gains and losses are recognized in profit or loss.

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Fair Value – Other Comprehensive Income (Mandatory)

• Gains and losses are recognized in other comprehensive income.

 Except for impairment and foreign exchange gains and losses
 Interest calculated using the effective interest method are recognized in PL
• When the asset is derecognized, the cumulative gain or loss recognized in OCI
reclassified from OCI to Profit and Loss.

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Fair Value – Other Comprehensive Income (Election)

• Gains and losses are recognized in other comprehensive income.

• Dividends received are recognized in PL
• When the asset is derecognized, the cumulative gain or loss recognized in OC
reclassified from OCI to Profit and Loss.
• From OCI to Retained Earnings

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INVESTMENT

• Financial assets measured at FVPL

• Investments in equity securities elected to be measured at FV OCI
• Financial assets mandatorily measured at FV OCI
• Financial assets measured at amortized cost

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 ILLUSTRATION 1
On January 1, 2024, ABC purchased 1,000 shares of DEF for P100,000. Taxes and L
amounted to P5,000. The equity securities are classified as held for trading securi
December 31, 2024, the share are quoted at 150 per share. On March 15, 2024, the
sold at its fair value of 130 per share.

• This is equity is to be classified/measured as? FV PL

• How much is the initial measurement on Jan. 01, 2024? 100,000
• How much is the subsequent measurement on Dec. 31, 2024? 150,000
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 ILLUSTRATION 1
On January 1, 2024, ABC purchased 1,000 shares of DEF for P100,000. Taxes and L
amounted to P5,000. The equity securities are classified as held for trading securi
December 31, 2024, the share are quoted at 150 per share. On March 15, 2024, the
sold at its fair value of 130 per share.

• This is equity is to be classified/measured as? FV PL

• How much is the initial measurement on Jan. 01, 2024? 100,000
• How much is the subsequent measurement on Dec. 31, 2024? 150,000
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 ILLUSTRATION 2
On January 1, 2024, ABC purchased P100,000 bonds at 98. The bonds mature on January 1, 2027 and pay 1
interest beginning January 1, 2024. Commission paid on the acquisition amounted to P10,000. The objective of
sell investments in the near term to take advantage of fluctuations in fair values for short term profit taking. On Dec
2024, the bonds are quoted at 101. On January 2, 2024, the bonds were sold at 110

• This is equity is to be classified/measured as? FV PL

• How much is the initial measurement on Jan. 01, 2023? 98,000
• How much is the gain or loss on Dec. 31, 2023? 3,000
• How much is the gain or loss to be recognized on January 02, 2024? 9,000

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 ILLUSTRATION 3
On January 1, 2024, ABC purchased 1,000 shares of DEF for P100,000. Taxes and Licenses amounted to P
equity securities are classified as held for trading securities. On December 31, 2024, the share are quoted at 150
On March 15, 2024, the share is sold at its fair value of 130 per share.

03/15/2024
Cash 130,000
Realized Loss on sale 20,000
Held for trading securities 150,000
Carrying amount = 150,000 minus proceeds (130 x 1,000 = 130,000) = 20,000 loss

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FINANCIAL ASSET AT FAIR

VALUE
Reference:
Intermediate Accounting 1

For Educational Purposes Only