ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-14

PFRS 9 Financial Instruments (Investments)

1. Definition of Investments: assets held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends
and rentals for capital appreciation or for other benefits to the investing entity such as those obtained through trading relationships.
2. Purpose of investments: (a) accretion of wealth or regular income; (b) capital appreciation; (c) ownership control; (d) meeting business
requirements; (e) protection
3. Classification: Investments are either
a. Current – investments that are readily realizable and are intended to be held for not more than one year
b. Noncurrent – investments other than current1
4. Financial asset is any asset that is
a. Cash
b. A contractual right to receive cash/another financial asset from another entity
c. A contractual right to exchange financial instrument with another entity under conditions that are potentially favorable 2.
d. An equity instrument of another entity.
5. Classification of financial assets3
a. Financial assets at fair value through profit or loss (equity securities 4 and debt securities5)
b. Financial assets at fair value through other comprehensive income (equity securities and debt securities)
c. Financial assets at amortized cost – debt securities
6. Measurement of financial assets
a. Initial – Fair value6 plus transaction cost (unless FVPL or held for trading, then FV only 7)
b. Subsequent – fair value through profit or loss (FVPL); fair value through other comprehensive income (FVOCI); amortized cost
c. Acquisition by exchange: Equity securities acquired in an exchange (order of priority)
i. FV of asset given
ii. FV of asset received
iii. CA of asset given
d. Lumpsum acquisition: single cost is allocated based on the fair value; when only one security has a known market value, the said
amount is allocated to the security with the remaining lumpsum cost allocated to the other securities
7. Financial assets at fair value through profit or loss: the following financial assets shall be measured at FVPL
a. Financial assets held for trading8 (trading securities: debt and equity securities that are purchased with the intent of selling them in
the near term) [measured at FVPL as required by the standard]
b. All other investments in quoted equity instruments9 [measured at FVPL as a consequence]
c. Financial assets that are irrevocably designated on initial recognition as FVPL10 [measured at FVPL by option]
d. All debt investments that do not satisfy the requirements for measurement at amortized cost or FVOCI [measured
at FVPL by default]
8. Equity investment at FVOCI
a. Initial recognition: the entity may make an irrevocable election to present in OCI subsequent changes in FV of an investment in
equity that are not held for trading11.
b. The amount recognized in OCI is not reclassified to P/L but may be transferred to equity or retained earnings
9. Debt investment at amortized cost
a. Financial assets shall be measured at amortized cost if both conditions are met:
i. The business model is to hold the financial asset in order to collect contractual cash flows on specified date
ii. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding
b. Interest income is computed using the effective interest method
10. Debt investments at FVOCI
a. Financial asset shall be measured at FVOCI if both conditions are met:
i. The business model is achieved both by collecting contractual cash flows and by selling the financial asset 12

1
Intended to be held for more than one year or are not expected to be realized within 12 months after the end of the reporting period
2
Conditions are potentially favorable when such exchanges will result to gain or additional cash inflow to the entity.
3
Classification depends on the business model for managing financial assets: (1) to hold investments in order to realize fair value changes; or (2) to hold investments
in order to collect contractual cash flows
4
Equity security includes any instruments representing ownership shares and right, warrants or options to acquire or dispose of ownership shares at a fixed or
determinable price (ownership interest). Do not include redeemable preference shares, treasury shares, and convertible debt.
5
Debt security is any security that represents a creditor relationship with an entity; has a maturity date and maturity value.
6
Fair value is normally the transaction price, the fair value of the consideration given
7
Transaction costs relevant to the acquisition of financial assets held for trading or classified as FVPL are expensed outright. Transaction costs do not include debt
premiums/discounts, financing costs, and internal administrative or holding costs.
8
Held for trading if: (1) acquired principally for the purpose of selling or repurchasing it in the near term; (2) on initial recognition, it is part of a portfolio of identified
financial assets managed together and for which there is evidence of a recent actual pattern of short-term profit taking; (3) a derivative, except for a derivative that is
a financial guarantee contract or a designated as an effective hedging instrument
9
Investments in unquoted equity instruments are measured at cost
10
Applicable to investments in bonds and other debt instruments which can be irrevocably designated as at FVPL even if the financial asset satisfies the amortized
cost or FVOCI
11
Not held for trading equity investments are measured at FVTPL unless irrevocably designated as FVOCI. Equity investments that are held for trading cannot be
designated as financial asset at FVOCI
12
May be measured at FVTPL by irrevocable designation or the FV option
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-14

ii. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding
b. Interest income is computed using the effective interest method
c. On derecognition: the cumulative gain and loss recognized in OCI shall be reclassified to profit or loss
11. Fair value of an asset is the price that would be received to sell an asset in an orderly transaction between market participants at the
measurement date. Best evidence:
a. Quoted price of identical asset in an active market13
b. Quoted price of similar asset in an active market
c. Quoted price of identical asset in an inactive market
12. Gain or loss on financial asset at fair value
a. Unrealized gain or loss are presented in P/L except:
i. When nontrading equity instrument and the entity irrevocably designated to present at OCI
ii. When debt investment that is measured at FVOCI
b. In determining the FV, no deduction is made for transaction costs that may be incurred on disposal of the financial asset
c. Realized gain or loss upon disposal
i. On financial asset at FVPL – P/L
ii. On financial asset at FVOCI – retained earnings14
13. Gain or loss on financial asset at amortized cost
a. Unrealized gain or loss shall not be recognized
b. Realized gain or loss are recognized in P/L upon derecognition, sale, impairment, and reclassification
14. Impairment
a. Not necessary to assess impairment for equity investments measured at FV
b. Entity must recognize lifetime ECL15 on:
i. Debt investments measured at amortized cost
ii. Debt investments measured at FVOCI

Equity Investments
1. Investment in equity securities are categorized as either:
a. Trading securities or financial assets at FVPL
b. Financial assets at FVOCI
c. Investment in associate
d. Investment in subsidiary
e. Investment in unquoted equity instruments
2. When only a portion of the equity shares are sold, cost is determined either FIFO or average cost
3. Dividend received
- Cash dividends
 When investment is either a or b considered income on the date of declaration16
 When investment is either c or d, considered as return of capital
- Property dividends17 are considered income at the fair value
- Share dividends (bonus issue) are not considered as income since there is no distribution of assets
 Share dividends of the same class
 Recorded only by means of memorandum entry
 Do not affect total cost but reduce the cost of investment per share
 Share dividends of different class
 The original cost is apportioned between the original shares and the share dividends on the basis of the market value
 Recognize the share received by crediting the original investment account
 Shares received in lieu of cash dividends
 Recognized as income at fair value of the shares received ( in effect are property dividends)
 In the absence of fair value, recognize as income at the cash that would have been received
 Cash received in lieu of share dividends
 Follow “as if” approach18: share dividends are assumed to be received and subsequently sold at the cash received
 Gain or loss may be recognized
- Liquidating dividends19 represent return of invested capital
- Share split: change in the number of shares without capitalizing retained earnings or changing the amount of its legal capital
13
Active market is a market wherein transactions take place with sufficient regularity and volume to provide pricing information on an ongoing basis.
14
The cumulative unrealized gain or loss previously recognized may be transferred to retained earnings.
15
When credit risk has increased significantly; the amount of impairment is the difference between the carrying amount and the PV of future cash flows discounted at
the original effective rate
16
Date when the right to receive payment is established. Sale between date of declaration and date of payment, the shares are selling dividend-on (buyer has right
over dividends); sale between date of record and date of payment, shares are selling ex-dividend (seller has the right to receive dividend)
17
Includes shares of another entity declared as dividends
18
BIR approach: under BIR ruling, all cash received, whether originally designated as cash dividend or share dividend, is recognized as income.
19
For wasting asset corporation, when dividend is partly liquidating and partly income; the portion representing liquidating dividend shall be recognized as return of
capital and the other, dividend income. When liquidating dividend > the cost of investment, the difference is gain on investment
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-14

Split up: outstanding shares are called in and replaced by larger number, accompanied by a reduction in the par/stated value;
results to increase in the cost per share
 Split down: outstanding shares are called in and replaced by smaller number, accompanied by increase in the par/stated
value; results to decrease in the cost per share
 Accounted using memorandum entry
4. Special assessments – additional capital contribution of the shareholders; recorded as additional cost of investments
5. Redemption of shares – recorded in the same manner as sale where the redemption price is the sale price
6. Share right or stock right (preemptive right/right issue) 20 – a legal right to subscribed for new shares issued by the corporation at a
specified price (usually below the prevailing market price) during a definite period; evidenced by a share warrant
- Accounting for share rights:
 Accounted for separately
 A portion of the original investment in equity shares is allocated to the share right at the FV of the share right 21
 The original investment is credited since the share rights are derived from the original investment
 Classified as current assets
 When share rights are exercised, the cost of the new investment includes the subscription price and the FV of share rights
 Sale of share rights: a gain or loss on sale of share rights may be recognized
o Between date of declaration and date of record: the shares are considered to be selling right-on (share and rights are
inseparable and are treated as one)
o Between the date of record and expiration date: the shares are selling ex-right and can be sold separately
 Expiration of share rights shall be recognized as loss on share rights 22
 Not accounted for separately
 Share rights are recognized as embedded derivative 23
 Upon receipt of share rights, a memorandum entry is prepared
 The exercise of share rights is recognized just like initial purchase of equity securities
 If the rights are sold, the original investment is credited; no gain or loss is recognized
 If the rights expired, a memorandum entry is prepared

Debt Investments
Debt Investments at amortized cost:
1. Based on the business model if both conditions are met:
i. The business model is to hold the financial asset in order to collect contractual cash flows on specified date
ii. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding
2. Measurement
- Initial: FV24 + TC
- Subsequent: Amortized cost25 using the effective interest method
3. Classification: Noncurrent investments
4. Amortization of discount or premium must be done over the life of the bonds (date of acquisition to date of maturity)
- Bond premium: a loss on the investor; payment to acquire the investment > what can be collected on the date of maturity
 Dr. Interest Income, Cr. Investment in bonds
- Bond discount: a gain on the investor; payment to acquire the investment < what can be collected on the date of maturity
 Dr. Investment in bonds, Cr. Interest Income
5. Sale of bonds prior to maturity: Amortization of discount/premium must be taken up until date of sale
- The difference between the sale price (net of the accrued interest) and the carrying amount of the bond = G/L on sale of investment
6. Callable bonds – those which may be redeemed by the issuer prior to date of maturity
- Call price (redemption price) is usually > face amount of the bonds
- Call price less carrying amount = Profit or loss
7. Convertible bonds – those which give the bondholders the right to exchange their bonds for share capital of the issuing entity at any time
prior to maturity

20
Inherent right in every share; a shareholder receives one right for every share owned; intended to give shareholders the chance to preserve their equity interest in
the corporation
21
In the absence of the FV of share rights, the theoretical/parity value of share right may be used:
a. When shares are selling right-on
(MV of share right-on less subscription price) / (Number of rights to purchase one share + 1)
b. When shares are selling ex-right
(MV of share ex-right less subscription price) / (Number of rights to purchase one share)
22
There is loss since the original shares have lost some of their value because the new shares are offered for sale at a price below the market price, thereby creating
a dilution and the investor failed to preserve the original equity interest
23
Embedded derivative is a component of a hybrid or combined contract (host contract) with the effect that some of the CFs of the combined contract vary in a way
similar to a stand-alone derivative. This shall be measured separately from the host contract under certain conditions except when:
1. The host contract is within the scope of PFRS 9 (meaning the investment is a financial asset)
2. The host contract is measured at FVPL
24
Market price of bonds is equal to the present value of the principal plus the present value of the future interest payments using the effective rate
25
Amortized cost is the initial recognition amount of the investment minus repayments, plus/minus amortization of discount/premium, and minus reduction for
impairment or uncollectibility
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-14

- The presence of the conversion feature precludes classification of the convertible bonds as financial assets at amortized cost
- Can be measured as financial assets measured at fair value

Debt instruments at FVOCI

1. Based on the business model of the company if both conditions are met:
i. The business model is achieved both by collecting contractual cash flows and by selling the financial asset 26
ii. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding
2. Measurement
- Initial: FV + TC
- Still, amortize using the effective interest method notwithstanding the changes in FV
- Subsequent: FV with changes presented in OCI27
3. Classification: Noncurrent investments
4. Amortization of discount or premium must be done over the life of the bonds (date of acquisition to date of maturity)
5. Sale: (Selling Price + Cumulative UG/UL) less carrying amount (FV + amortization) [or sales price less carrying amount (per amortization
table)] = gain or loss on sale

Debt Investments at FVPL

1. The entity may irrevocably designate the financial asset as measured at FVPL even if the financial asset satisfies the amortized cost or
FVOCI measurement
2. Measurement
- Initial: FV; transaction cost is expensed outright
- Subsequent: FV
- Changes in FV are included in P/L: gain on changes of fair value
- Interest income is based on nominal rate
3. Classification: Current assets
4. Upon sale, a G/L is recognized in P/L equivalent to the difference between the proceeds and the carrying amount

Reclassification
1. An entity shall reclassify financial assets only when it changes the business model for managing financial assets.
2. Apply the reclassification prospectively starting on the reclassification date 28, with disclosure.
3. Exemptions from reclassification
- Equity investments29 held for trading or measured at FVPL
- Equity investments measured at FVOCI by irrevocable designation.
- Debt investments measured at FVPL by irrevocable designation.
4. Reclassification from FVPL to amortized cost
- The FV at the reclassification date becomes the new carrying amount of the financial asset at amortized cost.
- The difference between the new carrying amount and the face amount shall be amortized through P/L over the remaining life of the
financial asset using the effective interest method.
- A new effective interest rate must be determined based on the new carrying amount (FV at reclassification date)
5. Reclassification from amortized cost to FVPL
- Difference between the previous carrying amount and the FV = recognized in P/L
6. Reclassification from amortized cost to FVOCI
- The financial asset is measured at FV at reclassification date.
- The difference between the amortized cost carrying amount and the fair value at reclassification date is recognized in OCI
(unrealized gain – OCI).
- The original effective interest rate is NOT ADJUSTED
7. Reclassification from FVOCI to amortized cost
- The FV at reclassification date becomes the new amortized cost carrying amount.
- The cumulative UG/UL previously recognized in OCI is eliminated and adjusted against the FV at reclassification date.
- The original effective interest rate is NOT ADJUSTED
8. Reclassification from FVPL to FVOCI

26
May be measured at FVTPL by irrevocable designation or the FV option
27
On the first year, UG/UL–OCI= FV less carrying amount per amortization table; in the subsequent periods, FV in the previous period +/– amortization less the FV in
the current period
28
Reclassification date is the first day of the reporting period following the change in business model that results in an entity reclassifying financial asset. However, a
disclosure about the change in business model must be made in the period of change.
29
All equity investments cannot be reclassified. Reclassification is only appropriate for debt investments since the change in business model apples appropriately to
debt investment.
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-14

- The financial assets continue to be measured at FV.

- The FV at reclassification date becomes the new carrying amount.
- A new effective interest rate must be determined based on the new carrying amount or FV at reclassification date.
9. Reclassification from FVOCI to FVPL
- The financial assets continue to be measured at FV.
- The FV at reclassification date becomes the new carrying amount.
- The cumulative UG/UL previously recognized in OCI is reclassified to P/L at reclassification date.

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