WEEK 5 – MODULE 1 FINANCIAL ASSETS AT FAIR VALUE

 Definition of investment – investments are 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.
 Purposes of investments
 Statement classification / classification of investment
 Current investments – investments that are by their very nature readily realizable and
are intended to be held for not more than one year. Trading securities are normally
classified as current assets because these investments are expected to be realized
within twelve 12 months after the end of the reporting period.
 Noncurrent or long-term investments – other than current investments. This residual
definition means that it is intended to be held for more than one year or are not
expected to be realized within twelve months after end on the reporting period.
 Financial asset – any asset that is:
 Cash
 Contractual right to receive cash or another financial asset from another entity
 Contractual right to exchange financial instrument with another entity under conditions
that are potentially favorable
 Equity instrument of another entity
 financial liability – any liability that is a contractual obligation
 to deliver cash or other financial asset to another entity
 To exchange financial instrument with another entity under conditions that are
potentially unfavorable
 Equity instrument – any contract that evidence a residual interest in the assets of an entity after
deducting all of its liabilities
 Classification of financial assets
 Financial assets at fair value through profit or loss – include both equity securities and
debt securities
 Financial asset at fair value through other comprehensive income – include both equity
securities and debt securities
 Financial assets at amortized cost – include debt securities only
 Recognition – an entity shall recognize a financial asset or financial liability in its statement of
financial position when, and only when, the entity becomes party to the contractual provisions
of the instrument
 Initial measurement of financial assets – an entity shall measure a financial assets at its fair
value plus, in the case of financial asset not at fair value through profit or loss, transaction costs
that are directly attributable to the acquisition of the financial asset
 Subsequent measurement of financial asset
 Fair value through profit or loss FVPL
 Fair value through other comprehensive income FVOCI
 Amortized cost
 Equity investments at fair value through OCI
 Debt investments at fair value through OCI
  Financial asset at amortized cost
 Summary of measurement rules
 Gain and loss on financial asset at fair value – gain and loss on financial asset measured at fair
value shall be presented in profit or loss unless:
 It is part of a hedging relationship
 It is an investment in equity instrument and the entity has elected present gain or losses
on that investment in other comprehensive income
 It is a financial asset measured at fair value through other comprehensive income and
the entity is required to recognize some changes in fair value in other comprehensive in
 Gain and loss on financial asset at amortized cost
 Derecognition – financial asset – FVPL
 Accounting for reclassification of financial assets
 Reclassification from FVPL to amortized cost
 Reclassification from amortized cost to FVPL
 Reclassification from amortized cost to FVOCI
 Reclassification from FVOCI to amortized cost
 Reclassification from FVOCI to FVPL
 Impairment – financial assets at fair value
 Impairment – financial assets at amortized cost
 Measurement of impairment

WEEK 5 MODULE 2 – INVESTMENT IN EQUITY INSTRUMENTS

 Investment in equity instruments – acquisition of equity securities for the purpose of accruing
income through dividends and increase in market value, or controlling another entity
 Equity securities – represent ownership shares such as ordinary shares, preference shares and
other share capital. Categories to acquire ownership shares:
 Control exists
 Investment in unquoted equity instruments
 Measurement of equity securities
 Acquisition by exchange
 Lump sum acquisition
 Sale of equity instruments
 When are dividends considered earned?
 Date of declaration
 Date of record
 Date of payment
 When to recognize dividends as income?
 Dividends – shall be recognized as revenue when the shareholder’s right to receive
payment is established.
 Accordingly, the dividends shall be recognized as revenue on date of declaration
 Accounting for dividends on equity instruments
 Cash dividends – measured at face amount of dividend
 Property dividends – recorded at fair value of the property
  Liquidating dividends – represent return of invested capital, and therefore, are not
income.
 Stock dividends – these are in the form of the issuing entity’s own shares. The IAS
term for stock dividend is “bonus issue”
 Kinds of stock dividends
 Stock dividends of same class
 Stock dividends different from those held
 Cash received in lieu of stock dividends
 As if approach
 BIR approach
 Shares received in lieu of cash dividends
 Share split – a corporation may restructure its capital by effecting a change in the number of
shares without capitalizing retained earnings or changing the amount of its legal capital. This
restructuring is known as share split.
 Split up – transaction whereby the outstanding shares are called in and replaced by a
larger number, accompanied by a reduction in the par or stated value of each share
 Split down – transaction whereby the outstanding shares are called in and replaced by
smaller, accompanied by an increase in par or stated value
 Special assessments – additional capital contribution of the shareholders. Recorded as
additional cost of the investment and on the part of the entity as share premium
 Redemption of share – shares, particularly preference shares, may be called in for redemption
and cancellation by the entity issuing them.
 Stock right / “right issue” – or preemptive right is a legal right granted to shareholders to
subscribe for new shares issued by a corporation at a specified price during a definite period.
 Accounted for separately
 Not accounted for separately
 Approach to be followed

WEEK 5 MODULE 3 – INVESTMENT IN DEBT INSTRUMENTS (FINANCIAL ASSETS AT AMOTIZED COST)

 Definition of a bond – formal unconditional promise made under seal to pay a specified sum of
money at a determinable future date, and to make periodic interest payments at a stated rate
until the principal amount is paid
 Classification of bond investments
 Financial asset held for trading
 Financial asset at amortized cost
 Financial asset at fair value through other comprehensive income
 Initial measurement of bond investment – recognized initially at fair value plus transaction cost
that are directly attributable to the acquisition
 Subsequent measurement of bond investment – subsequent to initial recognition:
 At fair value through profit or loss
 At amortized cost
 At fair value through other comprehensive income
 Acquisition of bond investments
  Accrued interest on date of acquisition & another approach
 Investment in bonds at amortized cost
 Amortization of premium or discount
 Philosophy on amortization
 Sale to bonds prior to maturity
 Callable bonds – those which may be called in or redeemed by the issuing entity prior to the
date of maturity.
 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
 Serial bonds – those which have a series of maturity dates or those which are payable in
installments
 Term bonds – those bonds that mature on a single date.
 Method of amortization
 Straight line method – provides for an equal amount of premium or discount
amortization each accounting period
 Bond outstanding method – this method is applicable to serial bonds and provides for a
decreasing amount of amortization
 Effective interest method or simple “interest method” or scientific method – provides
for an increasing amount of amortization


WEEK 6 MODULE 1 – EFFECTIVE INTEREST METHOD

 Effective interest method – PFRS 9 requires that bond discount and bond premium shall be
amortized using the effective interest method. Also known as scientific method or simply
“interest method”. This method distinguishes two kinds of interest rate
 Nominal rate – coupon rate or stated rate appearing on the face of the bond.
 Effective rate – yield rate or market rate which is the actual or true rate of interest
which the bondholder earns on the bond investment. Rate that exactly discounts
estimated future cash payments through the expected life of the bond or when
appropriate, a shorter period to the net carrying amount of the bond.
 Effective rate versus nominal rate – are the same if the cost of the bond investment is equal to
the face value. When bonds are acquired at premium, the effective rate is lower than the
nominal rate. The reason is that the premium is a loss on the part of the bondholder
 Effective interest method – simply require the comparison between the interest earned or
interest income and the interest received. The difference between the two represents the
premium or discount amortization
 Interest method or interest income – computed by multiplying the effective rate by the carrying
amount of the bond investment
 Interest received – computed by multiplying the nominal rate by the face amount of the bond
 Carrying amount of the bond investment – is the initial cost gradually increased by periodic
amortization of discount or gradually reduced by periodic amortization of premium
 Effective interest method-discount
  Effective interest method-premium
 Effective interest method-serial bonds
 Bond investment-FVOCI
 Fair value option – all changes in fair value are recognized in profit or loss.
 Computation of effective rate
 Basic theory – to find an effective rate that would equate the acquisition cost and the present
value of the future cash flows from the bonds
 Another interpolation
 Purchase price or market price of bonds – an investor may wish to know in advance the total
cash outlay for the bond investment of a specified rate of return
 Market price of serial bonds
 Discount – effective rate is higher than the nominal rate
 Premium – effective rate is lower than the nominal rate

WEEK 6 MODULE 2 – INVESTMENT IN ASSOCIATE AND JOINT VENTURES

 Three types of strategic investment

 Philippine accounting standards (PSA) 28 – applies to all entities that are investors with joint
control of, or significant influence over, an investee. The objective of the standard is to prescribe
the accounting investments in associates and to set out the requirements for the application of
the equity method when accounting for investments in associates and joint ventures.
 Significant influence – the power to participate in the financial and operating policy decisions of
the investee, but not control or joint control over those policies. This is usually evidenced in one
or more of the following ways
 Lack of significant influence – the presumption of significant influence may sometimes
be overcome in the following circumstances
 Potential voting rights – when assessing whether potential voting rights contribute to
the assessment of significant influence, the entity must examine all facts and
circumstances that affect potential voting rights, except the intention of management
and its financial ability to exercise or convert those potential rights.
 Holding of less than 20% of the voting power
 The equity method – an investment in an associate or joint venture is accounted by using the
equity method, except
 Exemption of the equity method
 Other topics
 Intercompany transactions – gains or losses resulting from upstream transactions (such
as sales of assets from an associate or joint venture to the investor or its consolidated
subsidiaries) and downstream transactions (such as sales of assets from the investor or
its subsidiaries to an associate or joint venture) between the investor
 Goodwill
 Losses
 Reporting dates
 Accounting policies
 Application of equity method
  Excess of cost over carrying amount – if the investor pays more than the carrying amount of the
net assets acquire, the difference is commonly known as “excess of cost over carrying amount”
 Excess of net fair value over cost
 Impairment
 “value in use”
 Impairment: objective evidence
 Measurement after loss of significant influence
 Investment in associate achieved in stages
 Fair value approach
 Associate – an entity over which the investor has significant influence
 Consolidated financial statements – the financial statements of a group in which assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity
 Joint arrangement – arrangement of which two or more parties have joint control
 Joint control – contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties
sharing control
 Joint venture- joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement

WEEK 6 MODULE 3 – FUND AND OTHER TYPES OF INVESTMENTS AND DERIVATIVES

 Definition of fund – defined as cash and other assets set aside for a specific purpose either by
reason of the action of management or by virtue of a control or legal requirement. May be in
the form of cash, securities and other assets
 Funds for current purposes – petty cash fund, payroll fund, interest fund, dividend fund,
and tax fund. Classified as current asset
 Funds for noncurrent purposes – sinking fund, preference share, redemption fund,
replacement fund, plant expansion fund, contingency fund and insurance fund.
 Measurement of fund – long term fund shall be carried at the amount of cash plus amortization,
and other assets in the fund
 Sinking fund – or redemption fund is a fund set aside for the liquidation of long-term debt, more
particularly long-term bonds payable. The accounting for sinking funds depends on whether the
fund is under the administration of the entity or under the charge of trustee
 Fund under the administration of the entity – the entity records the fund transactions currently
and thus makes a distinction whether the fund is in the form of cash, securities and other assets
 Funds under the administration of a trustee – fund transactions are not currently recorded by
the entity.
 Sinking fund contribution – amount of periodic contribution to the sinking fund may be
voluntary or mandatory.
 Annual contribution at the end of each year
 Funds accumulation
 Annual contribution in advance
 One-time contribution
 Classification of sinking fund – as a rule, sinking funds is classified as noncurrent asset. However,
if the bond for which the sinking fund was set aside becomes due within twelve months after
the end of the reporting period, the sinking fund is reclassified as current asset. The
classification of a fund shall parallel the classification of the related liability
 Preference share redemption fund
 Fund for acquisition property – the future acquisition of property, plant and equipment may
involve the setting aside of certain amount of cash. Such fund may be called replacement fund
or plant expansion fund.
 Contingency fund – cash set aside for the purpose of meeting obligations that may arise from
contingencies like pending lawsuits or taxes in dispute.
 Insurance fund – cash set aside for the purpose of meeting obligations that may arise from
certain risks not insured against, such as fire, typhoon, explosion, and other similar casualties
 Investment in cash surrender value of life insurance
 Cash surrender value
 Theory on the cash surrender value – cash surrender value of a life policy arises from
the fact that the fixed annual premium is much in excess of the annual risk during the
earliest years of the policy
 Accounting procedures for cash surrender value
 Basic financial concepts – recognized common financial product terminology and how these
terms are applied
 Long position – an asset that is purchased with the anticipation that it will appreciate in value
 Short position – sale of a security that is not owned by the seller, or that the seller has
borrowed. This is the liability negative position in the market
 Exchange – is an organized market where buyers and sellers meet to trade securities. Helps to
regulate the type of securities purchased and sold.
 Trade date – date of a contractual obligation to buy or sell a security
 Settlement date – date that cash transfers to settle or buy or sell transaction-the actual date on
which the transfer of cash or assets is completed
 Bid price – price that buyers are willing to pay for a particular financial instrument
 Mid price – price between the bid and ask price. When parties agree to the mid price there
typically is a trade
 Ask price – price that sellers are willing to sell a particular financial instrument
 Derivative instrument – contract whose value is based on the performance of an underying
financial asset, index or other investment
 Underlying - term used in derivatives trading. Financial instrument whose price is based on or
derived from another asset.
 Reasons for using derivative
 Forward contract – legal contract between two parties to purchase and sell a specific
quantity of commodity, foreign currency, or other financial instrument at a price
specified with delivery and settlement at a specified future date.
 Futures contract – exchange-traded legal contract to buy to sell a standard quantity and
quality of a commodity, etc
 Option – contract giving its owner the right, but not the obligation, to buy or sell a
specified commodity, etc
 Interest rate swap – contract between two parties to exchange interest payments on a
specified notional principal amount for a specified period in the future.
 Currency swap – exchange of principal denominated in two different currencies at the
current spot rate, under an agreement to repay the principal at a specified future date
at a specified rate.
 Warrants – confers the right, but not the obligation, to buy or sell a security – normally an
equity – at a certain price before expiration.