CHAPTER 21

RECLASSIFICATION OF FINANCIAL ASSETS

Classification
1 FVPL Financial assets at fair value through profit or loss FVPL
2 FVOCI Financial assets at fair value through other comprehensive income
3 Financial assets at amortized cost
Business model
a to hold investments in order to realize fair value changes
b to hold investments in order to collect contractual cash flows
c to hold investments in order to collect contractual cash flows and
sell the investment

An entity shall reclassify financial assets only when it changes the business model for
managing the financial assets.
An entity shall apply the reclassification prospectively from the reclassification date.
The entity shall NOT restate any previously recognized gains, losses and interes

The reclassification date is the first day of the reporting period following the change in
business model.
The entity must disclose the change in business model in the financial statements because
the change is significant and demonstrable event.
EXEMPTIONS
a Equity investment held for trading or measured at FVPL.
All equity investments cannot be classified.
b Equity investment measured at FVOCI by irrevocable election.
c Debt investment measured at FVPL by irrevocable election.

A Reclassification from FVPL to amortized cost

a The fair value at the reclassification date becomes the new carrying amount at
amortized cost
b The difference between the new carrying amount and the face amount shall be
amortized through profit and loss over the remaining life.
c A new effective interest rate must be determined based on the new carrying
amount or fair value at reclassification date.
ILLUSTRATION
On Jan 1, 2021 an entity purchased a portfolio of bonds in accordance with the
business model of managing financial assets by selling the bonds in the short
term or in order to realized fair value changes. The acquisition cost is
P6,000,000 and the face amount of the bonds is P5,000,000.

Financial asset-FVPL 6,000,000

Cash 6,000,000
To record the acquisition
*FVPL - fair value through profit or loss

During 2021, no securities were sold and on December 31, 2021, the fair value of the
 bonds is P5,500,000.

Unrealized loss 500,000

Financial Asset - FVPL (5,000,000-5,500,000) 500,000
To record decrease in fair value

B Change in business model

The acquisition of another entity that manages bonds in order to collect contractual
cash flows effectively changes the business model of the entity acquiring portfolio
of bonds.
The entity acquired another entity that manages comml bonds and has a business model
that holds the bonds in order to collect contractual flows
On December 31, 2022, the fair value of the bonds is P5,200,000.

Unrealized loss 300,000

Financial Asset - FVPL (5,500,000-5,200,000) 300,000
To record decrease in fair value

Investment in bonds 5,200,000

Financial Asset - FVPL (5,500,000-5,200,000) 5,200,000
To record reclassification of bonds
to financial asset at amortized cost

* A new effective interest rate must be computed based on the new

carrying amount or fair value.
* The effective interest rate must be lower than the nominal rate.

C Reclassification from amortized cost to FVPL

- the fair value is determined at reclassification date
- the difference between the previous carrying amount and fair value is
recognized in profit or loss.

ILLUSTRATION
On January 1, 2021 an entity purchased P5,000,000 face value bonds for P4,500,000
in accordance with the business model of managing financial asset by collecting
contractual cash flows. The bonds pay interest annually on December 31.

Investment in bonds 4,500,000

Cash 4,500,000
To record the acquisition of bonds

In December 2021, the objective of the entity's business model for managing the bonds
has changed from collecting contractual cash flows to realizing gains.
On December 31, 2021, assume the carrying amount of the bond investment is
P4,700,000, after recording the effective amortization of discount of P200,000.
The reclassification date is January 1, 2022. On such date, the fair value of the bond
investment is P5,500,000 or an increase of P800,000 from the carrying amount of
 P4,700,000.

Investment in bonds (5,500,00-4,700,000) 800,000

Gain on reclassification of financial asset 800,000
To record the increase in fair value on Jan 1, 2022

Financial asset - FVPL 5,500,000

Investment in bonds 5,500,000
To record the reclassification fr amortized cost to fair value thru profit or loss

D Reclassification from amortized cost to FVOCI

a The financial asset is measured at fair value at reclassification date
b The difference between the amortized cost carrying amount and the fair value
at reclassification date is recognized in other comprehensive income
c The original effective interest rate is not adjusted

ILLUSTRATION
On January 1, 2021 an entity purchased bonds with face amount of P6,000,000 for
P5,500,000. The entity's business model of managing financial asset is collecting
contractual cash flows composed of principal and interest. The bonds pay interest
annually every December 31.

Investment in bonds 5,500,000

Cash 5,500,000
To record the acquisition of bonds

On December 31, 2021 the entity's business model for managing financial asset has
changed from collecting contractual cash flows to collecting contractual cash flows
and selling the asset in the open market.
The amortized cost of the bonds on December 31, 2021 is P5,800,000 after recording
discount amortization of P300,000.
On January 1, 2022, the reclassification date, the fair value of the bonds is P6,200,000.

Financial asset-FVOCI 5,800,000

Investment in bonds 5,800,000
To record the reclassification on Jan 1, 2022

Financial asset-FVOCI 400,000

Unrealized gain - OCI(6,200,000-5,800,000) 400,000
To recognize the fair value change

E Reclassification from FVOCI to amortized cost

a The fair value at reclassification date becomes the new amortized cost
carrying amount
b The cumulative gain or loss previously recognized in other comprehensive
 income is eliminated and adjusted against the fair vale at reclassification
date. As a result, the investment is reverted back to amortized cost measurement
c The original effective interest rate is not adjusted

ILLUSTRATION
On January 1, 2021 an entity purchased bonds with face amount of P5,000,000 for
P4,600,000. The entity's business model of managing financial asset is collecting
contractual cash flows and selling the asset. The bonds pay interest annually ever
annually every December 31.

Financial asset-FVOCI 4,600,000

Cash 4,600,000
To record the reclassification on Jan 1, 2022

On December 31, 2021 the entity's business model for managing financial asset has
changed from collecting contractual cash flows to collecting contractual cash flows
and selling the asset to collecting contractual cash flows only.
The amortized cost of the bonds on December 31, 2021 is P4,800,000 after recording
discount amortization of P200,000.
The fair value on December 31, 2021 is P5,300,000. On January 1, 2022, the reclassification
date, the fair value of the bonds did not change.

Financial asset-FVOCI 500,000

Unrealized gain - OCI 500,000
To recognize the unrealized gain on December 31, 2021

Investment in bonds 5,300,000

Financial asset-FVOCI 5,300,000
To record the reclassification on Jan 1, 2022

Unrealized gain - OCI 500,000

Investment in bonds 500,000
To eliminate the amount of other comprehensive income on Jan 1, 2022

F Reclassification from FVPL to FVOCI

a The financial asset continues to be measured at fair value.
b The fair value at reclassification date becomes the new carrying amount
c A new effective interest rate must be determined based on the new carrying amount
or fair value at reclassification date.

ILLUSTRATION
On January 1, 2021 an entity purchased bonds with face amount of P3,000,000 for
P3,300,000. The entity's business model of managing financial asset is to realize fair value
changes. The bonds pay interest annually every December 31.
annually every December 31.
 Financial asset-FVPL 3,300,000
Cash 3,300,000

On December 31, 2021 the entity's business model for managing financial asset has
changed from realizing fair value changes to collecting contractual cash flows and selling
the asset in the open market.
The fair value on December 31, 2021 is P3,600,000. On January 1, 2022, the reclassification
date, the fair value of the bonds did not change.

Financial asset-FVPL 300,000

Unrealized gain - FVPL 300,000
To recognize the unrealized gain on Dec 31, 2021

Financial asset - FVOCI 3,600,000

Financial asset-FVPL 3,600,000
To record the reclassification on Jan 1, 2022

G Reclassification from FVOCI to FVPL

a The financial asset continues to be measured at fair value.
b The fair value at reclassification date becomes the new carrying amount
c The cumulative gain or loss previously recognized in other comprehensive income
is reclassified to profit or loss at reclassification date.

ILLUSTRATION
On January 1, 2021 an entity purchased bonds with face amount of P4,000,000 for
P4,200,000. The entity's business model of managing financial asset is collecting contractual
cash flows and selling the asset. The bonds pay interest annually every December 31.

Financial asset-FVOCI 4,200,000

Cash 4,200,000

On December 31, 2021 the entity's business model for managing financial asset has changed
from collecting contractual cash flows and selling the asset to realizing fair value changes.
On December 31, 2021 The fair value of the bonds is P3,900,000and the premium
amortization is P100,000 for 2021. The fair value did not change on Jan 1, 2022:

Interest income 100,000

Financial asset - FVOCI 100,000
To record the premium amortization for 2021

Unrealized loss - OCI (4,100,000-3,900,000) 200,000

Financial asset-FVOCI 200,000
To recognize the fair value change on Dec 31, 2022
Financial asset - FVPL 3,900,000
Financial asset-FVOCI 3,900,000
To record the reclassification on Jan 1, 2021

Unrealized loss - FVPL 200,000

Unrealized loss - OCI 200,000
To reclassify the amount of OCI to profit or loss