PFRS 9- Financial Instruments

INITIAL MEASUREMENT

At initial recognition, an entity shall measure a financial asset at 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
a. Fair Value through profit or loss
b. Fair Value through other comprehensive income
c. Amortized cost
FINANCIAL ASSETS @ FVPL
1.Financial assets held for trading or popularly known as "trading securities".

2. Financial assets that are irrevocably designated on initial recognition as at

fair value through profit or loss.

3. All other investments in quoted equity instruments.

4. All debt investments that do not satisfy the requirements for measurement
at amortized cost and a fair value through other comprehensive income.
Financial asset held for trading
Appendix A of PFRS 9 provides that a financial asset is held for trading when:

a. It is acquired principally for the purpose of selling or repurchasing it in the

near term.
b. On initial recognition, it is part of a portfolio of identified financial assets
that are managed together and for which there is evidence of a recent
actual pattern of short-term profit taking.
c. It is a derivative, except for a derivative that is a financial guarantee
contract or a designated and an effective hedging instrument.
Equity Security
The term "equity security" encompasses any
instrument representing ownership shares
and right, warrants or options to acquire or
dispose of ownership shares at a fixed or
determinable price.
Debt Security
A debt security is any security that represents a creditor relationship with an entity.

Examples of debt securities include the following:

a. Corporate bonds
b. BSP treasury bills
c. Government securities
d. Commercial papers
e. Preference shares with mandatory redemption date or 
are redeemable at
the option of the holder
Illustration-Trading Securities
During 2020, an entity purchased marketable equity securities at a total cost of
P5,000,000. The equity securities qualify as Financial Asset held for trading. The
entity also paid P50,000 as commission to the broker.

JOURNAL ENTRY:

Trading Securities 5,000,000

Commission Expense 50,000
Cash 5,050,000
INCREASE IN VALUE:
On December 31, 2020, the trading securities have a total
fair value of P6,000,000. The increase in value is recorded
as follows:

TRADING SECURITIES P1,000,000

UNREALIZED GAIN-TS P1,000,000
DECREASE IN FAIR VALUE
On December 31, 2021, the trading securities have a fair
value of P4,500,000. The decrease in fair value is recorded
as follows:

UNREALIZED LOSS- TS P1,500,000

TRADING SECURITIES P1,500,000
Sale of Trading Securities
On December 31, 2022, the trading securities are sold for P5,200,000. The sale is
recorded as follows:

CASH P5,200,000
TRADING SECURITIES P4,500,000
GAIN ON SALE OF TRADING SECURITIES 700,000
Financial asset at FVOCI
At initial recognition, PFRS 9 provides that an entity may make an irrevocable
election to present in other comprehensive income or OCI subsequent
changes in fair value of an investment in equity instrument that is not held for
trading.
Illustration:
During 2020, an entity purchased marketable equity securities at a total cost of
P1,000,000. The entity paid commission and taxes of P100,000.

Financial Asset-FVOCI P1,100,000

CASH P1,100,000
INCREASE IN VALUE:
On December 31, 2020 the securities have a total market value of P1,300,000.
The increase in market value is:

FINANCIAL ASSET-FVOCI P200,000

UNREALIZED GAIN-OCI P200,000
SALE OF EQUITY INVESTMENT-FVOCI
On July 1,2021, the securities are sold for P2,000,000. the Journal entry to record
the sale is:

CASH P2,000,000
FINANCIAL ASSET-FVOCI P1,300,000
RETAINED EARNINGS 700,000
DEBT INVESTMENT AT AMORTIZED
COST
PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at
amortized cost if both of the following conditions are met:

a. The business model is to hold the financial asset in order 
to collect
contractual cash flows on specified dates.

b. The contractual cash flows are solely payments of 
principal and interest
on the principal amount 
outstanding.
Debt investment @FVOCI
Provides that a financial asset shall be measured at fair value through OCI if
both of the following conditions are met:

1. The business model is achieved both by collecting contractual cash flows

and by selling financial asset.

2. The contractual cash flows are solely payments of principal and interest on
the principal outstanding.
Financial Asset @FVOCI
Financial Asset at Amortized
Cost
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.
Best evidence of fair value in descending hierarchy
a. Quoted price of identical asset in an active market
b. Quoted price of similar asset in an active market
c. Quoted price of identical and similar asset in an inactive 
market
Simply stated, fair value is the price agreed upon by a buyer and a seller in an
arm's length or orderly transaction. The buyer and seller who are the market
participants must be independent, knowledgeable and willing, meaning not
forced or not compelled to enter into the transaction.
FAIR VALUE
FAIR VALUE OF AN ASSET- is the price that would be received to sell an asset in
an orderly transaction between market participants.

FAIR VALUE OF LIABILITY- is the price that would be paid to transfer a liability in
an orderly transaction between market participants.
. On January 1, 2014, Reign Company purchased 12% bonds with face
Value of P5,000,000 for P5,380,000. The bonds provide an effective yield of
10%. The bonds are dated January 1, 2014, mature on January 1, 2019 and
pay interest annually on December 31 of each year. The bonds are quoted at
120 on December 31,2014. The entity has elected the fair value option for the
bond investment. What total income should be reported for 2014?

A. 600,000 C. 1,138,000
B. 1,120,000 D. 1,220,000 .
Answer is (D).
Fair value (5,000,000 x 120) 6,000,000
Carrying amount - January 1,2014 5,380,000
Gain from change in fair value 620,000
Interest income (5,000,000 x 12%) 600,000
Total income 1,220,000
PFRS 9, paragraph 4.1.5, provides that an entity at initial recognition may irrevocably
designate a financial asset as measured at fair value through profit or loss even if the financial
asset satisfies the amortized cost measurement. In other words, investment in bonds can be
designated without revocation as measured at fair value through profit or loss even if the
bonds are held for collection as a business model.
Under the fair value option, all changes in fair value are recognized in profit or loss. Moreover,
the interest income is based on the nominal interest rate rather than the effective interest rate.
. On January 1,2014, Queen Company purchased bonds with face value of
P5,000,000 for P5,400,000. The stated interest rate is 8% payable annually every
December 31. The bonds are acquired to yield an effective rate of 6%. The
entity has elected the fair value option for the bond investment. On
December 31, 2014, the bonds had a fair value of P5,600,000. What total
income should be reported for 2014?
A. 200,000 C. 500,000
B. 400,000 D. 600,000 .
Answer is (D).

Gain from change in fair value (5,600,000 - 5,400,000) 200,000

Interest income ( 5,000,000x8%) 400,000
Total income 600,000
PFRS 15
REVENUE FROM CONTRACTS
WITH CUSTOMER
REVENUE- is the income in the ordinary course of business activities.

INCOME-is the increase in economic benefit during the accounting

period in the form of inflow or enhancement of asset or decrease in
liability that results in an increase in equity other than contribution from
equity participants.
CORE PRINCIPLE
1. An entity should recognize revenue in a manner that depicts the pattern of
transfer of good or service to a customer.

2. The amount recognized as revenue should reflect the consideration to

which the entity expects to be entitled in exchange for goods or service.

REVENUE IS RECOGNIZED :
A. At a point in time or at a particular date when control of the goods or
service is transferred to the customer.
B. Over time or over a certain period in a manner that depicts the entity’s
performance.
Five-step model
STEP 1- IDENTIFY THE CONTRACT
WITH CUSTOMER
Five-step model
STEP 2- INDENTIFY THE
PERFORMANCE OBLIGATION IN THE
CONTRACT.
Five-step model
STEP 3- DETERMINE THE
TRANSACTION PRICE
Five-step model
STEP 4- ALLOCATE THE
TRANSACTION PRICE TO THE
PERFORMANCE OBLIGATIONS IN
THE CONTRACT
Five-step model
STEP 5- RECOGNIZE REVENUE WHEN
OR AS THE ENTITY SATISFIES A
PERFORMACE OBLIGATION.
I- REVENUE RECOGNITION AT A POINT IN TIME
II-REVENUE RECOGNITION OVER TIME
III-SALE OF GOODS
IV-SALE WITH A RIGHT OF RETURN
V-CONSIGNMENT ARRANGEMENT
VI-BILL AND HOLD ARRANGEMENT
VII-CUSTOMER LOYALTY PROGRAM

The customer loyalty program is generally designed to reward customers

for past purchases and to provide them with incentives to make further
purchases. If a customer buys goods or services, the entity grants the customer
award credits often described as points.
The entity can redeem the points by distributing to the customer free or
discounted goods or services.
MEASUREMENT
An entity shall account for the award credits as a separately component of
the initial sale transaction. In other words, the granting of award credits is
effectively accounted for as a future delivery of goods or services.
IFRS 15, Par 74, provides that an entity shall allocate the transaction price to
each performance obligation identified in a contract on a relative stand-
alone selling price basis. The fair value of the consideration received with
respect to the initial sale shall be allocated between the award credits and
the sale based on relative stand-alone selling price.
RECOGNITION
The consideration allocated to the award credits is initially recognized as
deferred revenue and subsequently recognized as revenue when the award
credits are redeemed.
The amount of revenue recognized shall be based on the number of award
credits that have been redeemed relative to the total number expected to be
redeemed
ILLUSTRATION:
ILLUSTRATION:
ILLUSTRATION:
ILLUSTRATION:
PFRS 16- LEASES
A lease is defined as a contract or part of a contract that conveys the right to
use the underlying asset for a period of time in exchange for consideration.

LESSEE- is the entity that obtains the right to use an underlying asset for a
period of time in exchange for consideration.

LESSOR- is the entity that provides the right to use an underlying for a period of
time in exchange for consideration.
ILLUSTRATION:

LESSEE
LESSOR UNDERLYING
(obtains)
(provides) ASSET
LESSOR ACCOUNTING

OPERATING LEASE- SUBTANCE IS EQUAL TO FORM.

Is a lease that does not transfer substantially all the risks
and rewards incidental to ownership of an underlying
asset.
FINANCE LEASE
FINANCE LEASE- SUBSTANCE IS NOT EQUAL TO FORM. Is a lease that
transfers substantially all the risks and rewards incidental to ownership
of underlying asset.
Lease classified as finance
lease
a. Transfers ownership
b. Lessee has option to purchase
c. Lease term is for major part of the economic life of
underlying asset
d. PV amounts to substantially all of the fair value of
underlying asset.
Lessee accounting
FINANCE LEASE MODEL- at the commencement date, a lessee shall recognize
a right of use asset and a lease liability. All leases shall be accounted for by
the lessee as a finance lease under the new lease standard

EXCEPTION: OPERATING LEASE MODEL

1. short-term value
2. Low value lease