e.
Security deposits and other returnable deposits
PAS 32 - Financial Instruments
Financial Instruments - Any contract that gives rise to a
financial asset of one entity and a financial liability or equity
instrument of one entity.
Characteristics of a Financial Instrument
⚫ There must be a contract
⚫ There must be at least two parties to the contract
⚫ The contact shall give rise to a financial asset of one party
and financial liability or equity instrument of another party.
Financial Asset
- Any asset that is:
a. Cash
b. An equity instrument of another entity.
c. A contractual right to receive cash or another financial asset
from another entity;
d. A contractual right to exchange financial instruments with
another entity under conditions that are potentially favorable.
Examples:
a. Cash and cash equivalents (e.g. cash on hand, in bank,
short-term money placements and cash finds)
b. Receivables such as accounts, notes, and loans
c. Investment in equity or debt instruments of other entities
such as held for trading securities, investment in subsidiaries,
associates, joint ventures, investment in bonds and derivative
assets.
d. Sinking fund and other long term funds composed of cash
and other financial asset.
Not Financial Assets
a. Physical assets such as inventories, biological assets, PPE
and investment property
b. Intangible assets (Reason: Control of such physical and
intangible assets create an opportunity to generate an inflow
of cash or another financial asset but it does not give rise to
present right to receive cash or another financial asset)
c. Prepaid expenses and advances to suppliers (Reason: The
future economic benefit is the receipt of goods or services
rather than the right to receive cash or another financial asset)
d. An entity’s own equity instrument (e.g. treasury shares)
e. Current and deferred tax assets (Not contractual)
Financial Liability
Any liability that is a contractual obligation:
a. To deliver cash or other financial asset to another entity; and
b. To exchange financial instruments with another entity under
conditions that are potentially unfavorable;
Examples:
a. Payables such as accounts, notes, loans, and bonds
b. Lease liabilities
c. Held for trading liabilities and derivative liabilities
d. Redeemable preference issued
Not Financial Liabilities
a. Deferred/unearned revenue and warranty obligations that are
to be settled by future delivery of goods and provisions of
services. (Reason: The outflow of economic benefits is the
delivery of goofs and services rather than a contractual
obligation to pay cash)
b. Taxes, SSS, Philhealth, Pag-Ibig Payables (Reason: Imposed
by law)
c. Constructive obligations
Equity Instrument
Any contract that evidences a residual interest in the asset of an
entity after deduction of all its liabilities
Includes;
a. Ordinary Share Capital
b. Preference Share Capital
c. Share options or share warrants
What is a Compound Instrument?
- A financial instrument that from the issuer’s perspective
contains both a liability and an equity component. These
components are classified and accounted for separately.
⚫ One component meets the definition of financial asset and
another component financial liability.
Example:
- Bonds payable issued with share warrants
- Convertible bonds payable - bonds that can be converted into
shares of stocks of the issuer
> Two Instruments
1. Debt instruments for the bonds payable
2. Equity instruments for the equity conversion feature
Accounting for Compound Financial Instrument
- If the financial instrument contains both a liability and an equity
component, components shall be accounted separately.
- Consideration received from the issuance of the compound
financial instrument shall be allocated between the liability and
equity components.
STEPS:
1. Determine the fair value of the whole instrument
2. Deduct from the FV of the whole instrument the fair value of
the debt component without the equity feature
3. Remaining amount represents the equity component
 PFRS 9 - Measurement of Financial Asset Fair Value through Profit or Loss

Initial Recognition
- Financial assets and financial liabilities are recognized only
when the entity becomes a party to the contractual provisions of
the instruments.
- Always measured at FAIR VALUE
Exceptions:
Transaction Cost (Incremental Cost) - Brokerage fees and
commissions, levies by regulatory agencies (SEC free on
transaction value and PSE), transfer taxes and duties.
Summary
Financial Asset at FV through OCI - Capitalized as cost of
financial asset
Financial Liability at FV through OCI - FV minus Transaction
Cost
Financial Asset/Liability at FV through P/L held for trading -
Expensed outright NOTES:
➢ Only debt instruments can be classified under amortized
Subsequent Measurement cost or FVOCU measurement categories
After initial recognition, an entity shall measure a financial asset ➢ Equity instruments are measures at FVPL unless the entity
at; makes an irrevocable election on initial recognition to
1. FV through P/L (e.g. Investment on Equity / Debt Securities- measure them at FVOCI (election)
Trading FVPL) ➢ Debt instruments that are not measured at amortized cost
2. FV through OCI (e.g. Investment in Equity / Debt Instruments or at FVOCI are measured at FVPL
@FVTOCI) ➢ Business model and SPPI tests are relevant only to debt
instruments
Basis of Classification ➢ Equity instruments do not have contractual cash flows that
PFRS 9 requires an entity to classify financial asset on the basis are solely payments of principal and interest
of both: ➢ Equity instruments are classified as FVPL unless they are
1. The entity’s model for managing the financial asset; and irrevocably elected to be classified as FVOCI
2. The contractual cash flow characteristics of the financial asset Gains and Losses

Business Model - Refers to how an entity manages its financial

asset in order to generate cash flow
⚫ To hold instrument to realize fair value changes
⚫ To hold instrument to collect contractual cash flows
⚫ To hold instrument to collect contractual cash flows and sell
the instrument
Contractual Cash Flows - solely payments of principal and Financial Instruments Summary
interest (SPPI) consistent with basic lending arrangement

Derecognition - Classification
Financial assets are derecognized when;
1. The contractual rights to the cash flows from the financial
asset expire
- Collected, canceled, or when they become uncollectible
because of loss events
2. The financial asset are transferred and the transfer qualities
for derecognition.
- Transfer of substantially all the risks and rewards of ownership
of the financial asset, entity derecognize
- Retains substantially all the risks and rewards - financial asset
- Neither retains or transfers (partial transfer and partial
retention)- determine whether there is control.
No control - derecognize
Retained control - financial asset

Subsequent Measurement of Liabilities

Amortized cost is the amount or which the financial asset or

financial liability is measured at initial recognition minus principal
prepayments, plus or minus the cumulative amortization using
the effective interest method of any difference between the initial
amount and the maturity amount, and for financial asset adjusted
for any lost allowances.