FINANCIAL ASSETS AT FAIR VALUE

INVESTMENT
• assets not directly identified with the operating activities of an entity AND occupy only an auxiliary relationship to the
central revenue producing activities of the entity.
• Investments are assets held by an entity for the accretion of wealth through distributions such as interest, royalties, dividends
and rentals.
• For capital appreciation through trading relationship.
PURPOSE OF INVESTMENT
• For accretion of wealth or regular income through interest, dividends, royalties and rentals.
• For capital appreciation as in the case of investments in land and real estate held for appreciation and direct investments in
gold, diamonds and other precious commodities.
• For ownership control as in the case of investments in subsidiaries and associates.
• For meeting business requirements as in the case of sinking fund, preference share redemption, plant expansion fund and
other noncurrent fund.
• For protection as in the case of interest in life insurance contract in the form of cash surrender value
EXAMPLES OF INVESTMENT
• Trading securities or Financial assets held for trading - Trading securities are investments in debt or equity that
management plans to actively trade for profit in the current period. In other words, trading securities are stocks or bonds
that management plans to purchase and sell in order to make money in the short term.
• Investment in equity securities - An equity investment is money that is invested in a company by purchasing shares of that
company in the stock market. These shares are typically traded on a stock exchange.
1. Trading securities or Financial assets held for trading
2. Financial assets at fair value through OCI
3. Investment in nontrading equity securities
4. Investment in bonds
5. Investment in associate
6. Investment in subsidiary
7. Investment property
8. Investment in fund
9. Investment in joint venture
STATEMENT CLASSFICATION
• Current - by their very nature are readily realizable AND are intended to be held for not more than one year. (Trading
Securities)
• Noncurrent /long term - investments are intended to be held for more than one year OR are not expected to be realized
within twelve months after the end of the reporting period.
FINANCIAL INSTRUMENTS (CHARACTERISTICS)
• there must be a contract
• at least two parties to the contract
• contract shall give rise to a financial asset of one party AND financial liability or equity instrument of another party.
FINANCIAL ASSETS
• cash
• a contractual right to receive cash or another financial asset from another entity.
• a contractual right to exchange financial instrument with another entity under conditions that are potentially favorable.
• an equity instrument of another entity
FINANCIAL ASSETS (EXAMPLES)
1. Cash or currency
2. The following represent a contractual right to receive cash:
Trade accounts receivable
Notes receivable
Loans receivable
Bonds receivable
3. Trading Securities
NOT-CONSIDERED FINANCIAL ASSETS
The following do not give rise to a present right to receive cash or another financial asset:
• Physical assets: Inventory, Property, plant and equipment
• Prepaid Expenses
• Intangible assets: Patents Trademarks
• Gold bullion (commodity)
• Leased Assets
CLASSIFICATION OF FINANCIAL ASSETS
 FINANCIAL ASSET AT FAIR VALUE though PROFIT or LOSS (PL) - include BOTH equity securities and debt
securities.
 FINANCIAL ASSET AT FAIR VALUE though OTHER COMPRESENSIVE INCOME (OCI) - include BOTH equity
securities and debt securities.
 FINANCIAL ASSET AT AMORTIZED COST - debt securities only

CLASSFICATION – BUSINESS MODEL

• To hold the investments in order to realize fair value changes.
• To hold investments in order to collect contractual cash flows.
• To hold the investments in order to collect contractual cash flows and sell the investment.

Equity Security Debt Security

 Any instrument representing an ownership interest in an Any security that represents a creditor relationship with an entity
entity includes: as maturity date and maturity value includes:
• ordinary shares • corporate bonds

• preference share • BSP treasury bills

• and other share capital • government securities

• rights, warrants or options • commercial papers

❖ Share Certificate • preference share with mandatory redemption date at the
option of the holder
❖ Rights – share in earnings, election of directors,
subscription for additional shares and share in net
assets upon liquidation.

It does not include: redeemable preference shares, treasury

shares and convertible debt

INITIAL MEASUREMENT OF FINANCIAL ASSET

• fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.
• However, if the financial asset is held for trading or if the financial asset is measured at fair value through profit or loss,
transaction costs are expensed outright.
• Transaction costs include fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies
and securities exchanges, and transfer taxes and duties.
• Transaction costs do not include debt premiums or discounts, financing costs and internal administrative of holding cost.
SUBSEQUENT MEASUREMENT
✓ Depends on the business model for managing financial assets, if financial assets are to be measured subsequently:
1. FAIR VALUE THROUGH PROFIT OR LOSS (FVPL) - to hold investments in order to trade to realize fair value changes.
2. FAIR VALUE THORUGH OTHER COMPREHENSIVE INCOME (FVOCI)
3. AMORTIZED COST - to hold investments in order to collect contractual cash flows (only principal and interest)
FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH P&L

• Financial assets held for trading or popularly known as “trading securities" (by requirements)
• All other investments in quoted equity instruments. (by consequence)
• Financial assets that are irrevocably designated known as fair value option on initial recognition as at fair value through profit
or loss. (by designation or by option)
• All debt investments that do not satisfy the requirements for measurement at amortized cost and at fair value through other
comprehensive income. (by default)
FAIR VALUE THORUGH OTHER COMPREHENSIVE INCOME (FVOCI)
• At initial recognition, PFRS 9, paragraph 5.7.5, 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. (BY ELECTION)
• This irrevocable approach is designed to impose discipline in accounting for nontrading equity investment.
• The amount recognized in other comprehensive income is not reclassified to profit or loss under any circumstances.
• However, on derecognition, the amount may be transferred to equity or retained earnings.
• PFRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair value through other comprehensive
income if both of the following conditions are met:
The business model is achieved both by collecting contractual cash flows and by selling the financial asset.
The contractual cash flows are solely payments of principal and interest on the principal outstanding.
• On derecognition, the cumulative gain and loss recognized in other comprehensive income shall be reclassified to profit or
loss.
AMORTIZED COST (DEBT INVESTMENT)
• 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 to collect contractual cash flows on specified date.
B. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding
• In other words, the business model is to collect contractual cash flows if the contractual cash flows are solely payments of
principal and interest.
• In such a case, the financial asset shall be measured at amortized cost is discussed in the next module.
SUMMARY OF MEASUREMENT RULES
Measurement of equity investments
1.Held for trading - at fair value through profit or loss
2.Not held for trading - as a rule, at fair value through profit or loss
3.Not held for trading - at fair value through other comprehensive income by irrevocable election
4.All other investments in quoted equity instruments – at fair value through profit or loss **
5.Investments in unquoted equity instruments - at cost **
6.Investments of 20% to 50% - equity method of accounting **
7.Investments of more than 50% - consolidation method to be taken up in an advanced accounting course.
Measurement of debt investments
1.Held for trading - at fair value through profit or loss
2.Held for collection of contractual cash flows – at amortized cost
3.Held for collection of contractual cash flows - at fair value through profit or loss by irrevocable designation or fair value option
4.Held for collection of contractual cash flows and for sale of the financial asset - at fair value through other comprehensive income
5.Held for collection of contractual cash flows and for sale of the financial asset - at fair value through profit or loss by irrevocable
designation or fair value option
FAIR VALUE
• Fair Value of an asset is the price that would be received to sell a asset in an orderly transaction between market participants
at the measurement date.
• Best Evidence of fair value in descending hierarchy
a. Quoted price of identical assets in an active market
b. Quoted price of similar assets in an active market
c. Quoted price of identical and similar assets in an inactive market
• Quoted Price – securities market (PSE)
GAIN AND LOSS – FINANCIAL ASSETS AT FAIR VALUE
• Unrealized Gain or Loss reported in the P/L.
• Actual Selling – Realized Gain or Loss reported in the P/L.
GAIN AND LOSS – FINANCIAL ASSETS AT AMORTIZED COST
• Unrealized Gain or Loss ARE NOT reported/recognized because such investment are not reported in FAIR VALUE.
• Gain or Loss using the Amortization Process/Amortization Table.
FINANCIAL ASSETS HELD FOR TRADING
• It is acquired principally for the purpose of selling or repurchasing it in the near term (to generate short term gains or profits)
• In other words, trading securities are debt and equity securities that are purchased with the intent of selling them in the "near
term" or very soon.
• Trading securities are normally classified as current assets.
• Transaction cost – expensed outright.
Trading Securities (Fair Value through P/L) Financial Assets – OCI (Fair Value through OCI)

Transaction Cost Expense Capitalized ( Added)

Journal Entry (Debit) Trading Securities Financial Assets – FVOCI

Unrealized Gain / Loss Profit or Loss Other comprehensive income

Cumulative unrealized Not Applicable Applicable – transferred to Retained Earnings

Gain / Loss
Original Cost less current market value

Gain or Loss on sale Profit or loss Retained Earnings

INVESTMENTS IN EQUITY SECURITIES

INVESTMENT CATEGORIES
a. Trading securities or Financial assets at FVPL
b. Financial asset at FVOCI
c. Investment in associate
d. Investment in subsidiary
e. Investment in unquoted equity instruments

INVESTMENT IN EQUITY SECURITIES

• Acquisition of equity investments
• Shall measure it at fair value plus transaction costs that are directly attributable to the acquisition except the Trading
securities or FA at FVPL.
• Acquisition by exchange
• The acquisition cost is determined by reference to the following in the order of priority:
a. Fair value of asset given
b. Fair value of asset received
 c. Carrying amount of asset given

INVESTMENT IN EQUITY SECURITIES

Lump sum acquisition
If two or more equity securities are acquired at a single cost or lump sum, the single cost is allocated to the securities acquired based
on their fair value. If only one fair value is known such amount shall be allocated and the balance to the other equity securities.

INVESTMENT IN EQUITY SECURITIES

Sale of equity shares
• PFRS 9, paragraph 3.2.12, provides that on derecognition of a financial asset measured at fair value through profit or
loss, the difference between the consideration received and the carrying amount of the financial asset shall be
recognized in profit or loss.
• When equity shares are of the same class acquired on different dates at different costs, a problem will arise as to the
subsequently sold. In such case, the entity shall determine the cost of the shares sold using either the FIFO or average
cost approach

DIVIDENDS (Shareholders’ point of view)

When are dividends considered earned?
• Date of declaration – This is the date on which the payment of dividends is approved by the Board of Directors.
• Date of record – This is the date on which the stock and transfer book of the corporation is closed for registration. Only
those shareholders registered as of this date are entitled to receive dividends. (No entry)
• Date of payment - This is the date on which the dividends declared shall be paid.

DIVIDENDS (Shareholders’ point of view)

• "dividend-on" - This means that when shares are sold after the date of declaration but prior to record date, they carry with
them the right to receive dividends.
• "ex-dividend" - This means that the shares can be sold, and still the original shareholder has the right to receive the
dividends on payment date.

DIVIDENDS (Shareholders’ point of view)

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 the date of declaration.
CASH DIVIDENDS
- If the equity securities are measured at fair value through profit or loss, or at fair value through other comprehensive income
or at cost, dividends earned are considered as income.
When the cash dividends are earned but not received (Date of declaration):
Dividends receivable XX
Dividend income XX
When the cash dividends are subsequently received (Date of payment):
Cash XX
Dividends receivable XX

- The cash dividends do not affect the investment account.

PROPERTY DIVIDENDS
- Property dividends or dividends in kind are dividends in the form of property or noncash assets. Property dividends are also
considered as income and recorded at fair value.
Noncash assets XX
Dividend income XX
LIQUIDATING DIVIDENDS
- Liquidating dividends represent return of invested capital, and therefore, are not income. The payment may be in the form of
cash or noncash assets. The liquidating dividend is recognized as follows:
Cash or other appropriate amount XX
Investment in shares XX
- Normally, liquidating dividends are paid when the corporation is dissolved and liquidated.
- However, in the case of wasting asset corporation or mining entity liquidating dividends maybe paid even before dissolution
and liquidation.
- Accordingly, when dividends are received from a wasting asset corporation, the dividends are designated as partly income and
partly return of capital. That portion representing a liquidating dividend should be credited to the investment account.
SHARE DIVIDENDS
• Share dividends are in the form of the issuing entity's own shares. The IAS term for share dividend is "bonus issue".
• Shares of another entity declared as dividends are not share dividends but property dividends. (See the illustration in
property dividends between X and Y Company.
• Share dividends may be the same as those held or different from those held.
• Share dividends whether of the same class or different are not income. The reason is that there is no distribution of the
assets of the entity.
• The assets of the entity are the same before and after the issuance of the share dividends.
• The shareholder receives additional shares but still has the same proportionate equity interest in the entity. The shareholder
may have more shares but at reduced market value.
- Share dividends of same class
Share dividends of the same class are recorded only be means of a memorandum entry on the part of the shareholder. An example
of a memorandum entry for the receipt of share dividends is:
"Received 2,000 shares representing 20% share dividend on 10,000 original shares held. Shares now held, 12,000 shares."
- Share dividends different from those held
A shareholder may receive a share dividend which is different from the original shares.
Again, share dividends of different class are not income.
 However, the original cost of the investment is apportioned between the original shares and the share dividends based on market
value of each at the date of receipt.

The receipt of the preference shares as share dividend on the ordinary share investment is recorded as follows:
Investment in preference shares xx
Investment in ordinary shares xx
Shares received in lieu of cash dividends
• When cash dividends are declared and received, it is without doubt that they are income. A problem will arise when shares are
received in lieu of cash dividends declared.
• It is generally accepted that shares received in lieu of cash dividends are income at fair value of the shares received. The
reason is that such shares are in effect property dividends.
• In the absence of fair value of the shares received, the income is equal to the cash dividends that would have been received.
The receipt of the shares is recorded as follows:
Investment in shares xx
Dividend income xx
If there is no market value, the journal entry is:
Investment in shares xx
Dividend income xx
Cash received in lieu of share dividends
• When share dividends are declared and received, unquestionably, they are not income. A problem will arise when cash is
received in lieu of share dividends.
• The "as if" approach is followed. This means that the share dividends are assumed to be received and subsequently sold
at the cash received. Therefore, a gain or loss may be recognized.
ILUSTRATION
A shareholder owns 10,000 shares costing P1,100,000. Subsequently, the shareholder receives P150,000 cash in lieu of 1,000 shares
originally declared as 10% share dividend.
As if approach
The original cost of P1,100,000 applies now to 11,000 shares which is the sum of the original 10,000 shares and the 1,000 shares
assumed to be received as share dividends. The cost share would then be P100.
The 1,000 shares representing share dividends are assumed to be sold for the cash received.
Cash 150,000
Investment in shares (1,000 shares x 100) 100,000
Gain on investment 50,000
Cash received in lieu of share dividends
- BIR approach
Under the ruling of the Bureau of Internal Revenue, all cash received, whether originally designated as cash dividend or share
dividend, is recognized as income.
Thus, under the “BIR” approach, the cash received of P150,000 is simply debited to cash and credited to dividend income.
 However, the "as if" approach is theoretically sound and should be followed for financial accounting purposes.
• 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. Share split may be split up or split down.
• Split up is a 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.
- For example, if a shareholder owns 10,000 shares and the share is split up 5-for-1, the shareholder receives 50,000 new
shares in exchange for the 10,000 original shares.
• Split down is the reverse of the split up. Split down is a transaction whereby the outstanding shares are called in and replaced
by smaller number, accompanied by an increase in the par or stated value.
For example, if a shareholder owns 10,000 shares and the share is split down 5-for-1, the shareholder receives 2,000 new shares
in exchange for the 10,000 old shares
• Share split does not affect the total cost of investment. But there is a decrease or an increase in the cost per share and the number
of shares.
• Only a memorandum entry is made to record the receipt of new shares by virtue of share split.
For example, a shareholder owns 10,000 shares costing P2,000,000. Subsequently, the shareholder receives notice that
share is split 2-for-1. The receipt of new shares is recorded as follows:
"Received 20,000 new shares as a result of a 2-for-1 split of 10,000 original shares."
The total cost of P2,000,000 will now apply to 20,000 shares or a cost per share of P100. Such cost would then be the basis for subsequent
transactions.
Special assessments – are additional capital contribution of the shareholders.
For example, a shareholder owns 10,000 shares costing P500,000. Subsequently, the directors pass a resolution to the effect that
the shareholders shall contribute P5 for each share held to the corporation.

On the part of the shareholder, the payment of the assessment is recorded as follows:
Investment in shares (10,000 x 5) 50,000
Cash 50,000

Redemption of shares
Shares, particularly preference shares, may be called in for redemption and cancelation by the entity issuing them. On the part of
the shareholder, the redemption of share is recorded in the same manner as sale of share. The redemption price is treated as the sale
price.
For example, if a shareholder acquires 10,000 preference shares for P100 per share, the entry is:
Investment in preference shares 1,000,000
Cash 1,000,000
Redemption of shares

If subsequently, the preference shares are called in by the issuing entity at P110 per share, the entry to record the redemption is:

Cash (10,000 shares x 110) 1,100,000

 Investment in preference shares 1,000,000
Gain on investment 100,000
SHARE RIGHT OR STOCK RIGHT OR RIGHT ISSUE
A share right 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.
A share right is inherent in every share. A shareholder receives one right for every share owned.
A share right is valuable to a shareholder because the price at which the new shares are sold is generally below the prevailing market
price.
The ownership of share rights is evidenced by instruments or certificates called share warrants.
Accounting for share rights (PFRS 9)
Accounted for separately
Share rights are a form of equity instrument and therefore shall be measured initially at fair value.
Share rights are normally classified as current assets if the rights are accounted for separately.

Not accounted for separately

Share rights are recognized as embedded derivative but not a "stand-alone“ derivative.
An embedded derivative is a "component of a hybrid or combined contract (host contract) with the effect that come of the cash
flows of the combined contract vary in a way similar to a stand-alone derivative". This simply means that if the host contract is a
financial asset, the embedded derivative is not separated.

Accounting for share rights

Approach to be followed
Admittedly, this subject matter is not a well settled issue. In fact, PFRS 9, paragraph 4.8.4, states that this standard does not address
whether an embedded derivative shall be presented separately in the statement of financial position.
The academicians strongly believe that the second approach not accounted for separately stands on solid and authoritative ground.

Example of Formal announcement of share right.

The Board of Directors in their meeting on December 15, 2021 approved to issue share rights to the shareholders of record on
January 15, 2022, entitling the shareholders to acquire one share at P100 par for every five shares held, the right to expire on March
31, 2022.

Date of Declaration
Date of Record (Issuing of share warrants)
Expiration Date

RIGHT ON or EX-RIGHT
RIGHT ON – between the date of declaration and date of record. This means that the share and the right are inseparable and are
treated as ONE.
(Page 479)

EX-RIGHT – between the date of record and expiration date. This means that are share can now be sold separate from the right or
vice versa.
Illustration – Accounted for separately
A shareholder acquired 10,000 shares costing P1,800,000. Subsequently, the shareholder received 10,000 share rights to subscribe
for new shares at P100 per share for every five rights held. The market value of the share is P150 and the market value of the right
is P10.

Original investment
Investment in shares 1,800,000
Cash 1,800,000
Illustration – Accounted for separately
Receipt of share rights
The share rights received are initially measured and recorded at fair value. (10,000 x P10)
Note also that the original investment account is credited when the rights are received because the share rights are "derived" from
the original investment.
Share right 100,000
Investment in shares 100,000

Exercise of share rights

When share rights are exercised, the cost of the new investment includes the subscription price and the cost of the share rights
exercised. Since there are 10,000 share rights and the investor can acquire one new share for every 5 rights, the investor would
acquire 2,000 new shares at P100 per share or P200,000.
The journal entry to record the acquisition of the new investment through the exercise of share rights is:
Investment in shares 300,000
Cash 200,000
Share rights 100,000
Illustration – Accounted for separately
Sale of share rights
The share rights are financial assets separate from the original shares. Accordingly, the share rights can be sold independently of
the original investment. Thus, if the share rights are not exercised but sold for P150,000, the journal entry is:
Cash 150,000
Share rights 100,000
Gain on sale of share rights 50,000