M i C P A R Review Center

3rd Floor Lautengco Bldg., Osmeña St. Cor. Quirino Ave., General Santos City
Tel No. 0942.045.4564

FINANCIAL ACCOUNTING & REPORTING BATCH 24-MAY 2021

FAR 14 – INVESTMENTS IN
DEBT INSTRUMENTS
(BONDS) LECTURE
1.0 CLASSIFICATION & MEASUREMENT AT INITIAL RECOGNITION
FVTPL FVTOCI Amortized Cost
At its fair value excluding fair value plus transaction costs fair value plus transaction costs
transaction costs incurred* incurred** incurred**
* Immediately expensed on initial recognition
** Capitalized transaction costs are amortized to profit or loss using the effective interest method.
Note: If debt instruments were acquired between interest dates, the amount paid for accrued interest should not
be part of the historical cost of the instruments.
2.0.MEASUREMENT SUBSEQUENT TO DATE OF ACQUISITION
FVTPL FVTOCI Amortized Cost
Statement of At Fair Value At Fair Value At ‘Amortized Cost’
Financial Position
(SFP)
Amortization Not subject to Subject to amortization, with the amortization of premium or
amortization discount reported in P/L as part of interest income
Interest Revenue Interest revenue Interest is calculated using the effective interest method is
using nominal recognised in P&L
interest rate
Change in fair Value Reported in P&L The difference between the Not recognized
amortized cost and its fair market
value is recognized in OCI and
accumulated in equity in
“Investment Revaluation Reserve”
Impairment Not applicable Recognise a loss allowance for expected credit losses
Presentation of Loss Not applicable Included as part of the revaluation As a deduction from the
Allowance in the SFP amount in the investments ‘gross carrying amount’ of
revaluation reserve [It shall not the assets [to arrive at the
reduce the carrying amount of the ‘amortised cost’ amount]
financial asset in the SFP.]
Gains & Losses P&L Recognised in OCI* until the Recognised in P&L when the
financial asset is derecognised or financial asset is
reclassified. derecognised, reclassified,
through the amortisation
When the financial asset is
process or in order to
derecognised the cumulative gain
recognise impairment gains
or loss previously recognised in
or losses.
OCI is reclassified from equity to
profit or loss as a reclassification
adjustment.
On derecognition, amounts
recognised in P&L are the same as
the amounts that would have
been recognised in P&L if the
financial asset had been measured
at amortised cost. [IFRS 9:5.7.10-
11]

FINANCIAL ACCOUNTING & REPORTING FAR 04 Lecture | Page 1 of 4

M i C P A R Review Center INVESTMENTS IN DEBT INSTRUMENTS | Page 2

* Except for impairment losses and foreign exchange gains and losses, which must be reflected in current profit
or loss.
Amortised cost of a financial asset – The amount at which the financial asset is measured at initial recognition minus
the principal repayments, plus or minus the cumulative amortisation using the ‘effective interest method’ of any
difference between that initial amount and the maturity amount adjusted for any ‘loss allowance’.
Gross carrying amount of a financial asset –the amortised cost of a financial asset, before adjusting for any loss
allowance.
Cumulative amortisation using Loss
Amount at Gross
Principal effective interest method of any allowance Amortised
initial – +/– = carrying – =
repayments difference between initial amount for financial cost
recognition amount
and maturity amount assets
Effective interest method is the method that is used in the calculation of the amortised cost of a financial asset (or a
financial liability) and in the allocation and recognition of the interest revenue (or interest expense) in profit or
loss over the relevant period.
Effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the
expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the
amortised cost of a financial liability.
→ When calculating the effective interest rate, an entity shall estimate the expected cash flows by considering
all the contractual terms of the financial instrument (for example, prepayment, extension, call and similar
options) but shall NOT consider the expected credit losses. The calculation includes all fees and points paid
or received between parties to the contract that are an integral part of the effective interest rate (see
paragraphs B5.4.1–B5.4.3), transaction costs, and all other premiums or discounts.
 Reclassification adjustments are amounts reclassified to profit or loss in the current period that were
recognised in other comprehensive income in the current or previous periods.

3.0.IMPAIRMENT AND RECOVERY

An entity shall recognise a loss allowance for expected credit losses on the following investment in bonds:
(a) Amortised cost and
(b) FVTOCI

Overview of the impairment requirements

Stage 1: The credit risk on a financial instrument has not increased significantly since initial recognition. (Low credit
risk (eg ‘investment grade’; Performing Assets)
 Loss allowance = 12-month expected credit losses
 Interest revenue applying the effective interest rate to the gross carrying amount
Stage 2: There have been significant increases in credit risk since initial recognition (but not credit-impaired)
(Underperforming assets)
 Loss allowance = lifetime expected credit losses
 Interest revenue applying the effective interest rate to the gross carrying amount
 There is a rebuttable presumption that the credit risk on a financial asset has increased significantly
since initial recognition when contractual payments are more than 30 days past due.

Stage 3: There have been significant increases in credit risk since initial recognition and there is evidence indicating
the financial asset has become credit-impaired (Non-performing assets).
 Loss allowance = lifetime expected credit losses
 Interest revenue applying the effective interest rate to the amortized cost
 There is a rebuttable presumption of default (ie, the financial asset is credit-impaired) when a financial
asset is more 90 days past due.
Example of current credit risk grading framework:
Basis for recognizing
Category Description expected credit losses
Performing The counterparty has a low risk of default and does not 12m ECL
have any past-due amounts
Doubtful Amount is >30 days past due or there has been a Lifetime ECL – not credit-impaired
significant increase in credit risk since initial
recognition
In default Amount is >90 days past due or there is evidence Lifetime ECL – credit-impaired
indicating the asset is credit-impaired

FINANCIAL ACCOUNTING & REPORTING FAR 04 Lecture | Page 2 of 4

M i C P A R Review Center INVESTMENTS IN DEBT INSTRUMENTS | Page 3

Write-off There is evidence indicating that the debtor is in severe Amount is written off
financial difficulty and the Company has no realistic
prospect of recovery.

Loss allowance – The allowance for ‘expected credit losses’ on financial assets measured at amortised cost, lease
receivables and contract assets, the accumulated impairment amount for financial assets measured FVTOCI and
the provision for expected credit losses on loan commitments and financial guarantee contracts.
Expected credit losses (ECL) - The weighted average of ‘credit losses’ with the respective risks of a default occurring as
the weights.
Credit loss - The difference between all contractual cash flows that are due to an entity in accordance with the
contract and all the cash flows that the entity expects to receive (ie all cash shortfalls), discounted at
• the original effective interest rate , or
• credit-adjusted effective interest rate for POCI financial assets.
→ 12-month expected credit losses (12-month ECL) - The portion of lifetime expected credit losses that
represent the expected credit losses that result from default events on a financial instrument that are
possible within the 12 months after the reporting date.
Lifetime expected credit losses (Lifetime ECL) - The expected credit losses that result from all possible default events
over the expected life of a financial instrument.
Credit-impaired financial asset – a financial asset is credit-impaired when one or more events that have a detrimental
impact on the estimated future cash flows of that financial asset have occurred.
Evidence that a financial asset is credit-impaired includes observable data about the following events [IFRS 9
Appendix A]:
(a) significant financial difficulty of the issuer or the borrower;
(b) a breach of contract, such as a default or past due event;
(c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty,
having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;
(d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
(e) the disappearance of an active market for that financial asset because of financial difficulties; or
(f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses
Measurement of expected credit losses
Expected credit losses are a probability-weighted estimate of credit losses (ie the present value of all cash shortfalls)
over the expected life of the financial instrument.
A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and
the cash flows that the entity expects to receive.
Note that because expected credit losses consider the amount and timing of payments, a credit loss arises even if the
entity expects to be paid in full but later than when contractually due.

For financial assets, a credit loss is the present value of the difference between:
(a) the contractual cash flows that are due to an entity under the contract;
and
(b) the cash flows that the entity expects to receive.

For a financial asset that is credit-impaired at the reporting date, but that is not a POCI financial asset, an entity shall
measure the expected credit losses as the difference between
(a) the asset’s gross carrying amount and
(b) the present value of estimated future cash flows discounted at the financial asset’s original effective
interest rate.
Any adjustment is recognised in profit or loss as an impairment gain or loss.

Interest revenue on purchased or originated credit-impaired financial assets

For those financial assets, the entity shall apply the credit-adjusted effective interest rate to the amortised cost of the
financial asset from initial recognition.

credit-adjusted effective interest rate is the rate that exactly discounts the estimated future cash payments or
receipts through the expected life of the financial asset to the amortised cost of a financial asset that is a
purchased or originated credit-impaired financial asset.
→ When calculating the credit-adjusted effective interest rate, an entity shall estimate the expected cash flows
by considering all contractual terms of the financial asset (for example, prepayment, extension, call and
similar options) AND expected credit losses.

FINANCIAL ACCOUNTING & REPORTING FAR 04 Lecture | Page 3 of 4

M i C P A R Review Center INVESTMENTS IN DEBT INSTRUMENTS | Page 4

4.0 CHANGES IN THE CATEGORY OF A DEBT INSTRUMENT

Reclassification of financial assets is permitted if, and only if, the objective of the entity’s business model for
managing those financial assets changes.
If an entity reclassifies financial assets it shall apply the reclassification prospectively from the reclassification
date. The entity shall not restate any previously recognised gains, losses (including impairment gains or losses) or
interest.
IFRS 9’s reclassification related measurement requirements are as summarised below:
Initial Revised
Notes
classification classification
FVTPL FVTOCI  Continue to measure at fair value with gains or losses subsequently
recognised in OCI.
5.6.6
 The effective interest rate is determined on the basis of the fair value of
the asset at the reclassification date.
FVTOCI FVTPL  Continue to measure at fair value with gains or losses subsequently
recognised through profit or loss.
 Cumulative gain or loss previously recognised in OCI → reclassified from
equity to profit or loss as a reclassification adjustment at reclassification
date
FVTOCI Amortised  Fair value on reclassification date used for purposes of the transfer;
cost  Cumulative gain or loss in OCI → removed from equity and adjusted
against FV at reclassification date
o such that asset reverts to measurement basis that would have
always been determined under the amortised cost approach.
 No change to recognition of interest income as the original effective
interest rate continues to be applied.
 Effective interest rate and expected credit losses → not adjusted
 However, the impairment amount would now be recognised as a reduction
from carrying amount.
Amortised FVTOCI  Fair value measured on reclassification date.
cost  Difference between previous amortised cost and FV → recognised in OCI
 No change to recognition of interest income as the original effective
interest rate continues to be applied.
 Effective interest rate and expected credit losses → not adjusted.
 However, the impairment amount would be recognised within OCI and not
as a reduction from carrying amount.
FVTPL Amortised  FV at reclassification date = new gross carrying amount
cost  Effective interest rate is determined based on this carrying amount.
the effective interest rate is determined on the basis of the fair
value of the asset at the reclassification date.
Amortised FVTPL  Fair value is measured at the reclassification date.
cost  Difference between previous amortised cost and FV → recognised in profit
or loss

5.0 SALE AND DERECOGNITION

On derecognition of a financial asset in its entirety, gain or loss shall be recognized in profit or loss, computed as the
difference between:
(a) the carrying amount (measured at the date of derecognition) and
(b) the consideration received (including any new asset obtained less any new liability assumed)

Partial disposal: The previous carrying amount of the financial asset shall be allocated between the part that
continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on
the date of the transfer. Gain or loss shall be recognized in profit or loss, computed as the difference between:
(a) the carrying amount (measured at the date of derecognition) allocated to the part derecognised and
(b) the consideration received for the part derecognised (including any new asset obtained less any new liability
assumed)

IFRS FOR SMES SECTION 11 CLASSIFICATION REQUIREMENTS

Investments in bonds are measured at amortised cost only. The fair value option or FVTOCI in IFRS 9 are not available.

FINANCIAL ACCOUNTING & REPORTING FAR 04 Lecture | Page 4 of 4