INVESTMENT IN DEBT SECURITIES

introduced
Discussed by: Ariel E. Serrano, CPA, MBA (in progress)
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

o Investments are assets not directly identified with the central revenue producing activities of the
enterprise, but are acquired for any of the following purposes:
✓ To earn a return on idle cash balance;
✓ To establish long-term relationship with suppliers and customers;
✓ To exercise significant influence or control over another entity;
✓ To accumulate funds for future use;
✓ For capital appreciation; or,
✓ For future protection.

o Investments include the following:

✓ Investment in debt and equity securities;
✓ Plant expansion fund, equipment acquisition fund, stock redemption fund, and sinking fund;
✓ Investment property;
✓ Cash surrender value of life insurance policies.
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

WHAT IS A SECURITY?
A security is either an ownership in share in another entity or a loan granted to another entity, embodied in a
financial instrument dealt with in capital markets.

Investment
in Securities

Those representing a creditor Debt Equity Those that represent ownership in a

company or rights to acquire

Securities Securities
relationship with an enterprise. ownership interests at an agreed-
upon or determinable price.
A BRIEF INTRO TO FINANCIAL INSTRUMENTS
Reference: The Intermediate Accounting Series Volume 1 by Empleo & Robles

Issuer’s POV

CONTRACT

Holder’s POV
A BRIEF INTRO TO FINANCIAL INSTRUMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Cash and cash equivalents

Loans and receivables

Investment in debt securities

Arises from a contract that
entitles the holder to receive
cash or another financial asset. Investment in equity securities

Derivatives
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Investment in
Securities

Debt Securities Equity Securities

Government
securities (treasury Preference shares
bills and warrants)

Corporate bonds Ordinary shares

Share warrants or
Convertible debt
stick rights

Commercial Call options and

papers put options
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Investment in
Securities

Debt Securities Equity Securities

NOTE:
The substance of a financial instrument, rather Government
than its legal form, governs its classification as to whether the
instrument is a debt or equity security. securities (treasury
bills and warrants)
Preference shares

For instance, a preference share that provides for mandatory redemption by the issuer for a fixed or determinable
amount at a fixed or determinable future date, Corporate
or gives the holder
bonds the right to require the issuer to redeem the
Ordinary shares
instrument at or after a particular date for a fixed or determinable amount, is more appropriately classified as debt
security rather than as equity security.
Share warrants or
Convertible debt
stick rights

Commercial Call options and

papers put options
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

o Debt securities are financial instruments issued by a company that typically have the following
characteristics:
✓ A maturity value;
✓ Periodic interest payments based on a rate specified in the instrument; and,
✓ A maturity date.
o Debt securities, such as bonds, may sell at a price different from the face value of the instruments.
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

o The bond’s market value is a result of an interaction of a variety of forces such as:
✓ the risk relating to the bonds,
✓ the credit image of the issuing corporation,
✓ current interest rates,
✓ expected future interest rates, and the
✓ Stated rate of interest on the investment

Sold/purchased at a Sold/purchased at a
DISCOUNT PREMIUM
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

NOTE:
Usually, the issuance price of bonds sold at a premium or discount is quoted as a percentage of the face value. A P1
million bond acquired at 102, is purchased at 102% of the face value, hence, P1,020,000. If purchased at 95.5, then,
P955,000.
Stated Interest Rate
Sold/purchased at a Sold/purchased at a
DISCOUNT PREMIUM

Desired Interest Rate Desired Interest Rate

(effective / market / yield) (effective / market / yield)
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

The market price of a bond can be determined by discounting the maturity value of the bond and
each remaining interest payment at the market rate of interest for a similar debt instrument on that
date.
ILLUSTRATION:
Assume a 5-year, P1 million, 15% XYZ Co. bonds are purchased. The effective interest rate for similar
bonds is 12%. Interest on the bonds is payable semi-annually.

P1 million at present value (6% for 10 periods, PVF = 0.558395) P558,395 Diff. in % (7.5 - 6) 1.5%
Interest payments at present value (6% for 10 periods, PVF = 7.36008) Face value P1,000,000
P1 million x 7.5% = P75,000 552,006 PVF 7.36008
Total present value / bond price P1,110,401 Premium P110,401
Stated rate > effective rate
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Classification (for
financial reporting Investments in Debt
Securities

purposes; IFRS 9)

Business model for Contractual cash flow

Basis of Both managing the financial
asset
characteristics of the
financial asset

Determined at a level
that reflects how Refers to how an entity Applied on a portfolio
How groups of financial
assets are managed
manages its financial
assets to generate cash
level and not on an
instrument-by-
together to achieve a flows instrument approach
particular objective
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Collecting cash flows that are solely payment for principal and interest (SPPI)

• Investment in debt securities measured at amortized cost

Selling financial assets when opportunity from profit taking arises because of
fluctuations in fair values and interest rates
• Investment in debt securities measured at fair value through profit or loss (FVPL)

Both collecting cash flows that are payment for principal and interest and selling
the asset when opportunity arises
• Investment in debt securities measured at fair value through other comprehensive income (FVOCI)
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Collecting cash flows that are solely payment for principal and interest (SPPI)

• Investment in debt securities measured at amortized cost

InterestSelling financial
represents assetsfor
consideration when opportunity
the time from and
value of money profit
thetaking arises
credit risk because
associated with of
the principal
amount fluctuations in faira values
outstanding during particularand interest
period of time.rates
• Investment in debt securities measured at fair value through profit or loss (FVPL)
The following instruments will NOT qualify at amortized cost:
Derivatives, such as options, forwards and swaps;
o
o
Both collecting cash flows that are payment for principal
Bonds convertible into equity instruments;
and interest and selling
o the
A loan asset
that when
pays an interestopportunity arisesrelationship to market rate;
rate that has an inverse
o A bond that pays a variable interest rate and whose maturity is periodically reset.
• Investment in debt securities measured at fair value through other comprehensive income (FVOCI)
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

These are investment in debt securities that are primarily

held for trading purposes.

Collecting cash flows that are solely payment

Business Model for
A principal and interest (SPPI)

• Investment in debt securities measured at amortized cost

Selling financial assets when opportunity from profit taking arises because of
fluctuations in fair values and interest rates
• Investment in debt securities measured at fair value through profit or loss (FVPL)

Both collecting cash flows that are payment for principal and interest and selling
Business Model C
the asset when opportunity arises
An entity•may
Investment in debt securities
also irrevocably designatemeasured at fair value
debt investments through
as at other itcomprehensive
FVPL, when income
chooses to measure (FVOCI)
such instruments
at fair value to eliminate accounting mismatch from the measurement of financial assets and liabilities.
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Whether or not the instrument is quoted in an active

market is not relevant for the measurement basis.

Collecting cash flows that are solely payment for principal and interest (SPPI)

• Investment in debt securities measured at amortized cost

Selling financial assets when opportunity from profit taking arises because of
fluctuations in fair values and interest rates
• Investment in debt securities measured at fair value through profit or loss (FVPL)

Both collecting cash flows that are payment for principal and interest and selling
the asset when opportunity arises
• Investment in debt securities measured at fair value through other comprehensive income (FVOCI)
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

Please refer to the Excel file

for the additional materials
on this topic.
INVESTMENTS
Reference: The Intermediate Accounting Series Volume 1 by Robles & Empleo

End of
Video
Lecture.
Thank you!