(Intermediate Accounting 1A)

LECTURE AID

2020

ZEUS VERNON B. MILLAN

Chapter 9 INVESTMENTS

Learning Objectives

• Identify financial assets and financial

liabilities.
• State the classifications of financial
assets and their initial and subsequent
measurements.
• Explain how fair value is measured.
• Account for investments in equity
securities.
INTERMEDIATE ACCTG 1A (by: MILL
AN)
Financial instruments

• Financial instrument is “any contract that gives rise to

a financial asset of one entity and a financial liability or
equity instrument of another entity.” (PAS 32)
• Financial instruments include both financial assets and
financial liabilities.
• Financial instruments include equity instruments of
another entity but exclude an entity’s own equity
instruments. An entity’s own equity instruments are
neither assets nor liabilities, but rather equity.
INTERMEDIATE ACCTG 1A (by: MILL
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Financial assets

A financial asset is any asset that is:

a. Cash;
b. Equity instrument of another entity; or
c. Contractual right to receive cash or another financial
asset or to exchange financial instruments with another
entity under conditions that are potentially favorable.

INTERMEDIATE ACCTG 1A (by: MILL

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Financial liabilities

A financial liability is any liability that is:

a. a contractual obligation to deliver cash or another
financial asset to another entity; or
b. a contractual obligation to exchange financial
instruments with another entity under conditions that
are potentially unfavorable.

INTERMEDIATE ACCTG 1A (by: MILL

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Initial recognition and Classification
• Financial assets are recognized only when the entity
becomes a party to the contractual provisions of the
instrument.

INTERMEDIATE ACCTG 1A (by: MILL

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Basis of classification

Financial assets are classified based on:

1. the entity’s business model for managing the financial assets;
and
2. the contractual cash flow characteristics of the financial asset.

INTERMEDIATE ACCTG 1A (by: MILL

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INTERMEDIATE ACCTG 1A (by: MILL
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Equity vs. Debt instruments

• Only debt instruments can be classified under the

Amortized Cost or FVOCI (mandatory) measurement
categories.
• Equity instruments are measured at FVPL, unless the
entity makes an irrevocable election on initial recognition
to measure them at FVOCI.
• A debt instrument that is not measured at amortized cost
or at FVOCI is measured at FVPL.
INTERMEDIATE ACCTG 1A (by: MILL
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Business models

INTERMEDIATE ACCTG 1A (by: MILL

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Business models

INTERMEDIATE ACCTG 1A (by: MILL

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Business models

INTERMEDIATE ACCTG 1A (by: MILL

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Business models

INTERMEDIATE ACCTG 1A (by: MILL

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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.” (PFRS 13)
• Fair value is based on the market price of the asset in a:
a. principal market; or
b. the most advantageous market (in the absence of a principal
market)
• The market price used in measuring fair value is not adjusted
for any transaction costs, but is adjusted for any transport
costs.
INTERMEDIATE ACCTG 1A (by: MILL
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Formula

Market price (in ‘principal’ or ‘most

advantageous’ market) xx
Less: Transport costs (xx)
Fair value xx

INTERMEDIATE ACCTG 1A (by: MILL

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 Fair value hierarchy
Level 1 Observable inputs that reflect quoted
prices for identical assets or liabilities in Most reliable
active markets.

Level 2 Inputs other than quoted prices included

in Level 1 that are observable for the
asset or liability either directly or through
corroboration with observable data.

Least reliable
Level 3 Unobservable inputs (for example, an
entity’s own data or assumptions).

INTERMEDIATE ACCTG 1A (by: MILL

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INTERMEDIATE ACCTG 1A (by: MILL
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 APPLICATION OF CONCEPTS

PROBLEM 6: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1A (by: MILLAN)

 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

INTERMEDIATE ACCTG 1A (by: MILLAN)

 END
INTERMEDIATE ACCTG 1A (by: MILLAN)