Equity Yyy

FINANCIAL INSTRUMENTS (EQUITY AND DEBT INSTRUMENTS)
1. Financial instruments
Introduction
A 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.
Need for accounting standard
In recent years there has been a huge growth worldwide in the variety and complexity of financial instruments in international financial markets.
There were numerous concerns about the accounting practices used for financial instruments which led to demands for an accounting standard. The concern i
There had been significant growth in the number and complexity of financial instruments.
Accounting standards had not developed in line with the growth in instruments.
There had been a particular problem with derivatives (e.g. forwards, future, swaps, etc.)
Unrealized gains/losses on many financial instruments were not recognized.
Entities could choose when to recognize profits on instruments in order to smooth profits.
Accounting standards
There are three reporting standards that deal with financial instruments:
 IAS 32 Financial Instruments: Presentation
 IFRS 7 Financial Instruments: Disclosures
2. IFRS 9 Financial Instru instruments
Introduction
A 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.
Need for accounting standard
In recent years there has been a huge growth worldwide in the variety and complexity of financial instruments in international financial
markets.
There were numerous concerns about the accounting practices used for financial instruments which led to demands for an accounting
standard. The concern included the following:
There had been significant growth in the number and complexity of financial instruments.
Accounting standards had not developed in line with the growth in instruments.
There had been a particular problem with derivatives (e.g. forwards, future, swaps, etc.)
Unrealized gains/losses on many financial instruments were not recognized.
Entities could choose when to recognize profits on instruments in order to smooth profits.
Accounting standards
There are three reporting standards that deal with financial instruments:
 IAS 32 Financial Instruments: Presentation
 IFRS 7 Financial Instruments: Disclosures
 IFRS 9 Financial Instruments
IAS 32 deals with the classification of financial instruments and their presentation in financial statements.
IFRS 9 deals with how financial instruments are measured and when they should be recognized in financial statements.
IFRS 7 deals with the disclosure of financial instruments in financial statements.
Financial assets
A financial asset is any asset that is:
 Cash
 A contractual right to receive cash or another financial asset from another entity
 A contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially
favourable
 An equity instrument of another entity (IAS 32, para 11)
Examples of financial assets include:

 Trade receivables
 Options
 Investments in equity shares.
Financial liabilities
A financial liability is any liability that is a contractual obligation:
 To deliver cash or another financial asset to another entity, or
 To exchange financial assets or liabilities with another entity under conditions that are potentially unfavourable, or
 That will or may be settled in the entity’s own equity instruments (IAS 32, para 11)
Examples of financial liabilities include:

 Trade payables
 Debentures loans
 Redeemable preference shares
What are NOT within the scope of IFRS 9 and you should apply some other standard to these items:
 Contract to deliver physical goods or services that is not settled by cash, cash equivalent, and financial
instruments.
 Constructive obligations such as deferred income, warranty, or impairment provision; and statutory obligations
such as tax payables; which are all not contractual.
 Special items with its own standards, such as insurance contracts under IFRS 4, finance lease under IAS 17 ,
share-based payment under IFRS 2, contract assets under IFRS 15, and contingent events and provisions under
IAS 37.
 Certain loan commitments and finance guarantees that is not booked at the FVPL. However, potential credit
losses are subject to the ECL model like the finance lease.
Page 1 of 30
 ments
IAS 32 deals with the classification of financial instruments and their presentation in financial statements.
IFRS 9 deals with how financial instruments are measured and when they should be recognized in financial statements.
IFRS 7 deals with the disclosure of financial instruments in financial statements.
Financial assets
A financial asset is any asset that is:
 Cash
 A contractual right to receive cash or another financial asset from another entity
 A contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially
favourable
 An equity instrument of another entity (IAS 32, para 11)
Examples of financial assets include:

 Trade receivables
 Options
 Investments in equity shares.
Financial liabilities
A financial liability is any liability that is a contractual obligation:
 To deliver cash or another financial asset to another entity, or
 To exchange financial assets or liabilities with another entity under conditions that are potentially unfavourable, or
 That will or may be settled in the entity’s own equity instruments (IAS 32, para 11)
Examples of financial liabilities include:

 Trade payables
 Debentures loans
 Redeemable preference shares
What are NOT within the scope of IFRS 9 and you should apply some other standard to these items:
 Contract to deliver physical goods or services that is not settled by cash, cash equivalent, and financial
instruments.
 Constructive obligations such as deferred income, warranty, or impairment provision; and statutory obligations
such as tax payables; which are all not contractual.
 Special items with its own standards, such as insurance contracts under IFRS 4, finance lease under IAS 17 ,
share-based payment under IFRS 2, contract assets under IFRS 15, and contingent events and provisions under
IAS 37.
 Certain loan commitments and finance guarantees that is not booked at the FVPL. However, potential credit
losses are subject to the ECL model like the finance lease.
Financial assets Nonfinancial assets Financial liabilities Nonfinancial liabilities

1. Cash and cash equivalents 1. Merchandise inventory 1. Accounts payable 1. Advances from customers
2. Accounts receivable 2. Biological assets 2. Utilities payable 2. Unearned rent
3. Allowance for bad debts 3. Non-current asset held for sale 3. Accrued interest expense 3. Warranty obligation
4. Notes receivable 4. Investment property 4. Cash dividends payable 4. Unearned interest
5. Interest receivable 5. Property, plant and equipment 5. Finance lease liability 5. Income taxes payable
6. Loans receivable 6. Accumulated depreciation 6. Bonds payable 6. SSS contributions payable
7. Prepaid interest (not a 7. Intangible assets 7. Add premium or Less discount 7. Philhealth payable
valuation account to financial 8. Prepaid rent on bonds payable 8. Property dividends
liability) 9. Claims for tax refund 8. Security deposit payable
8. Investment in equity and 10. Deferred tax assets 9. Issued redeemable preference 9. Deferred tax liabilities
debt instrument 11. Gold bullion deposited in shares (with mandatory 10. Provision for warranties
9. Investment in associate banks redemption)
10. Investment in subsidiary 10. Stock appreciation rights
11. Cash surrender value payable
12. Sinking fund
13. Derivatives
Page 1 of 30
3. Financial assets
Initial recognition of financial assets

IFRS 9 deals with recognition and measurement of financial assets. “An entity shall recognize a financial asset on its statement of financial position when, and only when, the
Initial measurement of financial assets

An initial recognition, all financial assets are measured at fair value. This is likely to be the purchase consideration paid to acquire the financial asset. Transaction costs are inclu
4. Equity instruments
Classification of Investment in Equity Securities
% of ownership Preference shares Ordinary shares

>% to <20%
Standard FVTPL
Applicable for Investment in Preference or FVTOCI
Shares FVTPL or FVTOCI
20% to 50% FVTPL or FVTOCI Investment in Associate
>50% FVTPL or FVTOCI Investment in Subsidiary
Type of investment Purpose Method Applicable Standard

Standard
Financial Applicable
asset for InvestmentDividend/Speculation
in Ordinary Shares Fair value PAS 32
PFRS7
PFRS 9
Type of investment Purpose Method Applicable Standard

Financial asset Dividend/Speculation Fair value PAS 32
PFRS 7
PFRS 9
Investment in associate Significant influence Equity method PAS 28
PFRS 7
Investment in joint venture Joint control Equity method PAS 28
PFRS 11
PFRS7
Investment in subsidiary Control a. Separate FS: (Cost or Equity PAS 27
Method) PAS 28
Equity instruments (purchases of shares in other entities) are measured at either:
b. Consolidation PFRS 10
 Fair value through profit or loss, or PFRS 7
 Fair value through other comprehensive income
Fair value through profit or loss
This is the default category for equity investments.
Any transaction costs associated with the purchase of these investments are expense to profit or loss, and are not included within
the initial value of the asset.
The investments are then revalued to fair value at each year-end, with any gain or loss being shown in the statement of profit or
loss.
Fair value through other comprehensive income
Instead of classifying equity investments as fair value through profit or loss (FVPL), an entity may designate the investment as “fair
value through other comprehensive income (FVOCI). This designation must be made on acquisition and can only be done if the
investment is intended as a long-term investment. Once designated this category cannot later be changed to FVPL.
Under FVOCI:
 Transaction costs are capitalized.
 The investments are revalued to fair value each year-end, with any gain or loss being shown in other comprehensive income
and taken to an investment reserve in equity.
This is similar to a revaluation of property, plant and equipment under IAS 16. The main difference is that the investment reserve
can be negative.
If a FVOCI investment is sold, the investment reserve will be transferred into retained earnings.
Equity instruments – Further detail
The normal expectation is that equity instruments will have the designation of fair value through profit or loss, with the price paid to
acquire the financial asset initially regarded as fair value. This could include unquoted equity investments, which may present problems
in arriving at a reliable fair value at each reporting date. However, IFRS 9 does not include a general expectation for unquoted equity
investments to be measured at cost. Instead if proves guidance on when cost may, or may not, be regarded as a reliable indicator of
fair value.
It is possible to designate an equity instrument as fair value through other comprehensive income, provided specified conditions have
been complied with as follows:
 The equity instrument cannot be held for trading, and
 There must be an irrevocable choice for this designation upon initial recognition.
In this situation, initial recognition will also include directly attributable transaction costs. This may apply, for example for strategic
investments to be held on a continuing basis which are not held to take advantage of changes in fair value. The election to designate
these investments at FVOCI would prevent any volatility in the share price being reflected within the entity’s profit.
Classification FVTPL FVTOCI

Instrument type Equity or Derivatives Equity
Page 2 of 30
Initial recognition Financial assets are recognized on the Statement of Financial Position when the entity becomes a
party to the contractual provisions of the instrument.
Initial measurement Fair value Fair value plus transaction cost
Subsequent measurement Fair value Fair value
G/L on remeasurement P&L OCI, net of tax
Dividends on equity instrument P&L P&L
Subject to impairment test? No No
Impairment loss N/A N/A
Impairment gain (I.e., reversal) N/A N/A
Foreign exchange gain or loss P&L OCI
Derecognition Gain or Loss – presentation P&L Directly closed to Retained earnings
Unrealized gain /Unrealized loss recognized in N/A Directly closed to Retained Earnings
OCI
Comparative journal entries of FVTPL (equity securities) and FVTOCI (equity securities)
FVTPL (Financial asset through profit or FVTOCI (Financial asset at fair value
loss) through other comprehensive income)
Date of acquisition FVTPL FVTOCI
Cash Cash
Date of acquisition (Transaction cost) Expenses FVTOCI
Cash Cash
Unrealized gain FVTPL FVTOCI
Unrealized gain-P&L Unrealized gain – OCI
Unrealized loss Unrealized loss-P&L Unrealized loss-OCI
FVTPL FVTOCI
Sale of equity securities Cash Cash
Loss on sale –P&L Retained earnings (if any)
FVTPL FVTOCI
Gain on sale –P&L Retained earnings (if any)
Transfer of unrealized gain to Retained Not applicable Unrealized gain
Earnings Retained earnings
Transfer of unrealized loss to Retained Earnings Not applicable Retained earnings
Unrealized loss
Note:
Acquisition in between dates of declaration and record of dividends
In some instances, the company might acquire investment in between date of declaration of dividends; the dividends that have accrued on such
investment shall be deducted from the total consideration given to arise at the adjusted cost of the investment. Pertinent journal entry would be:
1. To record the acquisition
Investment X
Dividend receivable (or dividend income) X
Cash X
2. To record receipt of dividend

Cash X
Dividend receivable (or dividend income) X
INVESTMENT IN EQUITY SECURITIES – (TRANSACTIONS SUBSEQUENT TO ACQUISITIONS)
Transactions Subsequent to Acquisitions
Dividends
Three Different Dates Relating to Dividends

1. Date of declaration This is the date when the board of directors announces the distribution of dividends. Dividend
income must be recognized on this date.
Journal entry:
Dividend receivable xxx
Dividend income xxx
2. Date of record This is the cut-off date that determines who among the stockholders are entitled to dividend per
listing as of the record date. No journal entry is required on this date.
3. Date of payment Is the date when the dividend liability is to be paid.
Journal entry:
Cash/Non-cash asset xxx
Dividend receivable xxx
Note:
If shares are acquired Dividend on (Between Declaration and Record-date of Dividends), the purchase price shall be debited
to dividend receivable first before debiting the Investment account for the balance.
(Initial Cost = Purchase Price – Dividend Receivable)
DIVIDENDS OUT OF EARNINGS
Form Investment in unquoted equity securities measured at Financial Asset at FVTPL Investment
cost designated as at
FVTOCI
1. Cash Recorded as income at the amount of cash receivables
dividends
2. Property Recorded as income at the fair value of noncash asset receivable at the date of declaration
dividends
3. Cash As if the shares were received and subsequently sold. Gain or Same except that the Same
received in lieu loss shall be recognized equal to the difference between the net carrying value of the
share divided selling price and carrying value of the investment sold. The investment sold is equal to
carrying value is computed as follows: the fair value date of
Share Dividend (SD) declaration
Page 3 of 30
CV before SD plus cost of share dividends (if any) x Share Dividend
Orig. shares + share dividend
4. Shares The income is equal to the cash dividends that would have been Income at the fair value of Income at the fair value
received in lieu received. the stock received. of the stock received.
of cash dividend
Note:
Shares received in lieu of cash dividend Cash received in lieu of share dividend
 Increase investment  As if the shares were received and subsequently
 Increase dividend income Sold
 Decrease investment
 Gain or loss is recognized
Note:
A. Cash dividends shall be credited to dividend income upon declaration of face.
Cash dividend is the payment of cash to shareholders in proportion to the number of shares owned. Cash dividend may be:
a. Certain amount of pesos per share
b. A certain percent of the par or stated value (e.g. 10% cash dividends = 10% x par value or stated value)
Journal entries:
1. Date of declaration: Dr. Dividend Receivable Cr. Dividend Income
2. Date of record: No formal accounting entry
3. Date of payment: Dr. Cash Cr. Dividend receivable
B. Liability dividends – is a deferred cash dividend.

Date of declaration Scrip Dividend Receivable X
Dividend income X
Date of record No formal accounting entry
Date of redemption Cash X
Interest income X
Scrip Dividend Receivable X
C. Property dividends (shares of another entity) shall be credited to dividend income at fair value on declaration date.
Property dividend is a dividend paid in the form of some asset other than cash.
Examples:
1. Noncurrent asset covered by PFRS 5 (e.g. property, plant and equipment, intangibles and investment in associate.
2. Assets other than those covered by PFRS 5 (e.g. current assets just like inventory, noncurrent assets covered by PFRS 9 like
FVTOCI).
Journal entries:
1. Date of declaration: Dr. Dividend receivable Cr. Dividend income
3. Date of payment: Dr. Non-cash asset Cr. Dividend receivable
Note: Property dividends, regardless of the types, should always be recorded at the fair value at the date of declaration
irrespective of the fair value on the date of settlement.
D. Stock in lieu of Cash shall be recorded as dividend income at the fair value of shares received or the supposed cash
dividend (in order of priority)
1. Income at the fair value of the stock received.
2. In the absence of fair value, the income is equal to the cash dividends that would have been received.
E. Cash in lieu of Stock shall be accounted for under the “as if “approach, that is, as if shares were received and sold at
the cash received. Gain or loss shall be recorded accordingly. (See disposal of Financial Asset at Fair Value).
Carrying value = CV before stock dividend x Stock dividend
Orig. Shares + Stock dividend
As if the stocks were received and subsequently sold at the amount of cash received. Gain or loss shall be recognized.
Journal entries:
1. Date of Declaration: Memo entry : received number of shares as a share dividend.
3. Date of redemption: Dr. Cash Cr. Investment Cr. Gain on sale
The Gain or Loss on sale may be computed as follows:

Net Selling Price X
Less: Carrying amount of the investment sold (X)
Gain (or Loss) on sale X
Carrying amount of the investment sold

Original carrying amount of the shares X
Divide by:
Original shares X
Add: Share Dividend X X
Carrying amount per share of the investment sold Px
Multiply by: Share dividends x
Carrying amount of the investment sold X
SHARE DIVIDENDS
A share dividend is a dividend received in the form of the issuing entity’s own share. Share dividends from the point of view of
the issuing company may be classified as either small share dividend or large share dividend. However, accounting for small or
large dividend is an investment is the same. The accounting depends on the type of investment from which the dividends
received:
Investment in unquoted equity FA at FVTPL Investment designated as as

FVTOCI
1. Upon receipt
of share
dividends
a. Same class Recorded as memorandum entry only Dr. FVTPL (@ fair value) Dr. FVTOCI (@ fair value)
Cr. Unrealized gain – P&L Cr. Unrealized gain – OCI
b. Different class Allocate the original cost using the aggregate Dr. FVTPL (@ fair value)- Dr. FVTOCI (@ fair value)-
par value method. Journal entry assuming preference shares preference shares
investment in preference shares were received: Cr. Unrealized gain – P&L Cr. Unrealized gain – OCI
Dr. Investment in preference shares
Cr. Investment in ordinary shares
3. No journal entry – this investment is unquoted Dr. FVTPL (@ fair value)- Dr. FVTOCI (@ fair value)-
Remeasurement equity securities preference shares preference shares
of the old Cr. Unrealized gain – P&L Cr. Unrealized gain – OCI
shares to fair
value
Note:
Stock dividend (Bonus issue)/(issuing entity’s own shares) shall be recorded only through memo (update carrying value per share).
It is a dividend paid in the form of entity’s own share. Shares of other entities declared as dividends qualify as property dividends and not
as share dividends.
Share dividends may be classified as either small share dividend or large share dividend. However, accounting for small or large dividend
in an investment is the same.
Effect of the share dividends:

Number of shares Increase
Cost per share Decrease
Total Cost No effect (Total cost remains the same)
 Same class – recorded as memorandum entry only.
 Different class – allocate the original using the relative fair value method. Journal entry assuming investment in preference
shares were received:
Investment in Preference shares xxx
Investment in Ordinary shares xxx
Dividends Out of Capital / Liquidating Dividends/ Return of Investments

Liquidating dividend represent return of capital (not return on capital). They are not recognized as dividend revenue but rather
a deduction from the carrying amount of the investment. Dividends out of capital are actually liquidating dividend. It is not an
income and therefore credited to the investment account.
Liquidating dividends are received when the investee is either undergoing liquidation or a wasting asset corporation.
Under wasting asset doctrine, partial liquidation (or liquidation by installment) is allowed only for Wasting Asset Corporation.
But if the corporation is not a wasting asset corporation, one-time liquidation should be done and shareholders shall be paid
accordingly.
The journal entry upon receipt of dividends will be:

Wasting Asset Corporation Other than Wasting Asset Corporation
Dr. Cash Dr. Cash
Cr. Investment Dr. Loss on liquidation
Cr. Investment
Cr. Gain on liquidation
Share assessment vs Share Split

Share assessment shall be debited to the investment account and credited to cash
Stock Split or Share Split – is a decision by the company’s board of directors to increase the number of shares that are
outstanding by issuing more shares to current stockholders. (Accounting Treatment recorded as memorandum entry only.
No income is recognized.)
Stock right
A stock right or preemptive right is a privilege giving current stockholders the first right to buy shares in a new offering, thus
maintain their proportionate ownership interest.
The IFRS uses the term “right issue” for stock right. A shareholder is usually given one right for every share owned. The
exercise price or price to purchase a share is generally below the prevailing market price of the stock.
Stock warrant is an instrument or certificate evidencing ownership stock right.
Accounting for Stock Right

Accounting for stock rights will depend if the rights emanates from fair value through profit or loss securities or fair value
through other comprehensive income.
Original classification of the Accounting treatment

shares of stock
FVTPL Only memorandum entry
FVTOCI Record the stock rights at its fair value by debit Stock rights and credit to
Unrealized gain (P&L)
Classification This can be considered as derivative thus, presented as current assets.

a. When SR is exercised The cost of investment includes:
FVTPL : Only subscription price
FVTOCI: Subscription price + Cost of the stock rights exercised.
b. When expired FVTOCI: Debit to loss on stock rights and Credit stock rights
Theoretical Value of the Rights: If the fair value of the stock rights is not given, then the company can compute its value
using the theoretical value of the rights. Formulas for the computation of the theoretical or parity value of stock right are:
1. When the share is selling right-on:
Market value of share right-on minus subscription price
Number of rights to purchase one share plus 1 = Value of one right
2. When share is selling ex-right:

Market value of share ex-right minus subscription price
Number of rights to purchase one share = Value of one right
Statement of Financial Position Presentation
Categories Financial Statement Presentation

FVTPL Current assets
FVTOCI a. Noncurrent – expected to be sold beyond one year after the reporting date.
b. Current – expected to be sold within one year after the reporting date.
5. Debt instruments
Debt instruments (such as bonds or redeemable preference shares) are categorized in one of three ways:
 Fair value through profit or loss
 Amortized cost
 Fair value through other comprehensive income
The default category is again fair value through profit or loss (FVPL). The other two categories depend on the instrument
passing two tests:
 Business model test. This considers the entity’s purpose in holding the investment.
 Contractual cash flow characteristic test. This looks at the cash that will be received as a result of holding the
investment and considers what is comprises.
Amortized cost
For an instrument to be carried at amortized cost, the two test to be passed are:
 Business model test. The entity must intend to hold the investment to maturity.
 Contractual cash flow characteristics test. This contractual terms of the financial asset must give rise to cash flows
that are solely of principal and interest.
If a debt instrument is held at amortized cost, the interest income (calculated using the effective interest as for liabilities) will be
taken to the statement of profit or loss, and the year-end asset value is similarly calculated using an amortized cost table:
Balance beginning (b/f) Interest income Payment received Balance ending (c/f)
X X (x) X
Fair value through other comprehensive income (FVOCI)
For an instrument to be carried at FVOCI, the two tests to be passed are:

 Business model test. The entity must intend to hold the investment to maturity but may sell the asset if the possibility of
buying another asset with a higher return arises.
 Contractual cash flow characteristics test. The contractual terms of the financial asset must give to cash flows that are
solely of principal and interest, as for amortized cost.
If a debt instrument is held at FVOCI

 The asset is initially recognized at fair value plus transaction costs.
 Interest income is calculated using the effective rate of interest, in the same way as the amounts that would have been
recognized in profit or loss if using amortized cost.
 At the reporting date, the asset will be revalued to fair value with the gain or loss recognized in other comprehensive
income. This will be reclassified to profit or loss on disposal of the asset.
The contractual cash flow characteristic test

The contractual cash flow characteristics test determines whether the contractual terms of the financial asset give rise
to cash flows on specified dates that are solely of principal and interest based upon the principal amount outstanding.
If this is not the case, the test is failed and the financial asset must be measured at FVPL. For example, convertible
bonds contain rights in addition to the repayment of interest and principal (the right to convert the bond to equity)
and therefore would fail the test and must be accounted for at FVPL.
Debt instruments – Further detail

Even if a financial instrument passes both tests, it is still possible to designate a debt instrument as FVPL if doing so
eliminates or significantly reduces a measurement or recognition inconsistently (i.e. accounting mismatch) that would
otherwise arise from measuring assets or liabilities or from recognizing the gains or losses on them on different bases.
Summary of Classification, measurement (initial and subsequent) and derecognition of financial asset (DEBT
SECURITIES)
Classification FVTPL FVTOCI FAAC

Initial recognition Financial assets are recognized on the Statement of Financial Position when the entity becomes
a party to the contractual provisions of the instrument.
Initial measurement Fair value Fair value plus transaction Fair value plus transaction
cost cost
Subsequent measurement Fair value Fair value Amortized cost
G/L on remeasurement P&L OCI, net of tax N/A
Interest income on debt Nominal rate Effective rate Effective rate
securities (P&L) (NR x Face Value) (EIR x Beginning amortized (EIR x Beginning amortized
cost) cost)
Dividends on debt P&L N/A N/A
instrument
Subject to impairment test? No Yes Yes
Impairment loss N/A P&L P&L
Impairment gain (i.e., N/A P&L*** P&L***
reversal)
***Limit:
Principal X
Add: Accrued interest (unpaid) x
Total X
Multiply: Present value using original effective rate X
Total PV of future cash inflows A
Amortized cost had there been no impairment B
Lower figure (A vs B) x
Less: Amortized cost based on the remaining future (x)
cash flows at the original effective interest
Gain on recovery – IS x
Foreign exchange gain or loss P&L OCI P&L
Derecognition Gain or Loss – P&L P&L P&L
Presentation
Unrealized gain /Unrealized N/A Recycled to P&L N/A
loss recognized in OCI
Comparative journal entries of FVTPL (debt), FVTOCI (debt) and FACC

FVTPL (Financial asset FAAC (Financial asset at FVTOCI (Financial asset at fair
through profit or loss) amortized cost) value through other
comprehensive income)
Date of acquisition Investment in bonds-FVTPL Investment in bonds – FAAC Investment in bonds – FVTOCI
Cash Cash Cash
Date of acquisition (transaction Expenses Investment in bonds – FAAC Investment in bonds – FVTOCI
cost) Cash Cash Cash
Collection of interest Cash Cash Cash
Interest income Interest income Interest income
(Face Value x SR) (Face Value x SR) (Face Value x SR)

Unrealized gain Investment in bonds-FVTPL No Journal entry Investment in Bonds-FVTOCI
Unrealized gain-P&L Unrealized gain – OCI
Unrealized loss Unrealized loss-P&L No journal entry Unrealized loss-OCI
Investment in bonds-FVTPL Investment in bonds-FVTOCI
Amortization of bond discount No journal entry Investment in bonds-FAAC Investment in bonds-FVTOCI
Interest income Interest income
Interest collect <(AC beg x ER) Interest collect <( AC beg x ER)
Amortization of bond premium No journal entry Interest income Interest income
Investment in bonds-FAAC Investment in bonds-FVTOCI
Interest collect >( AC beg x ER) Interest collect >( AC beg x ER)
Sale of bonds Cash Cash Cash
Loss on sale –P&L Loss on sale-P&L Unrealized gain – OCI
FVPTL FA at amortized cost Loss on sale – P&L
Gain on sale –P&L Gain on sale –P&L FVTOCI
Unrealized loss-OCI
Gain on sale – P&L
Note:
Financial asset at amortized cost should initially be recognized at fair value including transaction cost.
Bonds may be acquired thru the following scheme:
Proceeds (P) vs Face Effective (E) vs Nominal rate Maturity value

amount (FA) (N)
At face amount P = FA E=N FA
At a premium P > FA E<N FA
At a discount P < FA E>N FA
Term Bonds
Computation of purchase price or present value: Terms bonds acquired on the interest date
PV of Principal (PV of 1 using effective rate x Principal) X

PV of Interest payments (PV of ordinary annuity x Principal x Nominal Rate) X
Purchase Price or Present Value of the bonds X
Term Bonds: Acquired in Between Interest Dates
Step 1 Compute for the present value of the bonds on the last interest date (or date of the bonds)
Step 2 To get the present value – date of acquisition, add the bond discount amortization (or deduct premium amortization)
from the last interest date until the date of acquisition.
Step 3 To get the total purchase price, add the nominal interest from the last interest date until the date of acquisition to the
The complete formula
presentisvalue
as follows:
– date of acquisition.
PV of Principal (PV of 1 using effective rate x Principal) X

Add: PV of Interest payments (PV of ordinary annuity x Principal x Nominal rate) X
Present value of the bonds – last interest date X
Add: Discount amortization (or deduct premium amortization) X
Present value – date of acquisition X
Add: Nominal interest (from the last interest date to date of acquisition) X
Total Purchase Price X
Interest income shall be computed using effective amortization taking into consideration the number of months outstanding during the
year.
Serial Bonds
Computation of the Present Value of Serial Bonds
Years Principal Interest Total Collection PVF of 1 Total Present

Collection Collection Value
End of Year 1 A B (A+B) = C x C*x
End of Year 2
End of Year n
Purchase Price of Serial Bonds X
Investment in bond at fair value option
PFRS 9, paragraph 4.1.5, provides that an entity at initial recognition may irrevocably designate a financial asset as measured at
fair value through profit or loss even if the financial asset satisfies the amortized cost measurement.
In other words, investment in bonds can be designated without revocation as measured at fair value through profit or loss even if
the bonds are held for collection as a business model.
Under the fair value option, all changes in fair value are recognized in profit or loss.
Moreover, the interest income is computed using the nominal interest rate rather than the effective interest rate.
Investment in Bonds with Detachable Warrants

1. The investment in bonds and share warrants are initially recognized at fair values. The fair value of financial assets on initial
recognition is usually equal to the transaction price.
2. Upon exercise of the share warrants, the newly acquired investment is recognized at fair value and the carrying amount of
the share warrants exercised is derecognized.
3. Upon expiration, the carrying amount of the share warrants is written-off as loss.
a. The entry to record the acquisition

Investment in bonds at amortized cost X
Investment in share warrants at FVPL X
Cash X
b. Sale of warrants: Assume that the detachable warrants are subsequently sold .
The entry to record the sale is as follows:
Cash X
Gain on sale (squeeze) X
c. Exercise of warrants: Assume the detachable warrants are subsequently exercised and the purchase price of the newly
acquired shares. The acquired shares are classified as held for trading securities.
The entry to record the exercise is as follows:
To recognize the newly acquired investment.
Held for trading securities X
Cash X
To derecognize the carrying amount of the share warrants exercised.

Loss on derecognition of asset –P/L X
c. Expiration of warrants: Assume the detachable warrants expired.
The entry to record the expiration of the warrants is as follows:

Loss on expiration of share warrants X
Statement of Financial Position Presentation
Categories Financial Statement Presentation

FVTPL Current assets
FVTOCI a. Non-current – maturity date is beyond one year after the reporting date (debt) or expected to
be sold beyond one year after the reporting date (equity)
b. Current – maturity date is within one year after the reporting date (debt) or expected to be sold
within one year after reporting date (equity)
FAAC a. Non-current – maturity date is beyond one year after the reporting date.
b. Current – maturity date is within one year from the reporting date.
Offsetting financial assets/financial liabilities

andards rules on offsetting, a financial asset and a financial liability may only be offset in very limited circumstances. The net amount may only be presented in the statement of financial p
ght to set off the amounts, and
a net basis or to realize the asset and settle the liability simultaneously.
6. Derecognition
m the financial asset expire (IFRS 9, para 3.2.3), e.g. when an option held by the entity has expired and become worthless or when the financial asset has been sold and the transfer qualifies
been transferred from the seller to the buyer.
Financial liability – when, and only when, the obligation specified in the contra
On derecognition the difference between the carrying amount of the asset or liabili
Factoring of receivables Introduction

Factoring of receivables is where a company transfers its receivables balances to
and collection and receives an advance on the value of those receivables in return.
Accounting for the factoring of receivables
Key question: Is the seller in substance receiving a loan on the security of the rece
Factors to consider:
Who bears the risk (of slow payment and irrecoverable debts)?
A sale of receivables with recourse means that the factor can return any unpaid de
A sale of receivables without recourse means the factors bears the risk of irrecover
In most forms of factoring, receivables balances are sold to the factor, but the latter’s degree of control over, and responsibility for, those debts will vary from one arrangement
A significant accounting question is only likely to arise where the factoring arrangement leads to the receipt of cash earlier than would have been the case had the receivables be
If the seller is in essence a borrower, and the factor a lender, then the arrangements will be such as to provide that the seller pay the equivalent of an interest charge to the facto
The key factor in the analysis will be who bears the risk (of slow payment) and the benefit (of early payment) by the receivable. If the finance cost reflects events subsequent
Reclassification
For financial assets, reclassification is required if and only if the entity’s business model objective for its financial assets changes
so its previous model assessment would no longer apply. If reclassification is appropriate, it must be done prospectively from the
reclassification date. An entity does not restate any previously recognized gains, losses or interest.
A change in the objective of the entity’s business model must be effected before the reclassification date.
Reclassification date is defined as the first day of the first reporting period following the change in business model that results in
an entity reclassifying financial assets. The first day of the next reporting may mean the first day of the next quarter in which
financial statement is required to be presented.
PFRS 9 does not allow reclassification where:

1. The other comprehensive income option (FVTOCI) has been exercised for equity securities or
2. The fair value option has been exercised in any circumstances for debt securities.
The following changes in circumstances are not reclassification:

1. A derivative that was previously a designated and effective hedging instrument in a cash flow hedge or net investment hedge no
longer qualifies as such.
2. A derivative becomes a designated and effective hedging instrument in a cash flow hedge or net investment hedge.
PFRS 9 does not allow reclassification:

1. for equity investments measured at FVTOCI, or
2. where the fair value option has been exercised in any circumstance for a financial assets or financial liability.
PFRS 9 allows only reclassification on among the different categories of financial asset classified as debt securities.
The table below serves as guide in accounting for reclassification:
(AMC – Amortized cost) (FVPL – Fair value through profit or loss) ( FVOCI – Fair value through other comprehensive income)
From To Difference Initial cost (Reclassification date) New Effect rate (ER)
AMC FVPL (AMC – FV)= profit or loss Fair value on reclassification date No – not required
Interest income = Face value x SR
AMC FVOCI (AMC – FV)= other Fair value on reclassification date No– effective rate is not adjusted
comprehensive income
Interest income will not change and
therefore the entity continues to use the
same effective rate
FVPL FVOCI (FV – FV) =Profit or loss. Fair value on reclassification date Yes – Calculate New ER (Based on Fair
value on reclassification date)
FVPL AMC (FV – FV) =Profit or loss. Fair value on reclassification date Yes – Calculate New ER (Based on Fair
FVOCI AMC (FV – FV) =OCI Amortized cost* (Adj. to FV, back to AMC) No – effective rate is not adjusted
OCI-gain xxx Interest income will not change and

Investment in bonds xxx *Fair value on reclassification date Minus therefore the entity continues to use the
(OCI –gain) Plus (OCI – loss) same effective rate
Note: The amount accumulated in
equity is removed to adjust the
asset to amortized cost. As if it
had been designated at amortized
cost from date of initial recognition
FVOCI FVPL (FV – FV) =OCI Fair value on reclassification date No – not required
OCI-gain xxx Interest income = Face value x SR

Gain (P/L statement) xxx
Note: Transfer the cumulative

unrealized gains and losses in OCI
to profit or loss
Note: Reclassification shall be made prospectively from the reclassification date. The reclassification date as defined by IFRS 9 is the first day of
the first reporting period following the change in business model. Such reclassification is considered to be very infrequent.
Financial assets that are irrevocably designated or initial recognition as fair value through profit or loss. These financial assets are
measured at fair value through profit or loss “by irrevocable designation” or “by option”. This fair value option is applicable to investments it
bonds and other debt instruments which can be irrevocably designated as at fair value through profit or loss even if the financial assets satisfy
the amortization cost measurement.
This irrevocably designation is the fair value option allowed in accordance with par.4.1.5 of PFRS 9.
IMPAIRMENT (PFRS 9)
Scope
IFRS 9 requires that the same impairment model apply to all of the following:
1. Financial assets measured at amortised cost;
2. Financial assets mandatorily measured at FVTOCI;
3. Loan commitments when there is a present obligation to extend credit (except where these are measured at FVTPL);
-Financial guarantee contracts to which IFRS 9 is applied (except those measured at FVTPL);
-Lease receivables within the scope of IAS 17 Leases; and
-Contract assets within the scope of IFRS 15 Revenue from Contracts with Customers (i.e. rights to consideration following
transfer of goods or services).
IFRS 9 offers two approaches:

1. General model for measuring a loss allowance:
This model recognizes loss allowance depending on the stage in which the financial asset is. There are 3 stages:
o Stage 1 – Performing assets: Loss allowance is recognized in the amount of 12-month expected credit loss;
o Stage 2 – Financial assets with significantly increased credit risk: Loss allowance is recognized in the
amount of lifetime expected credit loss, and
o Stage 3 – Credit-impaired financial assets: Loss allowance is recognized in the amount of lifetime expected
credit loss and interest revenue is recognized based on amortized cost.
Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred and have a
significant impact on the expected future cash flows of the financial asset. It includes observable data that has
come to the attention of the holder of a financial asset about the following events:
1. significant financial difficulty of the issuer or borrower;
2. a breach of contract, such as a default or past-due event;
3. the lenders for economic or contractual reasons relating to the borrower’s financial difficulty granted
the borrower a concession that would not otherwise be considered;
4. it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
5. the disappearance of an active market for the financial asset because of financial difficulties; or
6. the purchase or origination of a financial asset at a deep discount that reflects incurred credit losses.
2. Simplified model:
You don’t need to determine the stage of a financial asset, because a loss allowance is recognized always at a lifetime
expected credit loss.
Impairment
Impairment of financial assets is recognised in stages:
Stage 1—as soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognised in profit or
loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For financial assets,
interest revenue is calculated on the gross carrying amount (ie without deduction for expected credit losses).
Stage 2—if the credit risk increases significantly and is not considered low, full lifetime expected credit losses are recognised in
profit or loss. The calculation of interest revenue is the same as for Stage 1.
Stage 3—if the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is
Page 10 of 30
calculated based on the amortised cost (ie the gross carrying amount less the loss allowance). Financial assets in this stage will
generally be assessed individually. Lifetime expected credit losses are recognised on these financial assets.
Basis for estimating expected credit losses
Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted amount that is
determined by evaluating the range of possible outcomes as well as incorporating the time value of money. Also, the entity should
consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of
future economic conditions when measuring expected credit losses. [IFRS 9 paragraph 5.5.17]
The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring
as the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk
or probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss
occurs, even if the probability of a credit loss occurring is low. [IFRS 9 paragraph 5.5.18]
In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on the financial instrument
during its expected life. 12-month expected credit losses represent the lifetime cash shortfalls that will result if a default occurs in
the 12 months after the reporting date, weighted by the probability of that default occurring.
An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting
date). Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial
reporting purposes qualifying as such).
For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced,
whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified
debtor. [IFRS 9 paragraphs B5.5.31 and B5.5.32]
An entity may use practical expedients when estimating expected credit losses if they are consistent with the principles in the
Standard (for example, expected credit losses on trade receivables may be calculated using a provision matrix where a fixed
provision rate applies depending on the number of days that a trade receivable is outstanding). [IFRS 9 paragraph B5.5.35]
To reflect time value, expected losses should be discounted to the reporting date using the effective interest rate of the asset (or an
approximation thereof) that was determined at initial recognition. A “credit-adjusted effective interest” rate should be used for
expected credit losses of purchased or originated credit-impaired financial assets. In contrast to the “effective interest rate”
(calculated using expected cash flows that ignore expected credit losses), the credit-adjusted effective interest rate reflects expected
credit losses of the financial asset. [IFRS 9 paragraphs B5.5.44-45]
Expected credit losses of undrawn loan commitments should be discounted by using the effective interest rate (or an approximation
thereof) that will be applied when recognising the financial asset resulting from the commitment. If the effective interest rate of a
loan commitment cannot be determined, the discount rate should reflect the current market assessment of time value of money and
the risks that are specific to the cash flows but only if, and to the extent that, such risks are not taken into account by adjusting the
discount rate. This approach shall also be used to discount expected credit losses of financial guarantee contracts. [IFRS 9
paragraphs B5.5.47]
The following table summarizes financial asset subject to impairment under PFRS 9
Categories Subject to impairment? Impairment Loss Impairment gain (i.e.
reversal)
1. FVTPL
a. Debt No N/A N/A
b. Equity No N/A N/A
c. Derivatives No N/A N/A
2. FVTOCI
a. Debt Yes P&L P&L
b. Equity No N/A N/A
3. FAAC (Debt) Yes P&L P&L
At FMV Through Profit or Loss Investment at Amortized Cost

Impairment loss (permanent Not applicable- it is not necessary to assess PV of remaining future cash
decline) financial assets measured at fair value for flows at original effective interest xxx
impairment. Less: Carrying value of HTM (xxx)
Impairment loss – IS xxx
Decreases in FMV whether temporary or
permanent are recognized in the profit or
loss.
Recovery of previous Not Applicable Principal X

Impairment Add: Accrued interest (unpaid) x
Total X
Subsequent increases in FMV shall be
Multiply: Present value using original X
recognized in the profit or loss. effective rate
Page 11 of 30
Total PV of future cash inflows A
Amortized cost had there been no B
impairment
Less: Amortized cost based on the (x)
remaining future cash flows at the original
effective interest
Gain on recovery – IS x
Disclosures
IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments: Disclosures including adding disclosures about
investments in equity instruments designated as at FVTOCI, disclosures on risk management activities and hedge accounting and
disclosures on credit risk management and impairment.
Accounting for Regular Purchase or Sale of Financial Asset

 Regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery
of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
 A regular way purchase or sale of financial assets is recognized and derecognized using either trade date or settlement
date accounting. The method used is to be applied consistently for all purchases and sales of financial assets that
belong to the same category of financial asset as defined in PFRS 9 (note that for this purpose, assets held for trading
from a different category from assets designated at fair value through profit or loss). The choice of method is an
accounting policy.
 Trade date accounting, the financial asset and liability are recognized on the date the enterprise commits to the
purchase.
 Settlement date accounting, the financial asset is recognized on the date it is delivered.
 In a regular way purchase, the buyer recognizes the change in fair value between the trade date and the settlement
date for an FVPL or FVOCI asset.
 In a regular way sale, the seller does not recognize the change in fair value between the trade date and settlement
date. Only the change in fair value as of the trade date is recognized for FVPL and FVOCI, but not for amortized cost.
Summary of recognition and derecognition in a regular way purchase and sale of financial asset
Trade Date Settlement Date
1. When to recognize the financial asset? Commitment Date Delivery Date
2. When to derecognized the financial asset? Commitment Date Delivery Date
3. Do changes in fair value (for financial asset measured at fair value) be
recognized?
Purchase Yes Yes
Sale Ignore Ignore
result of a transfer, a financial asset is derecognized in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liabi
Fair value of the new financial asset X

Less: Carrying amount (or cost) of the old financial asset (x)
Gain or (loss) on exchange X
Financial asset
The journal entry–would
newbe:
(at its fair value) X
Loss on exchange (if any) X
Gain on exchange (if any) X
Financial asset – (old) X
saction price (i.e, the fair value of the consideration given or received) However, if part of the consideration given or received is for something other than the financial instrument, an entity
plant and equipment

fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset rece
ment using the following rule, in order of priority:
en up
Disclosure of financial instruments

IFRS 7 provides the disclosure requirements for financial instruments. The major elements of disclosures required are:
 The carrying amount of each class of financial instrument should be recorded either on the face of the statement of financial
position or within the notes.
 An entity must also disclose items of income, expense, gains and losses for each class of financial instruments either in the
statement of profit or loss and other comprehensive income or within the notes.
 An entity must also make disclosures regarding the nature and extent of risks faced by the entity. This must cover the
entity’s exposure to risk, management’s objectives and policies for managing those risks and any changes in the year
Who should care about IFRS 7 Financial Instruments: Disclosures?
The standard IFRS 7 prescribes the disclosure requirements for all entities that have some financial instruments in their books.
IFRS 7 applies to everybody. So even if you work for a trading company and you have some loans and lots of trade receivables, then yes,
you should be familiar with IFRS 7 to know what to include in your notes to the financial statements.
There are some types of instruments that are exempt from IFRS 7 and you should provide disclosures in line with other standards,
such as:
 Subsidiaries, joint ventures, associates
 Insurance contracts
 Employee benefit plans
 Share-based payments
 Equity instruments in line with IAS 32 (here, OWN equity instruments are excluded, not the equity instruments in other entities
as these are your financial assets)
What disclosures are required by IFRS 7?
IFRS 7 requires certain disclosures in 2 main areas:

1. Significance of financial instruments, and
2. Nature and extent of risks from financial instruments and how they are managed
Significance of financial instruments
These disclosures are necessary to understand whether the financial instruments are significant for entity’s financial position and
performance.
They are divided into few subgroups and let me list a few of them here for your information:
1. Disclosures for the statement of financial position:
o Carrying amounts of your financial instruments by their categories
o Financial assets or financial liabilities measured at fair value through profit or loss (FVTPL)
o Investments in equity instruments designated at fair value through other comprehensive income (FVOCI)
o Reclassifications
o Offsetting financial assets and financial liabilities
o Collaterals
o Allowance account for credit losses
o Compound financial instruments with multiple embedded derivatives
o Default and breaches
2. Disclosures for the statement of comprehensive income:
You should disclose the items of income, expense, gains or losses (by categories), mainly:
o Net gains or net losses on each category of the financial instruments
o Total interest revenue and total interest expense
o Fee income and expense
o Analysis of the gain or loss in the statement of comprehensive income from the derecognition of financial assets at
amortized cost
3. Other disclosures:
o Accounting policies
o Hedge accounting disclosures (risk management strategies, effect of hedge accounting…)
o Fair value (how it was determined, fair values of FA and FL, explanations when the fair value cannot be determined)
You should disclose most of the information listed above in breakdowns at least by the categories of financial instruments.
Nature and extent of risks from financial instruments
This part of the disclosures is really demanding, because it requires additional analysis and work, especially for market risk disclosures.
IFRS 7 requires qualitative and quantitative disclosures for three main risks:
1. Credit risk
2. Liquidity risk
3. Market risk
For each type of risk, you should disclose:
 Qualitative disclosures:
Here, you would normally describe how the company is exposed to the risks, how the risks arise and how it manages these
risks.
 Quantitative disclosures:
You need to provide a summary of quantitative data (numbers) about the exposures to the risk.
It’s a lot of details and IFRS 7 requires specific quantitative disclosures for each type of risk (see below).
You should also provide the disclosures about the concentration of risks.
Credit risk
Credit risk relates to your financial assets and simply speaking, it is a risk that you will suffer a financial loss due to counterparty failing
to pay its obligations.
If you have trade receivables or you provide loans, then you are exposed to credit risk and you should focus on this part of the standard.
You should disclose:

 Credit risk management practices
 Information about amounts arising from expected credit losses
 Credit risk exposure
 Collateral and other credit enhancements obtained
This is one example of how your quantitative credit risk disclosure can look like for trade receivables:
Liquidity risk
Liquidity risk relates to your financial liabilities and it is a kind of “opposite” to the credit risk.
It is the risk that YOU will not meet your obligations from financial liabilities to be settled with cash or another financial asset.
You should disclose:

 Maturity analysis of financial liabilities with remaining contractual maturities (separately for non-derivative and derivative)
 How you manage the liquidity risk
Here, there’s an illustration of quantitative risk disclosure for liquidity risk:
Market risk
Market risk is the risk that either the fair value or future cash flows from your financial assets or financial liabilities will fluctuate due to
changes in market prices.
Market risk has a few components, based on what causes the change in future cash flows or fair value:
 Currency risk: the risk that foreign exchange rate changes cause the fluctuations in cash flows or fair values;
 Interest rate risk: : fluctuations are caused by the changes in interest rates;
 Other price risk: Fluctuations are caused by the changes in other market prices, such as commodity prices, equity prices, etc.
The disclosures for market risk are quite demanding and require some work, because you need to produce sensitivity analysis.
There are two types of sensitivity analysis and you can choose the one that’s the best in your situation:
1. ”Basic” sensitivity analysis: Here, you need to simulate the changes in certain variable (interest rate, foreign exchange
rate, etc.) and show how profit or loss and equity would have been affected.
2. Value-at-risk analysis: Here, you need to analyze interdependencies between variables, for example between interest rates
and exchange rates.
Other disclosures
Except for these 2 big groups of IFRS 7 disclosures (significance and nature of risk), there is few more information required about:
 Transfers of financial assets, and
 Information required on initial application of IFRS 9
How to present the disclosures?
As you can see from the above summary, IFRS 7 requires loads and loads of information to be presented. So, if you want your disclosures to be useful for the readers, please bear a few rule
Lots of disclosures are required by the classes of financial instruments (for example, credit risk disclosures or liquidity risk disclosures).
Classes are not the same as categories of financial instruments and here, you should group your financial instruments into classes according to your judgment, what’s the best for your readers to underst
You can provide the disclosures in an integrated package. Thus, one disclosure can satisfy more requirements.
Find the right balance between the level of detail and materiality.
Make sure you include all material information, but don’t include excessive details about items not significant that
much, because otherwise the users will be confused and the disclosures would be useless.
FINANCIAL INSTRUMENTS
Identify which of the following are financial instruments:
a) Inventories
b) Investment in ordinary shares
c) Prepayments for goods or services
d) Liability for income taxes
e) A share option (an entity’s obligation to issue its own shares)
Solution
a) Inventory (or any other physical asset such as non-current assets) is not a financial instrument since there is no present
contractual right to receive cash or other financial instruments.
b) An investment in ordinary shares is a financial asset since it is an equity instrument of another entity.
c) Prepayments for goods or services are not financial instruments since the future economic benefit will be the receipt of
goods or services rather than a financial asset.
d) A liability for income taxes is not a financial instrument since the obligation is statutory rather than contractual
e) A share option is a financial instrument since a contractual obligation exists to deliver an equity instrument.
Use the following information for the next five (5) questions:
On December 31, data for Diaz Co. include the following:

FA NFA FL NFL SHE
1. Accounts receivable P200,000 X
2. Allowance for bad debts 20,000 (X)
3. Cash and cash equivalents 140,000 X
4. Interest receivable 42,000 X
5. Prepaid interest (not a valuation account 40,000 X
to financial liability)
6. Investment in associate 90,000 X
7. Stock appreciation rights payable (SARs 240,000 X
payable)
8. Investment in equity instruments 250,000 X
9. Investment in subsidiary 140,000 X
10. Investment in bonds 340,000 X
11. Cash surrender value 120,000 X
12. Sinking fund 80,000 X
13. Share premium 70,000 X
14. Unearned interest on receivables 10,000 X
15. Income taxes payable 18,000 X
16. SSS contributions payable 10,000 X
17. Intangible assets 60,000 X
18. Prepaid rent 40,000 X
19. Treasury shares 46,000 (X)
20. Claims for tax refund 90,000 X
21. Deferred tax assets 120,000 X
22. Accounts payable 300,000 X
23. Utilities payable 500,000 X
24. Accrued interest expense 36,000 X
25. Cash dividends payable 54,000 X
26. Finance lease liability 90,000 X
27. Bonds payable 240,000 X
28. Discount on bonds payable 30,000 (x)
29. Security deposit 60,000 X
30. Advances from customers 32,000 X
31. Unearned rent 16,000 X
32. Merchandise inventories 266,000 X
33. Biological assets 240,000 X
34. Accumulated depreciation 100,000 (x)
35. Warranty obligations 26,000 X
36. Philhealth contributions payable 12,000 X
37. Deferred tax liabilities 38,000 X
38. Accumulated profits-appropriated for plant 1,000,000 X
expansion
39. Accumulated profits-unappropriated 6,400,000 X
40. Issued redeemable preference shares 200,000 X
(with mandatory redemption)
Page 15 of 30
FA NFA FL NFL SHE
41. Issued preference shares capital 700,000 X
Total
Compute the balance of:
1. Financial Assets
A. P1,422,000 B. P1,522,000 C. P1,622,000 D. P1,722,000
2. Non-financial Assets
A. P716,000 B. P816,000 C. P916,000 D. P1,016,000
3. Financial Liabilities
A. P1,690,000 B. P1,790,000 C. P1,890,000 D. P1,990,000
4. Non-financial Liabilities
A. P162,000 B. P172,000 C. P182,000 D. P192,000
5. Shareholders’ equity
A. P8,124,000 B. P8,125,000 C. P8,136,000 D. P8,137,000
FINANCIAL INSTRUMENTS – EQUITY INSTRUMENTS
Use the following information for the next three (3) questions:
Baby Company purchased the following portfolio of equity instruments during 20x9 and reported the following balances at December
31, 20x9. No sales occurred during 20x9. All declines are considered to be temporary:
Security Cost December 31, 20x9 Market value December 31, 20x9 Market value
(Bid Price) (Asked Price)
X P800,000 P820,000 P1,000,000
Y 1,400,000 1,500,000 P1,400,000
Z 1,320,000 1,380,000 P1,600,000
Income tax rate is 30%.
1. If the securities were designated as investment to profit or loss, how much should Baby Company report as unrealized gain or
loss related to the securities in its 20x9 statement of comprehensive income?
A. P20,000 unrealized gain C. P126,000 unrealized gain
B. P100,000 unrealized gain D. P180,000 unrealized gain
2. If the securities were designated as investment to other comprehensive income, how much should Baby Company report as
unrealized gain or loss related to the securities in the statement of comprehensive income?
3. If Baby Company is a medium-sized entity, what amount of unrealized gain or loss should be reported in the statement of
comprehensive income?
Cost Market value

X 800,000 820,000
Y 1,400,000 1,500,000
Z 1,320,000 1,380,000
3,520,000 3,700,000 180,000 Unrealized gain
126,000 Net of tax
Sharky Company began business in October of 20x8. During the year, Sharky purchased a portfolio of securities listed below. In its
December 31, 20x8 balance sheet, Sharky appropriately reported a P300,000 credit balance in its “Fair Value Adjustment – Equity
Security” account. The composition of the securities did not change during the year 20x8. The current and future tax rate is 30%.
Pertinent data are as follows:
Security Cost December 31, 20x9 Market value
P P2,400,000 P2,450,000
Q 2,500,000 2,550,000
R 1,900,000 2,000,000
Total P6,800,000 P7,000,000
4. What amount of unrealized gain or loss on these securities should be disclosed in Sharky’s profit or loss for the year ended
December 31, 20x9 assuming the securities were designated as investment in profit or loss?
A. P200,000 B. P300,000 C. P350,000 D. P500,000
5. What amount of unrealized gain or loss on these securities should be disclosed in Sharky’s other comprehensive income for the
year ended December 31, 20x9 assuming the securities were designated as investment at fair value to other comprehensive
income?
A. P200,000 B. P300,000 C. P350,000 D. P500,000
6. What amount of unrealized gain or loss on these securities should be disclosed in Sharky’s shareholders equity as of December
31, 20x9 assuming the securities were designated as investment at fair value to other comprehensive income?
A. P140,000 B. P200,000 C. P400,000 D. P500,000
Page 16 of 30
Cost 6,800,000
Market value 7,000,000
Fair value adjustment Dr. 200,000
Allowance
Unrealized gain 500,000 Beg. Loss 300,000
End Gain 200,000
500,000 500,000
Net of tax (30%) (500,000 x 70%) 350,000
Net of tax (30%) (200,000 x 70%) 140,000
Use the following information for the next two (2) questions:
Daddy Company with an income tax rate of 30% for current and future years, reported the following investment in long-term
marketable equity investment to other comprehensive incomes in its December 31, 20x9, statement of financial position:
Investment in non-current equity securities, at cost P2,600,000
Fair value adjustment (400,000)
Fair market value, December 31, 20x9 P2,200,000
7. On December 31, 20x10, the market value of the portfolio was P2,500,000. How much should Daddy report in its 20x10
statement of comprehensive income as a result of the increase in the market value of the investments in 20x10?
A. P200,000 B. P210,000 C. P272,000 D. P300,000
8. What amount of unrealized gain or loss should the company disclose in the December 31, 20x20 statement of financial position?
A. P70,000 B. P100,000 C. P272,000 D. P300,000
Market value, 12/31/20x9 2,200,000

Market value, 12/31/20x10 2,500,000
Unrealized gain 300,000
Net of tax (300,000 x 70%) 210,000
Net of tax (400,000 x 70%) (280,000)

Cumulative (70,000)
On November 1, 20x8, Red Company invested in P600,000 in equity securities representing 20,000 ordinary shares of Ribbon
Company. On December 31, 20x8, this investment has a market value of P580,000. On April 15, 20x9, Red Company sold the
investment for P630,000.
9. What amount of realized gain should Red Company recognized on the disposal of the security assuming the security was
classified as investment in profit or loss?
A. P20,000 B. P30,000 C. P40,000 D. P50,000
10. What amount of realized gain should Red Company disclosed in the profit or loss as a result of the disposal assuming the
security was classified as investment at fair value to other comprehensive income under the revised PFRS 9?
A. None B. P30,000 C. P40,000 D. P50,000
11. What amount of realized gain should Red Company disclosed in the retained earnings as a result of the disposal assuming the
security was classified as investment at fair value to other comprehensive income under the revised PFRS 9?
A. P20,000 B. P30,000 C. P40,000 D. P50,000
Net selling price 630,000

MV (580,000)
Gain on sale 50,000
Unrealized loss (20,000)

Not recycled 30,000
Ex-dividend: Aguila Company has the following transactions relating to its investments during 20x7.
January 5: Acquired 10,000 shares of Lyn Company for P1,000,000 paying additional P20,000 for brokerage fee and another
P5,000 for commission.
February 14: Received dividends from Lyn declared January 10, 20x7 to stockholders of record January 31, 20x7, P20,000.
12. What is the initial measurement of the investment, assuming the investment is classified as Financial assets at Fair Value
through Profit or Loss (FVPL) and Financial assets at fair value through other comprehensive income (FVOCI)?
FVPL FVOCI FVPL FVOCI
A. P1,000,000 P1,000,000 C. P1,025,000 P1,000,000
B. P1,000,000 P1,025,000 D. P1,025,000 P1,025,000
Date of acquisition Date of declaration
Jan. 5 Jan. 10
Purchase (FA @ PL) 1,000,000
Purchase (FA @ OCI) (P1M + P25,000) 1,025,000
Dividend –on: Aguila Company has the following transactions relating to its investments during 20x7.
January 5: Acquired 10,000 shares of Lyn Company for P1,000,000 paying additional P20,000 for brokerage fee and
another P5,000 for commission.
February 14: Received dividends from Lyn declared January 4, 20x7 to stockholders of record January 31, 20x7, P20,000.
13. What is the initial measurement of the investment, assuming the investment is classified as Financial assets at Fair Value
through Profit or Loss (FVPL) and Financial assets at fair value through other comprehensive income (FVOCI)?
FVPL FVOCI FVPL FVOCI
A. P1,000,000 P1,000,000 C. P1,025,000 P1,000,000
B. P980,000 P1,005,000 D. P1,025,000 P1,025,000
Date of declaration Date of acquisition

Jan. 4 Jan. 5
Purchase (FA @ PL) (P1M - 20,000) 980,000
Purchase (FA @ OCI) (P1M + P25,000)-P20K 1,005,000
14. Guess Company purchased 50,000 shares (5% ownership) of Casio Company on January 15, 20x9. Guess received a share
dividend of 15% on March 31, 20x9 when the market price of the share is P40. On December 15, 20x9 Guess received a cash
dividend of P8 per share. In the statement of comprehensive income for the year ended December 31, 20x9, what amount
should Guess report as dividend income?
A. P60,000 B. P150,000 C. P400,000 D. P460,000
Shares 50,000
Stock dividend (15%) 7,500 -
57,500 8 460,000
460,000
15. On January 2, 20x8 Tipsy Company acquired 16,000 shares of A Company ordinary shares at P50 per share. On July 1, 20x8,
the A Company shares were split 5 to 1. On October 1, 20x8 Tipsy Company received from A Company a preference share
dividend of one share for every 10 ordinary shares held. On this date, the market price of A Company’s ordinary shares is P15
per share and the preference shares is P10 per share. On December 31, 20x8, A Company transferred to Tipsy Company its
investment in B Company representing 5,000 ordinary shares as dividend. The market price of B Company shares is P15 per
share and its par value is P10 per share. What is the amount of dividend income that should appear in the December 31, 20x8
financial statements of Tipsy Company?
A. None B. P50,000 C. P75,000 D. P90,000
Shares Amount
16,000 800,000
5
80,000 10 800,000
MV Allocate
PS (80,000 /10) 8,000 10 80,000 50,000
OS 80,000 15 1,200,000 750,000
1,280,000 800,000
Investment in PS 50,000
Investment in OS 50,000
PAS 39
Investment (5,000 x 15) 75,000
Dividend income 75,000
16. (Shares received in lieu of cash dividend) Cattleya Company purchased 10,000 shares of Vincent ordinary shares of P90
share on January 3, 20x8. On December 31, 20x8 Cattleya received 2,000 shares of Vincent ordinary shares in lieu of cash
dividend of P10 per share. On this date, the Vincent ordinary share has a quoted market price of P60 per share. In its 20x8
statement of comprehensive income, Cattleya should report dividend income at
A. P120,000 B. P100,000 C. P10,000 D. None
Shares 2,000
X 60
Dividend income 120,000
Stock in lieu of Cash shall be recorded as dividend income at the fair value of shares received or the supposed cash dividend (in order of
priority)
1. Income at the fair value of the stock received.
2. In the absence of fair value, the income is equal to the cash dividends that would have been received.
Shares received in lieu of cash dividend Cash received in lieu of share dividend
 Purchase  Sale
 Increase investment  Decrease investment
 Increase dividend income  Gain or loss is recognized
Cash received in lieu of share dividend

On October 1, 20x7, Qualms Corp. owns 15,000 investment in equity securities in unquoted securities at acquired cost of
P345,000. The shares represent 15% of the shares outstanding of Sarcasm Corporation. On the same date, Sarcasm Corp. declared
15% share dividends payable to stockholders on October 31. On October 31, the stock is selling at P40 per share. However, on
October 31, Sarcasm Corp. gave P36 per share cash in lieu of the supposed share dividends previously declared.
17. How much is the dividend income to be recognized in 20x7?

A. Nil B. P45,000 C. P90,000 D. P36,000
18. How much is the gain or loss on the sale of investment to be recognized in 20x7?
A. Nil B. P45,000 C. P90,000 D. P36,000
Question No. 1
Nil. The share dividend is not considered an income. (A)
Question No. 2
Net Selling Price (15,000 x 15% x P36) 81,000
Less: Carrying amount of the investment sold
[(345,000/(15,000+(15% x 15,000)] x 2,250 45,000
Gain (or loss) on sale (D) 36,000
Cash in lieu of Stock shall be accounted for under the “as if “approach, that is, as if shares were received and sold at the cash received.
Gain or loss shall be recorded accordingly. (see disposal of Financial Asset at Fair Value).
Carrying value = CV before stock dividend x Stock dividend
Orig. Shares + Stock dividend
Question No. 3
October 1 No entry
October 31
Cash P81,000
Gain on sale P36,000
Investment in equity securities 45,000
Use the following information for the next four (4) questions:
Dividends Out of Capital

On January 2, 20x7, Earth Company has 20,000 shares of P100 par value ordinary shares. The shares were acquired a year ago at a
cost of P440,000. On February 14, of the current year, Earth Company received 15% cash, liquidating dividends from the Investee
Corporation.
Questions: Based on the above data, answer the following:

19. Assuming that the Investee Corporation is a wasting asset corporation and partial liquidation, how much is the amount of loss on
liquidation to recognized on 20x7?
A. Nil B. P140,000 C. P300,000 D. P440,000
20. Assuming that the Investee Corporation is a wasting asset corporation and partial liquidation, the necessary entries will include a
A. Debit to Cash, P440,000
B. Debit to loss on liquidation, P300,000
C. Credit to Investment, P440,000
D. Credit to Investment, P300,000
21. Assuming that the Investee Corporation is other than a wasting asset corporation, how much is the amount loss on liquidation to
be recognized in 20x7?
A. Nil B. P140,000 C. P300,000 D. P440,000
22. Assuming that the Investee Corporation is other than a wasting asset corporation, the necessary entries will include a
A. Debit to Cash, P440,000
B. Debit to loss on liquidation, P300,000
C. Credit to Investment, P440,000
D. Credit to Investment, P300,000
Questions No. 1 and 2

Cash (P100 x 15% x 20,000) 300,000
Investment 300,000
Questions No. 3 and 4
Cash 300,000
Loss on liquidation 140,000
Investment 440,000
SUMMARY OF ANSWERS:
1 . A 2 . D 3 . B 4 . C
Stock Split and Special Assessment

On January 1 of the current year, Phobos Company acquired 10,000 shares of investment in equity designated as at Fair Value
through Other Comprehensive Income of Deimos Company at P400,000 plus brokerage expense of P20,000. On March 1 of the
current year, Deimos Company ordinary share was split on a 5-for-2 basis. On October 1, Deimos Company made a special
assessment of P3.20 per share on all ordinary shareholders. Phobos Company accordingly paid the assessment. The fair value on
December 31 amounted to P30 per share.
23. The total number of shares at the end of the year:
A. Nil B. 14,000 C. 30,000 D. 25,000
24. The unrealized gain to be presented in the other comprehensive income for the current year.
A. Nil B. P140,000 C. P300,000 D. P250,000
25. The necessary entries on January 1, will include a

A. Debit to Financial Asset at FVTOCI, P400,000
B. Debit to Financial Asset at FVTOCI, P420,000
C. Credit to Cash, P400,000
D. No journal entry
26. The necessary entries on December 31, will include a

B. Debit to Financial Asset at FVTOCI, P300,000
C. Credit to Unrealized Gain, P250,000
D. Credit to Unrealized Gain, P140,000
Question No. 1
Date No. of Cost per Total
shares share Cost
1/1 10,000 P42 P420,000
3 /1 stock split 15 ,000
Total (10,000 x 5/2) 25,000 P16.80 P420,000
10/1 Special assessment (P3.2 x
25,000) 80,000
Total 25,000 P20 500,000
( D)
Question No. 2
Fair value (P30 x 25,000) P750,000
Less: Carrying value 500,000
Unrealized gain-OCI P250,000 (D)
Questions No. 3 and 4 Journal entries are:

1/1 Financial Asset at FVTOCI P420,000 (B)
Cash P420,000
3/1 Received '5,000 shares as a result of 5
for 2 share split.
11/1 Financial Asset at FVTOCI 80,000
Cash (P3.20 x 25,000) 80,000
12/31 Financial Asset at FVTOCI 250,000
Unrealized gain - OCI (C) 250,000
[(P30 x 25,000) - P500,000]
SUMMARY OF ANSWERS:
1 . D 2 . D 3 . B 4 . C
Stock Right
On June 15, 20x7, Mars Company owns 10,000 shares with a cost of P700,000 of Moon Company’s stocks. During the same period,
Moon Company issued stock rights to existing shareholders. Mars received 10,000 stock rights entitling him to purchase 5,000 new
shares at P80. The ordinary share was trading ex-rights at P80 a share and the rights had a market value P20 per right.
On July 15, 20x7, Mars exercised all the stock rights. The share is quoted right on at P90.

27. Assuming that the above securities are FVTPL, the stock rights should be initially recognized at
A. Nil B. P200,000 C. P100,000 D. P150,000
28. Assuming that the above securities are FVTOCI, the stock rights should be initially recognized at
A. Nil B. P200,000 C. P100,000 D. P150,000
29. Assuming that the above securities are FVTPL, the cost of investment acquired through exercised of stocks rights should be
A. Nil B. P400,000 C. P600,000 D. P200,000
30. Assuming that the above securities are FVTOCI, the cost of investment acquired through exercised of stocks rights should be
A. Nil B. P400,000 C. P600,000 D. P200,000
Question No. 1
Nil. The company will only make a memo entry to record the receipt of stock
right on a financial asset at FVTPL. (A)
Question No. 2
The stock right should be initially recorded at fair values as follows:
(P20 x 10,000) = P200,000. (B)
Question No. 3
The cost of the investment will only include the subscription price of P400,000
(5,000 x P80). (B)
Question No. 4
The cost of the investment will include the subscription price of P400,000 and
cost of stock rights exercised of P200,000 = P600,000. (C)
The journal entries under the two classifications are as follows: Fair Value through profit and loss
securities
June 15 Memo entry (Received 10,000 stock
rights)
July 15 FVTPL (P80 x 10,000/2) 400,000
Cash 400,000
Fair Value Through Other Comprehensive Income
June 15 Stock rights (P20 x 10,000) 200,000
Unrealized gain - P/L 200,000
July 15 FVTOCI (P80 x 10,000/2)+ 200,000 600,000
Cash 400,000
Stock rights 200,000
SUMMARY OF ANSWERS:
1 . A 2 . B 3 . B 4 . C
Theoretical Value of Rights

On January 2, 20x7, Jupiter Company purchased 10,000 shares of P200 par value ordinary shares at P240 per share of Saturn
Company. On March 2, 20x7, Saturn Company issued stock rights to its stockholders. The holder needs five rights to purchase one
share of ordinary stock at par. The market value of the stock on that date was P320 per share. There was no quoted price for the
rights.

31. Compute for the theoretical value of the rights assuming, the stock is selling right-on
A. Nil B. P20 C. P24 D. P54
32. Compute for the theoretical value of the rights assuming, the stock is selling ex-right
A. Nil B. P20 C. P24 D. P54
Question No. 1
When the stock is selling right-on
P320 — P200
5+1
= P20
Question No. 2
When the stock is selling ex-right
Value of one right P320 – P200
5
= P24
SUMMARY OF ANSWERS:
1 . B 2 . C
FINANCIAL INSTRUMENTS – DEBT INSTRUMENTS
Problem 1: On May 1, 20x19 AAA Company purchased a short-term P4,000,000 face value 9% debt instruments for P3,858,142.
The prevailing of interest at the time of acquisition is 12%. The debt instruments mature on January 1, 20x22, and pay interest
annually every December 31, 20x19, the fair value of the debt instrument based on the prevailing rate of interest of 11% is
P3,862,998.
1. If the debt instrument was designated at initial recognition as investment at fair value to profit or loss, what amount of gain
or loss should AAA Company disclose in the profit or loss in the statement of comprehensive income for the year ended
December 31, 20x19?
B. P4,856 unrealized loss D. P124,856 unrealized loss
2. What amount of interest income should AAA Company report in the statement of comprehensive income for the year ended
December 31, 20x19 assuming the instrument was designated at initial recognition as investment at fair value to profit or
loss?
A. P240,000 B. P307,051 C. P360,000 D. P448,577
FA @ PL
CV
Jan. 1 3,858,142
May 1 (P4M * 4/12 * 9%) 120,000 3,738,142
May 1 3,738,142
Dec. 31 3,862,998
4,000,000 12/12 9% 360,000

(120,000)
Intrest income 240,000
3. If the debt security was designated at initial recognition as investment at fair value to other comprehensive income, what
amount of unrealized gain or loss should the company report in the statement of comprehensive income for the year ended
December 31, 20x19?
B. P65,804 unrealized loss C. P124,856 unrealized loss
December 31, 20x19 assuming the investment was designated at initial recognition as investment at fair value to other
A. P299,051 B. P307,051 C. P360,000 D. P448,577
FA @ OCI
Interest Received Interest income Discount amortization CV
3,858,142
(120,000)
May 1 3,738,142
Dec. 31 240,000 299,051 59,051 3,797,193

Market value - December 31 3,862,998
5. If the debt instrument was designated at initial recognition as investment at amortized cost, what amount should the
investment account be reported statement of financial position of December 31, 20x19?
A. P3,738,142 B. P3,797,193 C. P3,862,998 D. P3,892,857
December 31, 20x19 assuming the instrument was designated at initial recognition as investment at amortized cost?
A. P299,051 B. P307,051 C. P360,000 D. P448,577
Amortized cost
Interest Received Interest income Discount amortization CV
3,858,142
(120,000)
May 1 3,738,142
Dec. 31 240,000 299,051 59,051 3,797,193
Problem 2: On January 1, 20x19, San Company purchased the debt instruments of Miguel Company with a face value of
P5,000,000 bearing interest rate of 8% for P4,621,006 to yield 10% interest per year. The bonds mature on January 1, 20x24 and
pay interest annually on December 30. On December 31, 20x19 the prevailing rate of interest is 9%.
Round off PV factors to 6 decimal places.
1. If the investment is designated as FVPL, what amount of unrealized gain or loss should the company disclose in their December
31, 20x19 profit or loss?
A. None C. P154,907 unrealized gain
PV of P 0.708425 5,000,000 3,542,125

PV of I 3.239720 5,000,000 8% 1,295,888
Dec.31 4,838,013
Jan. 1 4,621,006
2. If the investment is designated as FVOCI, what amount of unrealized gain or loss should the company disclose in their
December 31, 20x19 other comprehensive income?
A. None C. P154,907 unrealized gain
B. P26,559 unrealized gain*** D. P217,008 unrealized gain
Interest received Interest income Discount amortization Carrying value

Jan. 1, 20x19 4,621,006
12/31/20x19 400,000 462,101 62,101 4,683,107
Market value. 12/31 4,838,013
154,906
3. If the investment is designated as Amortized Cost, at what amount should the investment be reported in the company’s
statement of financial position for the year ended December 31, 20x19?
A. P4,621,006 C. P4,751,418
B. P4,683,107 D. P4,838,014
What if on January 1, 20x20 the bonds were sold at P5,500,000? Compute the gain or loss on sale.
Problem 3: On January 2, 20x19, Hellow Company invested in a 4-year 10% bond with a face value of P3,000,000 in which interest
is to be paid every December 31. The bonds has an effective interest rate of 8% and was acquired for P3,198,728. Hellow Company
has designated the debt instrument as investment at amortized cost. On December 31, 20x21, Hellow Company sold the bonds at
the prevailing rate of 12%.
1. What amount of gain or loss should Hellow Company recognize on the sale of the security?
A. P109,127 B. P154,127 C. P205,447 D. P250,477
2. What amount of interest income should Hellow Company report in its 20x21 statement of income?
A. P244,437 B. P248,552 C. P252,363 D. P300,000
Interest receive Interest income Premium amortization CV
Jan. 2, 20x19 3,198,728
December 31, 20x19 300,000 255,898 44,102 3,154,626
December 31, 20x20 300,000 252,370 47,630 3,106,996
December 31, 20x21 300,000 248,560 51,440 3,055,556
12% for one period 0.892857 3,000,000 2,678,571

0.892857 3,000,000 0.10 267,857 2,946,428
3,055,556
Loss on sale (109,128)
Problem 4: On January 2, 20x19, Sun Company invested in a 4-year 10% bond with a face value of P6,000,000 in which interest is
to be paid every December 31. The bonds has an effective interest rate of 9% and was acquired for P6,194,383. On December 31,
20x19, the security has a fair value of P6,229,862 which is based on the prevailing market rate of 8.5%.
Round off PV factors to 6 decimal places.
1. Assume that the debt security was classified initially as investment at fair value to profit or loss, assume further that during
the year 20x19 there was a change in the business model and cash flow characteristics but they decided to make a
reclassification on January 2, 20x20 to investment at fair value to other comprehensive income. On December 31,
20x20, the debt investment has a fair value of P6,213,992 which is based on the prevailing rate of 8%. What amount should
the debt investment be reported in the December 31, 20x20 statement of financial position?
A. P6,082,949 B. P6,159,400 C. P6,213,992 D. P6,229,862
2. In relation to No. 1, what amount of interest income should Sun Company report in its December 31, 20x20 statement of
A. P529,538 B. P553,669 C. P557,494 D. P600,000
3. In relation to No. 1 and 2, what amount of unrealized gain or loss should the company report in the December 31, 20x20
statement of comprehensive income?
A. None B. P15,870 C. P54,592 D. P70,462
FVPL FVOCI (FV – FV) =Profit or loss. Fair value on reclassification date Yes – Calculate New ER (Based on Fair
Jan. 2, 20x19 Dec. 31, 20x19 Jan. 2, 20x20 Dec. 31, 20x20
6,194,383 6,229,862 6,229,862 6,213,992
8.5% for 3 periods 0.782908 6,000,000 4,697,448
35,479 - 15,870 2.554022 6,000,000 0.10 1,532,413
PL PL 6,229,861
Interest receive Intest income Premium amortization CV
12/31/x19 6,229,861
12/31/x20 600,000 529,538 70,462 6,159,399
Less: FV, 12/31/x20 6,213,992
54,593
4. Assume that the debt security was classified initially as investment in fair value to profit or loss, assume further that during
the year 20x19 there was a change in the business model and cash flow characteristics but they decided to make a
reclassification on January 2, 20x20 to investment at amortized cost. On December 31, 20x20, the debt instrument has a fair
value of P6,213,992 which is based on the prevailing rate of 8%. What amount should the debt investment be reported in the
December 31, 20x20 statement of financial position?
A. P6,082,949 B. P6,159,400 C. P6,213,992 D. P6,229,862
A. P529,538 B. P553,669 C. P557,494 D. P600,000
FVPL AMC (FV – FV) =Profit or loss. Fair value on reclassification date Yes – Calculate New ER (Based on Fair
6,194,383 6,229,862 6,229,862 6,159,399
8.5% for 3 periods 0.782908 6,000,000 4,697,448
35,479 - 2.554022 6,000,000 0.10 1,532,413
PL PL 6,229,861
12/31/x19 6,229,861
12/31/x20 600,000 529,538 70,462 6,159,399
6. Assume that on the date of acquisition the debt security was designated as investment at amortized cost, but the
investment at amortized cost valuation was reclassified on January 1, 20x20 as investment at fair value to profit or loss, at
what amount of gain or loss should the company recognize on the date of transferred/reclassification?
A. None B. P35,479 C. P77,984 D. P113,373
A. P529,538 B. P553,669 C. P557,494 D. P600,000
AMC FVPL (AMC – FV)= profit or loss Fair value on reclassification date No – not required
Interest income = Face value x SR
AMC FV
Jan. 2, 20x19 6,194,383
6,194,383 6,151,877 6,229,862 6,213,992 1.09
(600,000)
Dec. 31, 20x19 (AMC) 6,151,877
8.5% for 3 periods 0.782908 6,000,000 4,697,448

77,985 15,870 2.554022 6,000,000 0.10 1,532,413
PL PL 6,229,861
12/31/x19 6,229,861
12/31/x20 600,000 529,538 70,462 6,159,399
8. Assume that on the date of acquisition the debt security was designated as investment at amortized cost, but the
investment at amortized cost valuation was reclassified on January 1, 20x20 as investment at fair value to other
comprehensive income, at what amount of gain or loss should the company recognize in the profit or loss on the date of
transfer/reclassification?
A. None B. P35,479 C. P77,984 D. P113,373
A. P529,538 B. P553,669 C. P557,494 D. P600,000
AMC FVOCI (AMC – FV)= other Fair value on reclassification date No– effective rate is not adjusted
comprehensive income
Interest income will not change and
therefore the entity continues to use the
same effective rate
AMC FV
6,194,383 6,151,877 6,229,862 6,213,992
8.5% for 3 periods 0.782908 6,000,000 4,697,448
77,985 15,870 2.554022 6,000,000 0.10 1,532,413
OCI PL 6,229,861
12/31/x19 6,151,877
12/31/x20 600,000 553,669 46,331 6,105,546
10. Assume that on the date of acquisition the debt security was designated as investment at fair value to other comprehensive
income but the investment at was reclassified on January 1, 20x20 as investment at amortized cost, at what amount should
the investment account be reported in the statement of financial position as of December 31, 20x20?
A. P6,105,547 B. P6,151,878 C. P6,159,400 D. P6,229,862
A. P529,538 B. P553,669 C. P557,494 D. P600,000
FVOCI AMC (FV – FV) =OCI*** Amortized cost* (Adj. to FV, back to AMC) No – effective rate is not adjusted
***Note: The amount accumulated Interest income will not change and
in equity is removed to adjust *Fair value on reclassification date Minus therefore the entity continues to use the
the asset to amortized cost. As if (OCI –gain) Plus (OCI – loss) same effective rate
it had been designated at amortized
cost from date of initial recognition
Jan. 2, 20x19 6,194,383

1.09
FV FV (600,000)
Jan. 2, 20x19 Dec. 31, 20x19 Jan. 2, 20x20 Dec. 31, 20x20 Dec. 31, 20x19 (AMC) 6,151,877
6,194,383 6,229,862 6,229,862 6,213,992
8.5% for 3 periods 0.782908 6,000,000 4,697,448
AMC 15,870 2.554022 6,000,000 0.10 1,532,413
6,151,877 PL 6,229,861
OCI - gain 77,985 (77,985) 12/31/x19 6,151,877
12/31/x20 600,000 553,669 46,331 6,105,546
Adjusted 6,151,877
12. Assume that on the date of acquisition the debt security was designated as investment at fair value to other comprehensive
income but the investment at was reclassified on January 1, 20x20 as investment at fair value to profit or loss, what
amount of gain or loss should the company recognize in the profit or loss on the date of transfer/reclassification?
A. None B. P35,479 C. P77,984 D. P113,373
A. P529,538 B. P553,669 C. P557,494 D. P600,000
FVOCI FVPL (FV – FV) =OCI Fair value on reclassification date No – not required
Note: Transfer the cumulative Interest income = Face value x SR

unrealized gains and losses in OCI
to profit or loss
Jan. 2, 20x19 6,194,383

1.09
FV FV (600,000)
Jan. 2, 20x19 Dec. 31, 20x19 Jan. 2, 20x20 Dec. 31, 20x20 Dec. 31, 20x19 (AMC) 6,151,877
6,194,383 6,229,862 6,229,862 6,213,992
8.5% for 3 periods 0.78291 6,000,000 4,697,448
AMC 15,870 2.55402 6,000,000 0.10 1,532,413
6,151,877 PL 6,229,861
OCI - gain 77,985 77,985
Problem 5: On December 31, 20x19, OOO Company invested in the 5-year bonds of PPP Corporation. The bonds have a face value
of P3,000,000 with 8% interest payable per year. OOO Company paid P2,772,552 to acquire the instruments at the prevailing
market rate of 10%. The debt security was amortized cost (PFRS 9).
During 20x21, PPP Corporation’s business deteriorated due to political instability and faltering global economy. After reviewing all
available evidence at December 31, 20x21, OOO Company determined that it was probable that PPP Company will still be able to pay
the annual interest on the original loan but a reduced principal of P2,500,000 at maturity. As a result, OOO Company decided that
the investment in bonds was impaired and that a loss should be recorded immediately.
1. What amount of impairment loss should OOO Company recognize on its debt instruments?
A. None B. P375,656 C. P413,222 D. P454,545
Interest receive Interest income Discount amortization Carrying value

Dec. 31, 20x19 2,772,552
Dec. 31, 20x20 240,000 277,255 37,255 2,809,807
Dec. 31, 20x21 240,000 280,981 40,981 2,850,788
Old effective rate

@10% (3 periods)_ 0.751315 2,500,000 1,878,288
2.486852 240,000 **note(original) 596,844
New present value 2,475,132
Amortized cost 2,850,788
Impairment loss (375,656)
2. Assume that on December 31, 20x22, PPP Company’s financial condition had improved and informed OOO Company to pay back
P2,900,000 on maturity instead of the reduced amount of P2,500,000 in December 31, 20x21, what amount of impairment
recovery should OOO Company report in its 20x22 profit or loss?
A. None B. P247,934 C. P330,578 D. P363,636
Dec. 31, 20x19 2,772,552
Dec. 31, 20x20 240,000 277,255 37,255 2,809,807
Dec. 31, 20x21 240,000 280,981 40,981 2,850,788
Old effective rate

@10% (3 periods)_ 0.751315 2,500,000 1,878,288
2.486852 240,000 **note(original) 596,844
Amortized cost 2,850,788
Impairment loss (375,656)

Dec. 31, 20x19 2,772,552
Dec. 31, 20x20 240,000 277,255 37,255 2,809,807
Dec. 31, 20x21 240,000 280,981 40,981 2,850,788
Dec. 31, 20x22 240,000 285,079 45,079 2,895,867
Old effective rate

@10% (2 periods)_ 0.826446 2,900,000 2,396,693
1.735537 240,000 **note(original) 416,529

Dec. 31, 20x21 2,475,132
Dec. 31, 20x22 240,000 247,513 7,513 2,482,645
Principal X Per computation 2,813,222

Add: Accrued interest (unpaid) x
Total X
As if no impairmen 2,895,867
Multiply: Present value using original effective rate X Lower 2,813,222
Total PV of future cash inflows A Per book 2,482,645
Amortized cost had there been no impairment B
Recovery 330,577
Less: Amortized cost based on the remaining future cash (x)
flows at the original effective interest 2,813,222 2,895,867
Gain on recovery – IS x 2,482,645 2,482,645
330,577 413,222
Limit
Problem 6: (Investment in bonds at Fair Value Option) On January 1, 20x1, Woot Company purchased 12% bonds with face
amount of P5,000,000 for P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The
bonds are dated January 1, 20x1 and pay interest annually on December 31 of each year. The bonds are quoted at 115 on December
31, 20x1. The entity has irrevocably elected the fair value option.
1. What amount of gain from change in fair value should be reported for 20x1?
A. 0 B. P250,000 C. P350,000 D. P750,000
2. What amount of interest income should be reported for 20x1?

A. P540,000 B. P550,000 C. P600,000 D. P660,000
3. What is the carrying amount of the bond investment on December 31, 20x1?
A. P5,400,000 B. P5,450,000 C. P5,500,000 D. P5,750,000
4. What total amount of income from the investment should be reported in the income statement for 20x1?
A. P540,000 B. P890,000 C. P900,000 D. P950,000
1 Purchase price 5,500,000
Transaction cost (100,000)
Adjusted cost 5,400,000
The transaction cost is expensed immediately if teh financial asset is measured at fair value through profit or loss
Market vlaue (5,000,000 x 115) 5,750,000

Adjusted cost 5,400,000
Gain from change in fair value 350,000
2 Interest income (12% x 5,000,000) 600,000
Under the fair value option, interest income is based on nominal rate rather than effective rate.
3 Carrying amount equal to market value at year-end 5,750,000
4 Gain from change in fair value 350,000

Interest income 600,000
Total income from investment 950,000
Under the fair value option, any change in fair value is recognized in profit or loss.
Problem 7: (Investment in bonds with detachable warrants) ABC Co. acquired investment in bonds with detachable warrants
for P1,050,000. The bonds have a face amount of P1,000,000. Without the detachable warrants, the bonds are selling at P950,000.
The detachable warrants have a fair value P100,000. ABC Co.’s business model requires debt instruments to be measured at
amortized cost and equity instruments at fair value.
Required: Prepare the necessary journal entries.
Note:
1. The investment in bonds and share warrants are initially recognized at fair values. The fair value of financial assets on initial
recognition is usually equal to the transaction price.
2. Upon exercise of the share warrants, the newly acquired investment is recognized at fair value and the carrying amount of the
share warrants exercised is derecognized.
3. Upon expiration, the carrying amount of the share warrants is written-off as loss.
a. The entry to record the acquisition

Investment in bonds at amortized cost P950,000
Investment in share warrants at FVPL 100,000
Cash P1,050,000
b. Case 1: sale of warrants: Assume that the detachable warrants are subsequently sold for P120,000.
The entry to record the sale is as follows:
Cash P120,000
Investment in share warrants at FVPL P100,000
Gain on sale (squeeze) 20,000
c. Case 2: Exercise of warrants: Assume the detachable warrants are subsequently exercised and the purchase price of the
newly acquired shares is P1,000,000. The acquired shares are classified as held for trading securities.
The entry to record the exercise is as follows:
To recognize the newly acquired investment.
Held for trading securities P1,000,000
Cash P1,000,000
To derecognize the carrying amount of the share warrants exercised.

Loss on derecognition of asset –P/L P100,000
c. Case 3: Expiration of warrants: Assume the detachable warrants expired.
The entry to record the expiration of the warrants is as follows:

Loss on expiration of share warrants P100,000
OTHER TOPICS
ACCOUNTING FOR REGULAR PURCHASE OR SALE OF FINANCIAL ASSET REGULAR WAY PURCHASE OR SALE OF A
FINANCIAL ASSET
Problem 1: (Purchase – Trade Date vs. Settlement Date) On December 29, 20x6, Cacao Company commits itself to purchase
a financial asset for P10,000, which is its fair value on commitment (trade) date. Transaction costs are immaterial. On December
31, 20x6 (financial year-end) and on January 5, 20x7 (settlement date) the fair value of the asset is P10,200 and P10,300,
respectively.
Required: Provide the entries using (a) trade date accounting and (b) settlement accounting assuming the financial asset
purchased is:
1. Financial asset at fair value through profit or loss (FVTPL)
2. Financial asset at fair value through other comprehensive income (FVTOCI)
3. Financial asset at amortized cost (FAAC)
Trade Date Accounting Settlement Date Accounting
Financial asset at FVTPL
12/19/16 Financial asset at FVTPL 10,000 No Journal entry
Accounts payable - others 10,000
12/31/16 Financial asset at FVTPL 200 Accounts receivable - others 200

Unrealized gain -P&L (10,200 - 10,000) 200 Unrealized gain -P&L (10,200 - 10,000) 200
1/15/17 FVTPL (10,300 - 10,200) 100 Financial asset at FVTPL 10,300

Accounts payable -others 10,000 Accounts receivable - others 200
Cash 10,000 Cash 10,000
Unrealized gain - P&L 100 Unrealized gain - P&L 100

FV through OCI
12/19/16 Financial asset at OCI 10,000 No Journal entry
12/31/16 Financial asset at OCI 200 Accounts receivable - others 200

Unrealized gain -OCI (10,200 - 10,000) 200 Unrealized gain -OCI (10,200 - 10,000) 200
1/15/17 FVTOCI (10,300 - 10,200) 100 FVTOCI 10,300

Accounts payable -others 10,000 Accounts receivable - others 200
Cash 10,000 Cash 10,000
Unrealized gain -OCI 100 Unrealized gain - OCI 100

Financial asset at amortized cost
12/19/16 Financial asset at amortized cost 10,000 No Journal entry
12/31/16 No journal entry No Journal entry
1/15/17 Accounts payable - others 10,000 Financial asset at amortized cost 10,000
Cash 10,000 Cash 10,000
Problem 2: (Sale – Trade Date vs. Settlement Date) On December 29, 20x6 (trade date) Dacanay enters into a contract to sell
a financial asset for its current fair value of P10,100. The asset was acquired one year earlier for P10,000 and its amortized cost is
P10,000. On December 31, 20x6 (financial year-end), the fair value of the asset is P10,200. On January 5, 20x7 (settlement date),
the fair value is P10,300.
Required: Provide the entries using (a) trade date accounting and (b) settlement accounting assuming the financial asset sold is
1. Financial asset at fair value through profit or loss (FVTPL)
2. Financial asset at fair value through other comprehensive income (FVTOCI)
3. Financial asset at amortized cost (FAAC)
Financial asset at FV through profit or loss

12/19/16 Accounts receivable-others 10,100 FVTPL (10,100 - 10,000) 100
FVTPL 10,000 Unrealized gain - P&L 100
Realized gain on sale 100
12/31/16 No Journal entry No Journal entry
1/15/17 Cash 10,100 Cash 10,100

Accounts receivable - others 10,100 FVTPL 10,100

FV through OCI
12/19/16 Accounts receivable -others 10,100 100
FVTOCI (10,100 - 10,000)
FVTOCI 10,000 100
Unrealized gain - OCI
Retained earnings 100
12/31/16 No journal entry

No journal entry
1/15/17 Cash 10,100 10,100
Accounts receivable - others 10,100 Cash 10,100
FVTOCI 100
Unrealized gain -OCI 100
Retained earnings

Financial asset at amortized cost
12/19/16 Accounts receivable - others 10,100 No journal entry
FAAC 10,000
12/31/16 No journal entry No journal entry
1/15/17 Cash 10,100 Cash 10,100

Accounts receivable - others 10,100 FAAC 10,000
Purchase: Trade Date vs. Settlement Date Accounting

On December 29, 20x7, Bifurcation Company commits itself to purchase a financial asset to be classified as held for trading for
P600,000, its fair value on commitment (trade) date. This security has a fair value of P601,000 and P602,000 on December 31, 20x7
(Bifurcation’s financial year-end), and January 5, 20x8 (settlement date), respectively.

1. If Bifurcation applies the trade date accounting method to account for regular-way purchases of its securities, how much should
be recognized as trading securities on December 31, 20x7?
A. P600,000 B. P601,000 C. P602,000 D. P0
2. If Bifurcation applies the settlement date accounting method to account for regular-way purchases of its securities, how much
should be recognized as trading securities on December 31, 20x7?
A. P600,000 B. P601,000 C. P602,000 D. P0
Sale: Trade Date vs. Settlement Date Accounting

On December 29, 20x7 (trade date), Subterfuge Corp. enters into a contract to sell an equity security classified as Fair Value through
Other Comprehensive Income (FVTOCI) for its current fair value of P506,000. The asset was acquired a year ago and its cost was
P500,000. On December 31, 20x7 (financial year-end), the fair value of the asset is P510,000. On January 5, 20x8 (settlement
date), the asset’s fair value is P513,000.

3. If Subterfuge uses the trade date method to account for regular-way sales of its securities, how much is the carrying amount of
FVTOCI at December 31, 20x7?
A. P506,000 B. P510,000 C. P513,000 D. P0
4. If Subterfuge uses the settlement date method to account for regular-way sales of its securities, how much is the carrying
amount of FVTOCI at December 31, 20x7?
A. P506,000 B. P510,000 C. P513,000 D. P0
Exchange of One Financial Asset into Another Financial Asset

Uranus Company owns 8,000, convertible preference shares of which was acquired in 20x6 at a cost of P400,000. The investment
was classified as trading securities. On December 31, 20x6, the fair value of the preference shares was P425,000. On March 31,
20x7, Uranus Company converted the 4,000 preference shares into 6,000 shares of ordinary shares, when the market price was P50
per share for the preference shares and P40 per share for the ordinary shares.

5. Compute for the gain on exchange to be recognized in 20x7
A. Nil B. P40,000 C. P27,500 D. P60,000
6. The necessary journal entry on March 31, will not include a

A. Debit to Investment in Trading-Ordinary shares, P240,000
B. Credit to Investment in Trading-Pref. shares, P27,500
C. Credit Gain on Exchange, P27,500
D. Credit to Investment in Trading-Pref. shares, P212,500
Question no. 14
Fair value - Ordinary Shares (6,000 x P40) 240,000
Less: Carrying value - Preferred shares (P425,000/8,000 x 4,000) (212,500)
Gain on exchange 27,500
Question no. 15
Journal entry would be:
Investment in Trading - Ordinary Shares (6,000 x P30) 240,000
Investment in Trading - Preferred Shares (P425,000/8,000 x 4,000) 212,500
Exchange of a PPE for Financial Asset

On January 1, 20x7, Neptune Company has a piece land acquired a year ago at a cost of P600,000. The land has a fair value of
P700,000. On March 31, 20x7, Neptune Company exchanged the land for financial asset to be initially recognized at fair value
through other comprehensive income. At the time of the exchange, the shares, which was publicly listed, has a fair value of
P820,000.

7. Compute for the gain on exchange to be recognized in 20x7
A. Nil B. P220,000 C. P120,000 D. P100,000
8. The necessary journal entry on March 31, will not include a

B. Credit Land, P700,000
D. Credit Land, P600,000
Question 16
Fair value of the financial asset 820,000
Less: Carrying value of the land (600,000)
Question 17
Journal entry would be:
Financial asset at FVTOCI 820,000
Land 600,000
Gain on exchange (P820,000-P600,000) 220,000
Exchange of a Financial Asset for PPE
On January 1, 20x7, Pluto Company has Investment in equity designated as at Fair Value through Other Comprehensive Income,
with a fair value of P600,000. These securities were acquired a year ago at a cost of P625,000. On March 31, 20x7, Pluto Company
exchanged these securities for a piece of land from Mars Company. The carrying amount of the land in books of Mars Company was
P480,000 and has a zonal value of P800,000. At the time of the exchange, the shares, which was publicly listed, has a fair value of
P650,000.

9. Compute for the gain on exchange to be recognized in 20x7 equity
A. Nil B. P50,000 C. P25,000 D. P170,000
10. The necessary journal entry on March 31, will include a

B. Debit Land, P650,000
D. Debit to loss on exchange, P25,000
Question 18
Fair value of the financial asset 650,000
Less: Carrying value of the financial asset (600,000)
Question 19
Journal entries are
Land (at fair value of teh asset given up) 650,000
FVTOCI 600,000
Gain on exchange (P650,000 - P600,000) 50,000
Retained earnings 25,000

Unrealized loss (625,000 - 600,000) 25,000

Equity Yyy

Uploaded by

Copyright:

Available Formats

Equity Yyy

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Equity Yyy

Uploaded by

Copyright:

Available Formats

FINANCIAL INSTRUMENTS (EQUITY AND DEBT INSTRUMENTS)

Examples of financial assets include:

Examples of financial liabilities include:

Examples of financial assets include:

Examples of financial liabilities include:

Financial assets Nonfinancial assets Financial liabilities Nonfinancial liabilities

Initial recognition of financial assets

Initial measurement of financial assets

Classification of Investment in Equity Securities

% of ownership Preference shares Ordinary shares

Type of investment Purpose Method Applicable Standard

Type of investment Purpose Method Applicable Standard

Fair value through profit or loss

This is the default category for equity investments.

Fair value through other comprehensive income

Classification FVTPL FVTOCI

2. To record receipt of dividend

INVESTMENT IN EQUITY SECURITIES – (TRANSACTIONS SUBSEQUENT TO ACQUISITIONS)

Transactions Subsequent to Acquisitions

Three Different Dates Relating to Dividends

DIVIDENDS OUT OF EARNINGS

B. Liability dividends – is a deferred cash dividend.

The Gain or Loss on sale may be computed as follows:

Carrying amount of the investment sold

Investment in unquoted equity FA at FVTPL Investment designated as as

Effect of the share dividends:

Dividends Out of Capital / Liquidating Dividends/ Return of Investments

The journal entry upon receipt of dividends will be:

Share assessment vs Share Split

Stock warrant is an instrument or certificate evidencing ownership stock right.

Accounting for Stock Right

Original classification of the Accounting treatment

Classification This can be considered as derivative thus, presented as current assets.

2. When share is selling ex-right:

Statement of Financial Position Presentation

Categories Financial Statement Presentation

Fair value through other comprehensive income (FVOCI)

For an instrument to be carried at FVOCI, the two tests to be passed are:

If a debt instrument is held at FVOCI

The contractual cash flow characteristic test

Debt instruments – Further detail

Classification FVTPL FVTOCI FAAC

Comparative journal entries of FVTPL (debt), FVTOCI (debt) and FACC

(Face Value x SR) (Face Value x SR) (Face Value x SR)

Bonds may be acquired thru the following scheme:

Proceeds (P) vs Face Effective (E) vs Nominal rate Maturity value

PV of Principal (PV of 1 using effective rate x Principal) X

PV of Principal (PV of 1 using effective rate x Principal) X

Years Principal Interest Total Collection PVF of 1 Total Present

Investment in bond at fair value option

Investment in Bonds with Detachable Warrants

a. The entry to record the acquisition

To derecognize the carrying amount of the share warrants exercised.

c. Expiration of warrants: Assume the detachable warrants expired.

The entry to record the expiration of the warrants is as follows:

Statement of Financial Position Presentation

Categories Financial Statement Presentation

Offsetting financial assets/financial liabilities

Factoring of receivables Introduction

Accounting for the factoring of receivables