Financial Asset at Amortized Cost

1. Explain the initial and subsequent measurement of bond

investments.
Bond investment are recognized initially at fair value
plus transaction costs that are directly attributable to the
acquisition.
Subsequent to initial recognition, bond investments
are measured at fair value through profit or loss, at
amortized cost, and at fir value through other
comprehensive income.

2. What is a bond premium and bond discount? Explain the

treatment of premium or discount on trading bond
investment and on bond investments measured ate
amortized cost.
Bond premium is a loss on the part of the bondholder
because the bondholder paid more than what can be
collected on the date of maturity. Loss is not recognized
outright but allocated over the life of the bonds to be offset
against the interest income to be derived from the bond
investment.
Bond discount is a gain on the part of the bondholder
because the bondholder paid less than what can be
collected on the date of maturity. Gain is not recognized
outright but allocated over the life of the bonds to be
added to the interest income derived from the bond
investment.
The treatment of bond premium on trading bond
investments and on bond investments that is measured at
amortized cost is deducted from the interest income while
bond discount is added to interest income.
3. Enumerate the three methods of amortizing bond premium
or discount. Then, explain briefly.

The three methods of amortizing bond premium or

discount are:
 Straight line method – This method provides an equal
amount of premium or discount amortization each
accounting period. This method is acceptable only
when the computation will result in periodic interest
income that is not materially different from the
amount that would be computed using effective
interest method.
 Bond outstanding method – This method is
applicable to serial bonds and provides for a
decreasing amount of amortization. The same as
straight line method, this method is acceptable only
when the computation will result in periodic interest
income that is not materially different from the
amount that would be computed using effective
interest method.
 Effective interest method – Also known as “interest
method” or scientific method. This method provides
for an increasing amount of amortization. Bond
investments shall be classified as financial assets
measured at amortized cost using this method. This
means that any discount or premium must be
amortized using the effective interest method.
Effective Interest Method
1. Define nominal and effective rate.
Nominal rate is the coupon rate or stated rate
appearing on the face of the bond.
Effective rate is the yield rate or market rate which is
the actual or true rate of interest which the bondholder
earns on the bond investment. It is the rate that exactly
discounts estimated future cash payments through the
expected life of the bond or when appropriate, a shorter
period to the net carrying amount of the bond.

2. Explain the effective interest method of amortizing bond

discount and bond premium.
The effective interest method requires the
comparison between interest earned and interest
received. The difference between the two represents
premium or discount amortization. Interest earned is
computed by multiplying the effective rate by the carrying
amount of the bond investment. And the interest received
is computed by multiplying the nominal rate by the face
amount of the bond. The carrying amount of the bond
investment is the initial cost that is increased by periodic
amortization of discount and decreased by periodic
amortization of premium.

3. What do you understand by the “fair value option” in

relation to bond investment?
Investments 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 this fair value option, all changes in fair
value are recognized in profit or loss. Any transaction cost
incurred is an outright expense.
Reclassification of Financial Asset
1. Explain the requirement for classification of financial
assets between categories.
The entity shall reclassify financial assets only when
it changes the business model for managing the financial
assets. If reclassification occurs, the entity shall apply the
reclassification prospectively from its reclassification date.
The entity shall not restate any previously recognized
gains, losses and interest. The reclassification date is the
first day of the reporting period following the change in
business model that will result in an entity reclassifying
financial asset.

2. What financial assets are permitted to be reclassified?

What are the exemptions from classification of financial
assets?
Only debt investment can be reclassified because the
change in business model is only applicable to debt
investment.
The exemptions from reclassification are equity
investment held for trading or measured at FVPL, equity
investment measured at FVOCI by irrevocable election
and debt investment measured at FVPL by irrevocable
election.

3. Explain the reclassification from:

a. FVPL to amortized cost – The fair value at the

 reclassification date becomes the new carrying amount
of financial asset at amortized cost. The difference
between the new carrying amount and the face amount
shall be amortized through profit or loss. A new
effective interest date must be determined based on the
new carrying amount.
b. Amortized cost to FVPL – When an entity reclassifies a
financial asset from amortized cost to fair value through
profit or loss, the fair value is determined at
reclassification date. The difference between the
previous carrying amount and fair value is recognized in
profit or loss.
c. Amortized cost to FVOCI – The financial asset is
measured at fair value at reclassification date. The
difference between the amortized cost carrying amount
and the fair value at reclassification date is recognized
in other comprehensive income. The original effective
interest rate is not adjusted.
d. FVOCI to amortized cost – The fair value at
reclassification date becomes the new amortized cost
carrying amount. The cumulative gain or loss previously
recognized in other comprehensive income is
eliminated and adjusted against the fair value at
reclassification date. The original effective interest rate
is not adjusted.
e. FVPL to FVOCI – The financial asset continues to be
measured at fair value. The fair value at reclassification
date becomes the new carrying amount. A new
effective interest rate must be determined based on the
new carrying amount or fair value at reclassification
date.
f. FVOCI to FVPL – The financial asset continues to be
measured at fair value. The fair value at reclassification
date becomes the new carrying amount. The
cumulative gain or loss previously recognized is
 reclassified to profit or loss at reclassification date.

Investment Property
1. Differentiate investment property from owner-occupied
property.
The difference between investment property and
owner-occupied property is that investment property is a
property held by an owner or by the lessee under a
finance lease to earn rentals for capital appreciation or
both while owner-occupied property is held by an owner
for use in the production or supply of goods or services, or
for administrative purposes.

2. Explain the cost model and fair value model of measuring

investment property.
If the entity measures the investment property under
cost model, the asset shall be carried at cost less
accumulated depreciation and any accumulated
impairment loss.
If the entity measures the investment property under
fair value model, the changes in fair value from year to
year are recognized in profit or loss. No depreciation is
recorded for the investment property.

3. Explain the recognition of transfers to and from investment

property.

a. When entity uses the cost model, transfers between

 investment property, owner-occupied property and
inventory shall be made at carrying amount.
b. A transfer from investment property carried at fair value
to owner-occupied property or inventory shall be
accounted for at fair value.
c. If owner-occupied property is transferred to investment
property that is to be carried at fair value.
d. If an inventory is transferred to investment property that
is to be carried at fair value.
e. When an investment property under construction is
completed and to be carried at fair value, the difference
between fair value and carrying amount shall be
included in profit or loss.

4. Explain cash surrender value.

Cash surrender value is the amount which the
insurance firm will pay upon the surrender and cancelation of
the life insurance policy. Cash surrender value arises if the
policy is a life policy except in fire, accident and other nonlife
policies, premiums for three full years must have been paid
and the policy is surrendered at the end of the third year or
anytime thereafter. It is classified as noncurrent investment.