Financial Assets at Fair Value Notes

Financial Assets at Fair Value
Felix L. Domingo, CPA, CMA
Investments, definition:
➢ Assets held by an entity for the accretion of wealth through distribution of such interest, royalties,
dividends and rentals, for capital appreciation or for other benefits to the investing entity such as
those obtained through trading relationship.
➢ Statement classification:
• Current investments are by their very nature readily realizable and are intended to hold for
not more than one year.
▪ Examples, trading securities
• Non-current or long-term investments are other than current investments

▪ Intended to be held for more than one year, or
▪ Not expected to be realized within 12 months after the end of reporting period.
Financial instruments
➢ Any contract that gives rise to a financial asset of one entity and financial liability or equity
instruments of another entity.
• Financial asset, is any assets that is:

a) Cash
b) Contractual right to receive cash or another financial asset
c) Contractual right to exchange financial instruments under conditions that are potentially
favourable
d) Equity instruments
• Financial liability, is any liability that is a contractual obligation:

a) To deliver cash or other financial asset to another entity.
b) To exchange financial instruments under conditions that are potentially unfavourable
• Equity securities, is any contract that evidence a residual interest in the assets of an entity
after deducting all its liabilities
Classification of Financial Assets

1. Financial asset at Fair Value
2. Financial asset at Amortized Cost
❖ Financial asset at Fair Value includes both Equity and Debt Securities while financial assets
at Amortized cost include only Debt Securities.
❖ Under PAS 39, the usual categories, such as loans and receivables, available for sale and
held to maturity are now eliminated.
➢ Equity security, any instruments representing ownership shares and right, warrants
or option to acquire or dispose of ownership shares at a fixed or determinable price.
• Includes, ordinary shares, preference shares and other share capital.
• Not include redeemable preference share, treasury shares and convertible debt.
➢ Debt Security, represents a creditor relationship with an entity,

• This security has a maturity date and a maturity value.
Financial asset at Fair Value

The following financial assets shall be measured at “Fair Value through Profit and Loss”:
1. Financial assets held for trading or Trading Securities, these financial assets are measured at
fair value through profit and loss by requirement, meaning, required by the standard.
• A financial asset is held for trading, if:
a) Acquired principally for the purpose of selling or repurchasing it in the near term.
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b) Initial recognition, it is part of a portfolio of identifiable financial assets that are managed
together and for which there is evidence of a recent actual pattern of short-term profit
taking.
c) It is a derivative, except for a derivative that is financial guarantee contract or a
designated and an effective hedging instrument.
2. Financial assets that are irrevocably designated on initial recognition as at fair value through
profit and loss.
3. All other investments in quoted equity instruments.
Initial measurement of financial assets

➢ An entity shall measure a financial asset at fair value (transaction price) plus, in the case of
financial assets not at fair value though profit and loss, transaction costs that are directly
attributable to the acquisition of the financial asset.
• Transaction costs include:

a) fees and commissions paid to agents, advisors, brokers, and dealers,
b) levies by regulatory agencies and securities exchanges, and
c) transfer taxes and duties
• Transaction costs not include:

a) Debt premiums and discounts,
b) Financing costs, and
c) Internal administrative or holding costs
• If the financial assets are held for trading or if the financial assets are measured at fair
value through profit and loss, transaction costs are expensed outright.
Subsequent measurement, after initial recognition:

➢ An entity shall measure a financial asset either at fair value or amortized cost, depending on the
entity’s business model for managing financial assets:
• To hold investments in order to:
a) realize fair value changes
b) collect contractual cash flows
Measurement at Amortized Cost

➢ The following condition should be met:
• The business model is to hold the financial assets in order to collect contractual cash flows
on specific date,
• The contractual cash flows are solely payments of principal and interest on the principal
amount outstanding.
Measurement at Fair Value

➢ Financial assets that do not meet the conditions for amortized costs are measurement hall be
measured at fair value.
• However, in initial recognition, an entity may irrevocably designate a financial asset as
measured at fair value through profit or loss even if the financial asset satisfies the
measurements at amortized cost.
Unrealized Gains and Losses – Trading Securities

➢ Gains and losses on financial assets measured at fair value shall be presented in profit and loss,
unless, Financial asset is:
• Part of a hedging relationship,
• An investment in equity instruments and the entity has irrevocably elected to present the
unrealized gains and losses on other comprehensive income.
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❖ Unrealized Gain if Fair Value is greater than Carrying Amount

❖ Unrealized Loss if Fair Value is less than Carrying Amount
Gains and losses – Financial Assets at Amortized Cost

➢ Unrealized gains and losses on financial assets at amortized cost are not recognized simply
because such investments are not reported at fair value.
➢ Gains and losses on financial assets measured at amortized cost and are not part of hedging
relationship shall be recognized in profit or loss when the financial assets are derecognized, sold,
impaired ore reclassified, and through amortization process.
Reclassification
➢ An entity shall reclassify financial assets only when it changes its business model for managing
the financial assets.
• The entity shall apply the reclassification prospectively from the reclassification date.
• The entity shall not restate any previously recognized gains or losses and interest.
➢ Reclassification date is the first day after of the reporting period following the change in business
model that results in an entity reclassifying financial asset.
➢ The following would not result to a change in business model:

• Change in intention related to a particular financial asset
• Temporary disappearance of a particular market of a financial asset
• Transfer of financial asset between parts of the entity with different business model
Reclassification from Fair Value to Amortized Cost

➢ The fair value at the reclassification date becomes the new carrying amount of the financial asset
at amortized cost.
• The difference between the new carrying amount of the financial asset at amortized cost and
the face value of the financial asset shall be amortized through profit and loss over the
remaining life of the financial asset using effective interest method.
Reclassification from Amortized Cost to Fair Value

➢ The fair value is determined at reclassification date.
• The difference between the previous carrying amount and fair value is recognized in profit or
loss.
Impairment – Financial Asset at Fair Value

➢ There is no impairment loss on financial asset measured at fair value, whether through profit or
loss, or other comprehensive income
• If the decline in value of financial asset measured at fair value through other comprehensive
income is judge to be non-temporary, the unrealized loss will continue to be reported as
component of other comprehensive income rather than as an impairment loss.
Impairment – Financial Asset at Amortized Cost

➢ An entity shall access at the end of each reporting period whether there is any objective evidence
that a financial asset or group of financial assets measured at amortized cost is impaired.
• If there is objective evidence that an impairment loss on financial assets has been incurred,
the amount of the loss is measured as the difference between the carrying amount and
the present value of estimated future cash flows discounted at the original effective
interest rate.
• The carrying amount of the asset shall be reduced either directly or through the use of an
allowance account.
• The amount of the loss shall be recognized in profit or loss
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Financial Assets at Fair Value

Felix L. Domingo, CPA, CMA

• Non-current or long-term investments are other than current investments

• Financial asset, is any assets that is:

• Financial liability, is any liability that is a contractual obligation:

Classification of Financial Assets

➢ Debt Security, represents a creditor relationship with an entity,

Financial asset at Fair Value

3. All other investments in quoted equity instruments.

Initial measurement of financial assets

• Transaction costs include:

• Transaction costs not include:

Subsequent measurement, after initial recognition:

Measurement at Amortized Cost

Measurement at Fair Value

Unrealized Gains and Losses – Trading Securities

❖ Unrealized Gain if Fair Value is greater than Carrying Amount

Gains and losses – Financial Assets at Amortized Cost

➢ The following would not result to a change in business model:

Reclassification from Fair Value to Amortized Cost

Reclassification from Amortized Cost to Fair Value

Impairment – Financial Asset at Fair Value

Impairment – Financial Asset at Amortized Cost

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