Chapter 15 - Intermediate Accounting PDF

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Classification of Investments in the Financial Statement  Current Asset – investments that are by their very nature readily realizable and are intended to be held for not more than one year  Noncurrent Asset – investments that are not expected to be realized within twelve months after the end of t...

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CHAPTER 15: FINANCIAL ASSET AT FAIR VALUE Investments  Assets held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends, and rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading relationships  They are not directly identified with the operating activities of an entity and occupy only an auxiliary relationship to the central revenue producing activities of the entity Purposes of Investments  Accretion of wealth – through interest, dividends, royalties, and rentals  Capital Appreciation – as in the case of land and real estate held for appreciation and direct investments in gold, diamonds, and other precious commodities  Ownership Control – as in the case of investments in subsidiaries and associates  Protection- as in the case of interest in life insurance contract in the form of cash surrender value Examples of Investments  Trading securities or financial asset at fair value through profit of loss (FA-FVPL)  Financial asset at fair value through other comprehensive income (FA-FVOCI)  Investment in nontrading equity securities  Investment in bonds or financial asset at amortized cost  Investment in associate  Investment in subsidiary  Investment property

Classification of Investments in the Financial Statement  Current Asset – investments that are by their very nature readily realizable and are intended to be held for not more than one year  Noncurrent Asset – investments that are not expected to be realized within twelve months after the end of the reporting period Definition of Financial Asset  Cash  A contractual right to receive cash or another financial asset from another entity  A contractual right to exchange financial instrument with another entity under conditions that are potentially favorable  An equity instrument of another entity Examples of Financial Assets  Cash or Currency – it represents the medium of exchange  Deposit of Cash with a Bank or Similar Financial Institution – it represents the contractual right of the depositor to obtain cash from the bank or to draw a check against the balance in favor of a creditor in payment of a financial liability  Financial assets representing the right to receive contractual cash flows: a. Trade accounts receivable b. Notes receivable c. Loans receivable  Exchange with favorable conditions: a. Purchase of shares of another entity at less than market price  Investment in shares or other equity instruments a. Trading securities Not Considered a Financial Asset  Gold bullion deposited in a bank – it is a commodity  Intangible Assets - no present right to receive cashflows  Physical assets (PPE and Inventory) – no present right to receive cashflows P id th i f t

Classification of Financial Assets:  Financial Assets at Fair Value through Profit or Loss – includes equity and debt securities  Financial Assets at Fair Value through Other Comprehensive Income – includes equity and debt securities  Financial Assets at Amortized Cost – debt securities only Business Models Used as Basis for the Classification of Financial Assets  To hold investments in order to realize fair value changes  To hold investments in order to collect contractual cash flows  To hold investments in order to collect contractual cash flows and sell the investment Equity Security  Any instrument representing ownership shares and right, warrants or options to acquire or dispose of ownership shares at a fixed or determinable price  Simple definition = ownership interest in an entity  Includes: a. Ordinary Shares b. Preference Shares c. Rights or Options  Shareholders – owners of equity securities  Share – is the ownership interest or right of a shareholder in an entity  Share Certificate – evidence for owning shares of another entity  Does not include: a. Redeemable preference shares b. Treasury Shares c. Convertible Debt Debt Security  Any security that represents a creditor relationship with an entity  Has a maturity date and a maturity value  Examples: a. Corporate bonds

Initial Measurement of Financial Assets  General Measurement: Fair Value + Transaction Cost  Except FVPL: Fair Value  Transaction costs incurred in acquiring trading securities are considered outright expense  Not considered transaction costs: a. Debt premiums or discounts b. Financing costs c. Internal or administrative or holding costs Subsequent Measurement  Fair Value through Profit and Loss (FVPL)  Fair Value through Other Comprehensive Income (FVOCI)  Amortized Cost Financial Assets at Fair Value through Profit or Loss  Financial assets held for trading or trading securities – measured at FVPL by requirement (it is required by the standard)  All Other Investments in Quotes Equity Instruments – measured at FVPL by consequence  Financial Assets that are irrevocably designated on initial recognition as at fair value through profit of loss – measured at FVPL by irrevocable decision or by option  All debt investments that do not satisfy the requirements for measurement at amortized cost and at FVOCI – measured at FVPL by default Financial Asset held for Trading (Debt and Equity Securities)  If acquired with the purpose of selling or repurchasing it in the near term  It is part of a portfolio that shows evidence of a recent actual pattern of short-term profit making  It is a derivative but not a derivative hedging instrument Equity Investment at Fair Value through Other

Debt Investment at Amortized Cost  A debt investment shall be measured at amortized cost if it meets BOTH conditions: 1. The business model is to hold the financial asset to collect contractual cash flows on specified date 2. The contractual cash flows are solely payments of principal and interest  Simple Definition – A debt investment is to be measured at amortized cost when the entity holds the investment to receive contractual cash flows and that the cashflows received are principal and interest payments only. Debt Investment at Fair Value through OCI  A debt investment shall be measured at fair value through OCI if both conditions are met: 1. The business model is achieved by both collecting contractual cash flows and by selling the financial asset 2. The contractual cash flows are solely payments of principal and interest  Simple Definition – A debt investment is to be measured at FVOCI when it is held by the entity to receive contractual cash flows provided that the cash flows received are interest and principal payments and that the entity intends to sell the debt investment.  During the derecognition of the asset, the cumulative gain or loss in the debt investment is to be reclassified to profit or loss Summary of Measurement Rules:  Equity Investments 1. Trading Securities – FVPL 2. Not for Trading Securities – FVPL rule

1. Held to collect contractual cash flows and to sell the financial asset – FVPL through irrevocable decision or designation Fair Value  the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date  Simple Definition – the price agreed upon by a buyer and a seller in an arm’s length or orderly transaction. The buyer and seller must not be forced or not compelled to enter into the transaction Evidence of Fair Value Hierarchy:  Quoted price of identical asset in an active market  Quoted price of similar asset in an active market  Quotes price of identical and similar asset in an active market Active Market – a market in which transactions take place with sufficient regularity and volume to provide pricing information on an ongoing basis Quoted Price  Quoted price – the fair value of securities in the securities market  Quotes price in reference to a share or equity securities – pesos per share  Quotes price in bond or debt security – percent of the face amount of the bond Gain or Loss – Financial Asset at Fair Value  Gain or loss in securities held at FVPL are presented in profit or loss, except: 1. If the investment is a nontrading security and it has been irrevocably elected that the unrealized gain or loss is to be presented in other comprehensive income (OCI)

Gain or Loss – Financial Asset at Amortized Cost  Unrealized gain or loss in financial assets measured at amortized cost is not recognized because these financial assets are not reported it at fair value  The gain or loss in financial assets measured at amortized cost shall be classified to FVPL when it is sold or derecognized Impairment – Equity Investments at Fair Value  It is not necessary to test equity investments measured through FVPL or FVOCI for impairment Impairment – Debt Investments  The entity shall recognize expected credit loss in case of impairment. Expected credit loss is an estimate of credit loss over the life of the financial instrument  Credit Loss – present value of all cash shortfalls  Impairment Loss = Carrying Amount less Present Value of Estimated Future Cash Flows discounted at the original effective rate ...