Chpater 5 investment - notes PDF

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CAHPTER 5 INVESMENTS

CHAPTER OBJECTIVES  Apply the business model test of classifying financial assets.  Formulate entries for recognition, measurement and disposal and reclassification of financial asset.  Explain how fair value is measured INVESTMENT PFRS9 INITIAL RECOGNITION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES When the entity becomes party to the contractual provisions of the instrument. Classification of financial asset A. Debt instruments  Amortized Cost(AC) -The asset is held to collect its contractual cash flows and The asset’s contractual cash flows represent ‘solely payments of principal and interest’  Fair Value through Profit or Loss(FVPL) -FVPL is either Held for trading(HFT) or designated -For short term profit taking.  Fair Value through Other Comprehensive Income(FVOCI) -The objective of the business model is achieved both by collecting contractual cash flows and selling financial assets B. Equity instruments  Fair Value through Profit or Loss (FVPL).  Fair Value through Other Comprehensive Income (FVOCI) INITIAL MEASUREMENT At fair value, plus for those financial assets and liabilities not classified at fair value through profit or loss, directly attributable transaction costs. SUBSEQUENT MEASUREMENT classification composition Subsequent measurement FVPL 1. HFT Debt and equity Fair value 2. designated Debt and equity Fair value FVOCI Debt and equity Fair value Amortized cost Debt Amortized cost or carrying amount. RECLASSIFICATION FINANCIAL ASSET  The entity shall reclassify financial assets only when it changes its business model for managing the financial assets.  Where reclassification occurs, an entity shall apply the reclassification prospectively from the reclassification date.  The entity shall not restate any previously recognized gains, losses and interest.  The “reclassification date” is the first day of reporting period following the change in business model that results in an entity reclassifying financial asset.



This means that if the change in business model is in 2020, the reclassification date is January 1 ,2021, the first day of the next reporting period. RECLASSIFICATIONS OF DEBT INSTRUMENTS 1. From Amortized cost to FVPL -the difference between the fair value at reclassification date and the Carrying amount (amortized cost) is recognized in profit or loss. 2. From FVPL to Amortized Cost - the difference between the fair value at reclassification date and the face amount is either discount or premium to be amortized. - Fair value at the reclassification date becomes its new carrying amount to be amortized using effective interest method. 3. From Amortized cost to FVOCI -the difference between the fair value at reclassification date and the Carrying amount (amortized cost) is recognized in other comprehensive income. 4. From FVOCI to Amortized cost - the difference between the fair value at reclassification date and the face amount is either discount or premium to be amortized. - the cumulative gain or loss recognized from FVOCI security is adjusted against new fair value. -As if the instrument is amortized cost from the time the investment was purchased. - Fair value at the reclassification date becomes its new carrying amount to be amortized using effective interest method. 5. From FVPL to FVOCI - Fair value at reclassification date becomes its new carrying amount. -gain or loss previously recognized from FVPL remains in the profit or loss. 6. From FVOCI to FVPL - Fair value at the reclassification date becomes its new carrying amount to be amortized using effective interest method. - The cumulative gain or loss recognized from FVOCI security is transferred to profit or loss. - As if the instrument is FVPL from the time the investment was purchased.

ADDITIONAL Classify cation

1. FVPL a. HFT b. Designated 2. FVOCI

Compo sition

Direct cost

Rate to be Reclassi used in fication computation of interest income.

Debt Equity Debt Equity Debt Equity

Exp. Exp. Exp. Exp. Cap. Cap

Nominal N/A Nominal N/A Effective N/A

 N/A N/A N/A  N/A

Change in fair value

P/L P/L P/L P/L OCI OCI

3. AC

debt

Cap.

Effective



Ignore d

NOTE:  For FVPL the direct cost to acquire the investment is expense when incurred because it is expected to be sold at a short period of time. Not capitalized as cost of asset.  For reclassification, only the debt instruments can be reclassified.  FVPL Designated (equity and debt) and FVOCI equity securities is not subject to reclassification. The classification is as is until derecognized.  The change in fair value of financial asset at amortized cost is ignored. In the financial statement we record the asset at amortized cost (carrying amount) not at fair value. DERECONITION OF FINANCIAL ASSET The following criteria should be met in order for an entity to derecognize a financial asset:  The rights to the cash flows from the asset has expired.  The entity has transferred its rights to receive the cash flows from the asset and transferred substantially all the risk and rewards.  If the entity does not retain control of the asset  The recognition for the gains and losses from derecognition will depend if the financial asset is a debt instrument or equity instrument and its classification....