(1) Financial Asset at Fair Value

8/6/2019 (1) Financial Asset at Fair Value

http://slidepdf.com/reader/full/1-financial-asset-at-fair-value 1/38



Definition: INVESTMENT

-assets not directly identified with the

operating activities of an entity

ANDoccupy only an auxiliary relationship to the

central revenue producing activities of the

entity



Reasons why entities INVEST?

a. For accretion of wealth or regular income throughinterest, dividends, royalties and rentals.

b. For capital appreciation as in the case of investmentsin land and real estate held for appreciation and direct

investments in gold, diamonds and other preciouscommodities.

c. For ownership control as in the case of investments insubsidiaries and associates.

d. For meeting business requirements as in the case of

sinking fund, preference share redemption, plantexpansion fund and other noncurrent fund.

e. For protection as in the case of interest in lifeinsurance contract in the form of cash surrender value.



Examples of investments

1. Trading securities

2. Investment in equity securities

3. Investment in bonds4. Investment in associate

5. Investment in subsidiary

6. Investment property

7. Investment in fund

8. Investment in joint venture



Statement classification

Current= by their very nature are readily realizable

AND

are intended to be held for not more

than one year

Noncurrent /long term =investments are intended to be held for more than one year

ORare not expected to be realized within twelve months

after the end of the reporting period.



Noncurrent investments

-accumulation of funds for such purposes as plant

expansion or liquidation of foreign debt

-shareholdings acquired for the purpose of

controlling another firm or creating good

customer or supplier relationship

-investment of land and buildings acquired for

capital appreciation which are intended to beheld for a number of years to generate income

and capital gain



Financial instruments

Characteristics:

-there must be a contract

-at least two parties to the contract-contract shall give rise to a financial asset

of one party AND financial liability or

equity instrument of another party.



Examples of financial instruments:

Cash in the form of notes and coins:

Financial asset of the holder or bearer

Financial liability of the issuing government.

-----------------------------------------------------------Cash in the form of checks:

Financial asset of the payee

Financial liability of the drawer or issuer

-----------------------------------------------------------Cash in bank:

Financial asset of the depositor

Financial liability of the depository bank.



Definition 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



What are conditions that are

potentially favorable

� Exchanges of financial instruments with

another entity will result to a gain or additional cash inflow to the entity



Examples of financial assets

Cash or currency

The following represent a contractual right to receive cash:

Trade accounts receivableNotes receivable

Loans receivable

Bonds receivable

An option held by the holder to purchase shares of another entity at less than market price.(potentially favorable)



Not considered as financial assets

The following do not give rise to a present right toreceive cash or another financial asset.

Physical assets:Inventory

Property, plant and equipment

Intangible assets:Patents

Trademarks



Definition of financial liability

-any liability that is a contractual obligation:

To deliver cash or other financial asset toanother entity

To exchange financial instruments withanother entity under conditions that are

potentially unfavorable.



Examples of financial liabilitiesObligation to deliver cash:-trade accounts payable

-notes payable

-loans payable

-bonds payable

- Redeemable preference share-

financial liability on the part of the issuer

-preference share that gives the holder the right to requirethe issuer to redeem the instrument at a particular date-

financial liability on the part of the issuer

-an option written or issued by the issuer to sell shares in aspecified company at less than market price (potentiallyunfavorable)



Not considered financial liabilities

Deferred revenue

Warranty obligations

Associated with the delivery of goods and services rather than a

contractual obligation to pay cash or another financial asset

Income taxes payable-

statutory requirements imposed by governmentConstructive obligations-

the obligation do not arise from contracts



Definition of equity instrument

Any contract that evidences a residual interest in the assetsof an entity after deducting all of its liabilities.

Includes:

Ordinary share capital

Preference share capital

Redeemable preference share-

Warrants or written call options that allow the holder to

subscribe for or purchase a fixed number of ordinaryshares of the issuing entity in exchange for a fixedamount of cash or another financial asset.



Classification of financial assets

� Financial assets at fair value

� Financial assets at amortized cost



Financial assets at fair value

-include BOTH equity securities and debt securities



Equity security

-any instrument represent an ownership interest inan entity

-includes :

ordinary shares

preference share

and other share capital

rights, warrants or options

-it does not include:redeemable preference shares

treasury shares

convertible debt



Debt security

-any security that represents a creditor relationshipwith an entity

-has maturity date and maturity value

-includes:corporate bonds

BSP treasury bills

government securities

commercial paperspreference share with mandatory redemption

date at the option of the holder



Financial assets measured at fair

value through profit and loss

� By requirement (required by the standard)

trading securities =financial assets held for trading

� By designation on initial recognition

investment in bonds

other debt instruments

� By consequence

all other investments in quoted equity instruments



Financial assets held for trading

� It is acquired principally for the purpose of selling or repurchasing it in the near term.

( to generate short term gains or profits)

� On initial recognition, it is part of a portfolio of identifiedfinancial assets that are managed together and for whichthere is evidence of a recent actual pattern of short-termprofit taking.

� It is a derivative, except for a derivative that is a financialguarantee contract or a designated and an effectivehedging instrument.



Financial assets held for trading

Classification: CURRENT ASSETS

Initial measurement:

measured at fair value through profit and loss (required by the standard)

(fair value=transaction price or fair value of the consideration given)

transaction cost: EXPENSED OUTRIGHTfees and commissions paid to agents,etc

levies by regulatory agencies and security exchanges

transfer taxed and duties

Pro-forma entry:Trading securities----------------xx

Commission expenses---------xx

Cash--------------------------------------xx



Subsequent measurement

� Depends on the business model for

managing financial assets, if financial assets

are to be measured subsequently :

at fair value

or

at amortized cost



business model for managing financial assets

determined by key management personnel

-to hold investments in order to trade to realize

fair value changes

(subsequently measured at FAIR VALUE)

-to hold investments in order to collect

contractual cash flows (only principal and

interest)

(subsequently measured at AMORTIZED COST)



FAIR VALUE-price in an arm¶s length transaction

� Quoted price:pesos/share = equity security

percentage of the fair value of the bond= debt security

� Bid price= quoted market price for an asset held= price which a willing buyer wants to pay

� Asking price=quoted market price for an asset to be acquired

=price which a willing seller wants to receive

Use the most recent transaction price if bid and asking pricesare not available



Unrealized gains and losses-trading securities

� Arise from investments that are reported at fair value (fair value changes )

unrealized gain= fair value FV>carrying amount CA of securities

unrealized loss= FV < CA

proforma entry:

Trading securities(increase in FV)-------------xx

Unrealized gain-----------------------------------xx

� Presented in profit and loss, hence, shown in INCOME STATEMENT as OTHER INCOME; OTHER EXPENSE

� gains and losses= result from actually selling the securities

= CA ± consideration received

PRO-FORMA ENTRY:

Cash-----------------------------xx

Trading securities---------------------xx

Gain on sale of trading securities²xx



Unrealized gains and losses-trading securities

For more than one securities:

Get the net amount of the unrealized gain or

loss of the individual securities.



Subsequently measured at Amortized cost

� to hold investments in order to collect contractual cashflows which are solely payments of principal and intereston the principal amount outstanding

� Unrealized gains and losses are not recognized becausethey are not reported at fair value

� Gains and losses are recognized when the financialassets are:

derecognizedimpaired or reclassified

through the amortization process



Financial assets not at fair value

Initial recognition:

fair value plus transaction costs that are

directly attributed to the acquisition of thefinancial asset

proforma entry:investment in equity securities---xx

cash---------------------------------xx



Financial assets not held for trading

� May make an irrevocable election to present to OTHER

COMPREHENSIVE INCOME (OCI) subsequentchanges in fair value of an investment in equityinstrument

hence,

unrealized gain/loss-OCI

will be part of the statement of comprehensive incomebut not subsequently transferred to profit and loss

thus, not part of Retained earnings but of

reserves in the stockholders equity

proforma entry:investment in equity securities----xx

unrealized gain-oci-----------------xx



Cumulative unrealized gain

= original cost

- market value



Derecognition of a financial asset

Cash-----------------------------xx

(consideration received)

Loss on sale of securities--xx

Investment in equity securities---------xx(carrying amount of the invesment)

Gain on sale of securities----------------xx

#

Unrealized gain-OCI--------XX

Retained earnings----------------xx

to close since these are related

to sold Investment in securities



RECLASSIFICATION either from fair value to

amortized cost or vice versa

When it changes its business model for managing thefinancial assets

Applied prospectively from reclassification date

Reclassification date- 1st day of the reporting period following thechange in business model

Not a change in business model:

a. Change in intention related to the financial asset

b. A temporary disappearance of a particualr market fro a financialasset

c. A transfer of financial asset between parts of the entity withdifferent business models



RECLASSIFICATION from fair value to amortized cost

The fair value at the reclassification date becomes the newcarrying amount of the financial asset at amortized cost.

New carrying amount of the financial asset at amortized cost

Less face value of the financial asset

amount is amortized over profit or loss over the

remaining life of the financial asset

using the effective interest method

Proforma entry:investment in bonds--------xx

financial asset at fair value-------xx



RECLASSIFICATION from amortized cost to fair value

Fair value is determined at reclassification date;

previous carrying amount

Less fair value of the financial asset

amount is recognized in profit or loss

Proforma entry:

financial assets at fair value------xxinvestment in bonds------------------xx



impairment

Financial assets at fair value:

not necessary

Financial assets at amortized cost:



tainting

Documents

(1) Financial Asset at Fair Value