FINANCIAL INSTRUMENT – ACCOUNTING 203 Any contract that evidences a residual interest in the
Overview of IFRS 9 assets of an entity after deducting all of its liabilities.
IFRS 9 replaced IAS 39 – Financial Instruments –
Recognition and Measurement EXERCISE PROBLEMS
Final standard was issued in July, 2014. The following is a list of assets from the books of Brio
IFRS 9 generally effective for years beginning on or after Company as of December 31, 2021. Compute the total
Jan 1, 2018 with early adoption permitted amount of Financial Assets.
In 2016, IASB agreed to provide insurance entities with
Petty Cash Fund 5,000
option of delaying implementation until 2021
Cash in Bank - BPI 75,000
The following are examples of assets and liabilities that fall Notes Receivable 140,000
within the scope of PFRS 9: Discount on Notes Receivable (10,000)
a) Cash Loans Receivable 85,000
b) Trade receivables/payables Allowance for Doubtful Account – Loans Receivable (5,000)
c) Loans receivables/payables Advances to Suppliers 12,000
d) Loans commitments on bank borrowings Prepaid income Tax 10,000
e) Investment in shares in listed and unlisted Prepaid Assets 7,000
companies Investment in trading securities 45,000
f) Investments in convertible notes Investment in associate 63,000
g) Derivative financial instruments Deferred tax assets 16,000
Sinking fund 92,000
Definition of Financial Instrument
* Any contract that gives rise to a financial asset of one Answer:
entity, and a financial liability or equity instrument of
Petty Cash Fund 5,000
another entity.
Cash in Bank - BPI 75,000
* The following are not financial instruments:
Notes Receivable 130,000
- Items that will be settled through the receipt or Loans Receivable 80,000
delivery of goods or services Investment in trading securities 45,000
- Tax assets and liabilities Investment in associate 63,000
Sinking fund 92,000
FINANCIAL ASSET TOTAL FINANCIAL ASSETS 490,000
Any asset that is: INITIAL RECOGNITION
* Financial assets are recognized only when the entity
Cash becomes a party to the contractual provisions of the
A Contractual right instrument.
o To receive cash or another financial asset from * Financial Asset may either be a debt instrument (bonds) or
another entity equity instrument (shares).
o To exchange financial assets or financial liabilities
with another entity under conditions that are Classification of Financial Assets
potentially favorable to the entity Financial assets are classified as either:
An equity instrument of another entity − Financial assets are amortized cost, or
− Financial assets at fair value
FINANCIAL LIABILITY Basis of classification
Any liability that is: − The entity’s business model for managing the
financial assets
A contractual obligation − The contractual cash flow characteristics of the
o To deliver cash or another financial asset to another financial assets
entity
o To exchange financial assets or financial liabilities
with another entity under conditions that are
potentially unfavorable to the entity
Classification of debt instruments
1. Financial asset at amortized cost (FAAC) – must meet the
following conditions:
EQUITY INSTRUMENT a. Hold-to-collect (held-to-maturity) business model
b. Cash flows are solely payments of principal and
interest (SPPI) on the principal amount outstanding
2. Financial asset at fair value through PL (FAFVPL)
a. Residual – do not quality to be measured at Summary
amortized cost or FVOCI
b. Fair value option – entity elects to measure at
FAFVPL to avoid accounting mismatch; irrevocable
3. Financial asset at fair value through OCI (FAFVOCI) – both
conditions are met:
a. Hold-to-collect and sell business model
b. Cash flows are solely payment of principal and
interest (SPPI) on the principal amount outstanding
Classification of Equity Instruments
1. Financial asset at fair value through PL (FAFVPL)
a. Held for trading
b. Residual – those that were not elected to be
classified as FVOCI
Initial Measurement
2. Financial asset at fair value through OCI (FAVOCI) – Measured at fair value on initial recognition
irrevocable election at initial recognition for instruments Transaction costs are included in the initial measurement
that are not held for trading of financial instruments that are not measured at fair
value through profit or loss.
Initial Measurement
Applies to all financial instruments – whether or not
Financial asset at negotiated on an arm’s length basis (e.g., interest-free
amortized cost (FAAC) loans by a shareholder or government)
Fair value plus transaction costs
Financial asset at FVOCI
(FAFVOCI) Fair Value Concepts
Financial asset at FVPL Fair value (transaction costs are Fair value is defined as the amount for which an asset
(FAFVPL) expensed) could be exchanged or a liability settled between
knowledgeable and willing parties in an arm’s length
Subsequent Measurement transaction
Fair value does not take into consideration transaction
Financial asset at amortized
Amortized cost costs expected to be incurred on transfer or disposal of a
cost (FAAC)
financial instrument
Financial asset at FVOCI
Fair value – changes through OCI Fair value of a financial instrument on initial recognition
(FAFVOCI)
is normally the transaction price (i.e., fair value of
Financial asset at FVPL Fair value – changes through
consideration given or consideration received)
(FAFVPL) profit and loss
GUIDANCE ON FAIR VALUES
a) When the financial asset is part of a hedging
relationship
b) When the financial asset is an investment in non-
trading equity instrument and the entity has
irrevocably elected to present unrealized gain and
loss in other comprehensive income.
c) When the financial asset is a debt investment that is
measured at fair value through other comprehensive
income.
GAIN and LOSS - FAAC
G/L are not recognized since investments is not reported at
fair value unless:
GAIN and LOSS – FAFV
a) Derecognized
Presented in P/L except: b) Sold
c) Impaired PVPL to AMORTIZED COST
d) Reclassified
Fair value at reclassification date becomes the new
EXERCISE PROBLEMS carrying amount
James Company invested in the following transactions: Difference between new carrying amount and face
value of financial asset shall be amortized through
Dec. 3 Purchased 12,000 shares of Woody Company
P/L over remaining life of the FA using the effective
P3 share. James paid P1,800 brokerage fee.
interest method.
Dec. 31 Woody Company’s shares have a quoted price
SAMPLE PROBLEM: FVPL to AC
of P5 per share
Jan. 16 James Company sold all the shares at P8 per
share and incurred sales transaction cost of
P 4,800.
Case 1 – investment is held for trading (FAFVPL)
Dec 3 FAFVPL 36,000
Cash 36,000
Expense 1,800
Cash 1,800
Dec 31 FAFVPL 24,000
FROM AMORTIZED COST to FVPL
Unrealized gain – PL 24,000
Fair value is determined at reclassification date.
Jan 16 Cash 91,200
The difference between previous carrying amount
FAFVPL 60,000
and fair value is recognized in P/L.
Gain on Sale 31,200
Case 2 – investment is irrevocably elected at FVOCI
Dec 3 FAFVOCI 37,800
Cash 37,800
Dec 31 FAFVOCI 22,200
unrealized gain – OCI 22,200
Jan 16 FAFVOCI 31,200
Unrealized gain – OCI 31,200
Cash 91,200
FAFVOCI 91,200
Unrealized Gain – OCI 53,400
Retained Earnings 53,400
RECLASSIFICATION
PFRS 9 Requirements
When it changes its business model
Reclassification applied prospectively from
reclassification date
The entity shall not restate any previously
recognized gain, losses and interest.
Reclassification date is the first day of the reporting
period following change in business model.
Reclassification is infrequent
FROM AMORTIZED COST to FVOCI
Fair value is determined at reclassification date.
Any gain or loss from the difference between the
amortized cost carrying amount and fair value is
recognized in OCI
The effective interest rate and the measurement of
expected asset credit losses are not adjusted as a
result of reclassification.
FVOCI to AMORTIZED COST
Fair value at reclassified date becomes the new
amortized cost carrying amount.
Cumulative gain or loss previously recognized in OCI
is removed from equity and adjusted against the fair
value at reclassification date.
RECLASSIFICATION from FVOCI to FVPL
The financial asset continues to be measured at fair
value.
The fair value at reclassification date becomes the
new carrying value.
Cumulative gain or loss previously recognized in OCI
is classified to PL at reclassification date.
