Accounting 602 – Investments
Rilloraza, CPA
DISCUSSION
PFRS 9 – Financial Instruments
 Specifies how an entity should classify and measure financial assets, financial
liabilities, and some contracts to buy or sell non-financial items.
 Mandatory application starting January 1, 2018
INITIAL MEASUREMENT OF FINANCIAL INSTRUMENTS
 At fair value plus or minus the transaction costs, except if the investment is carried at
Fair Value through Profit or Loss (i.e. transaction costs for financial assets at fair value
through profit or loss are expensed)
SUBSEQUENT MEASUREMENT OF FINANCIAL INSTRUMENTS
 See discussions below on specific classifications of financial instruments
INVESTMENT IN EQUITY SECURITIES
General Application
 If investor has CONTROL over the investee, or if the investor holds more than 50%
interest in the investee, the investment is accounted for as Investment in Subsidiary
(PAS 27 – Separate Financial Statements; PFRS 10 – Consolidated Financial
Statements)
 If investor has SIGNIFICANT INFLUENCE over investee, or if the investor holds 20% or
more interest in the investee, the investment is accounted for as Investment in
Associate (PAS 28 – Investment in Associates and Joint Ventures)
 If investor has no control nor significant influence over the investee, or if the investor
has less than 20% interest in the investee, account for under PFRS 9
Classifications
 Investment in equity securities can be accounted for as follows:
o Financial asset at fair value through profit or loss (FVPL)
o Financial asset at fair value through other comprehensive income (FVOCI)
 Investor has an irrevocable option to carry the investment as FVOCI at initial
recognition
FVPL
 Initially measured at fair value; transaction costs are expensed
 Subsequently measured at fair value; changes in the fair value are recognized through
profit or loss
 Dividends are recorded as income
 Reclassification to FVOCI is NOT ALLOWED, since the option to classify as FVOCI only
exists at initial recognition
 Upon disposal, difference between selling price and carrying value is presented in profit
or loss
FVOCI
 Initially measured at fair value, plus or minus transaction costs
 Subsequently measured at fair value; changes in the fair value are recognized as a
component of other comprehensive income
 Dividends are recorded as income
Lord Gen A.
 Reclassification to FVPL is NOT ALLOWED, since the option to classify as FVOCI at
initial recognition is IRREVOCABLE
 Upon disposal, difference between selling price and carrying value is recognized
DIRECTLY TO RETAINED EARNINGS; cumulative gain or loss previously recognized in
OCI is likewise closed to retained earnings
INVESTMENT IN DEBT SECURITIES
Classifications
 Investment in debt securities can be accounted for as follows:
o Financial asset at amortized cost (FAAC)
o Financial asset at fair value through other comprehensive income (FVOCI)
o Financial asset at fair value through profit or loss (FVPL)
 Basis of classification is the entity’s BUSINESS MODEL
Business Models and the Investments’ Classifications
Business Model Classification
Collect contractual cash flows (principal and interest at specified dates) FAAC
Collect contractual cash flows and sell the financial assets FVOCI
If not held in one of the business models above FVPL
FAAC
 Initially measured at fair value, plus or minus transaction costs
 Subsequently measured at amortized cost
 Interest income is based on the carrying value multiplied by the effective rate
 Difference in the interest income and interest received is the amortization
 Upon disposal, difference between selling price and carrying value is recognized in
profit or loss
FVOCI
 Initially measured at fair value, plus or minus transaction costs
 Subsequently measured at fair value
 Amortization is the same as that of FAAC, however, the amortized cost shall be
increased or decreased to match the fair market value; the difference is presented as
unrealized holding gain or loss – OCI at the statement of financial position
 The increase or decrease in the unrealized holding gain or loss – OCI at the statement
of financial position, shall be presented as a component of other comprehensive income
 Upon disposal, difference between selling price and carrying value is recognized in
profit or loss; cumulative gain or loss previously recognized in OCI is likewise
transferred to profit or loss
FVPL
 Initially measured at fair value; transaction costs are expensed
 Subsequently measured at fair value; changes in the fair value are recognized through
profit or loss
 Interest income is based on the principal amount of the security multiplied by the
stated or nominal rate
Accounting 602 – Investments Lord Gen A. Rilloraza, CPA
 Upon disposal, difference between selling price and carrying value is recognized in can be presented at fair value through other comprehensive income include both debt and
profit or loss equity securities [C] investments that can be presented at amortized cost include both debt
and equity securities [D] transaction costs are capitalized, except if the investment is
Reclassification carried at fair value through profit or loss
 Reclassification of investment in debt securities is allowed; this happens when the 3. Transaction costs include [A] fees and commission paid to agent, levies by regulatory
entity changes its business model authorities, transfer taxes and duties [B] debt premiums or discounts [C] finance costs [D]
 Reclassification shall be done on the FIRST DAY OF THE NEXT PERIOD FOLLOWING internal administrative costs
THE CHANGE IN BUSINESS MODEL (e.g. if entity changed its business model on 4. Unrealized gains and losses on trading investments are reported in [A] equity [B] net income
November 3, 2017, reclassification shall be made on January 1, 2018) [C] other comprehensive income [D] retained earnings
5. Gain or loss on disposal of equity investments measured at fair value through other
Summary comprehensive income is recognized in [A] profit or loss [B] other comprehensive income
FAAC FVOCI FVPL [C] retained earnings [D] part retained earnings and part profit or loss
6. Debt instruments not held for collection are reported at [A] amortized cost [B] fair value [C]
Reclassify to FVOCI at Reclassify to FVPL at
the lower of amortized cost and fair value [D] net realizable value
fair value; difference fair value; difference
7. Reclassifications of investments between categories are recognized [A] prospectively, at the
between fair value and between fair value and
end of the period after the change in the business model [B] prospectively, at the beginning
FAAC previous carrying value previous carrying value
of the period after the change in the business model [C] retroactively, at the end of the prior
is recognized in OCI is recognized in profit
period [D] currently, at the date of change in business model
or loss
8. If an investment in debt securities carried at fair value through other comprehensive
income is reclassified to at amortized cost, the cumulative unrealized holding gain or loss
Reclassify to FAAC at Simply transfer from [A] is recognized in profit or loss [B] is transferred to retained earnings [C] is still carried at
amortized cost; FVOCI to FVPL since the equity section of the statement of financial position [D] is adjusted against the fair value
cumulative gain or loss both are measured at of the financial asset
previously recognized fair value; cumulative 9. What is the best evidence of the fair value of a financial instrument? [A] the cost, including
in OCI is adjusted gain or loss previously transaction costs [B] the estimated value determined using discounted cash flow technique
FVOCI against the fair value recognized in OCI is or option pricing model [C] the quoted price, if an active market exists for the financial
FROM
of the financial asset; recognized in profit or instrument [D] the present value of the contractual cash flows
effective rate is not loss as reclassification 10. Which is not precluded from classification as financial asset at amortized cost? [A] an
changed adjustment investment in an unquoted equity instrument [B] an investment in a quoted equity
instrument [C] a quoted derivative financial asset [D] an investment in a quoted debt
instrument
The fair value at The fair value at
reclassification date reclassification date PROBLEMS
becomes the new becomes the new Problem 1
carrying amount; carrying amount; During 2015, Nes Corporation purchased marketable equity securities for P1,850,000 to be
FVPL effective interest rate is effective interest rate is held as trading investments. In 2015, the entity appropriately reported an unrealized loss of
computed based on computed based on P200,000 in the income statement. There ws no change during 2015 in the composition of the
that amount that amount portfolio of trading securities. Pertinent data on December 31, 2016 are as follows:
Security Cost Market Value
A 600,000 700,000
B 450,000 400,000
EXERCISES
C 800,000 900,000
THEORY QUESTIONS
1. Which of the following is not a category of financial assets? [A] financial assets at fair value 1. What amount of unrealized gain on these securities should be included in the 2016 income
through profit or loss [B] financial asset at fair value through other comprehensive income statement? [A] 350,000 [B] 150,000 [C] 550,000 [D] 0
[C] financial asset at amortized cost [D] financial assets held for sale
2. Which of the following statements is false? [A] investments that can be presented at fair
value through profit or loss include both debt and equity securities [B] investments that
Accounting 602 – Investments
Problem 2
At the beginning of the year, Erl Corp. purchased equity instruments for P4,000,000 to be
measured at fair value through other comprehensive income. The entity incurred transaction
costs of P700,000. At year-end, the fair value of the investment was P5,500,000, and the
transaction costs that would be incurred to sell the investment was estimated at P600,000.
2. What amount of unrealized gain should be recognized in other comprehensive income for
the year? [A] 200,000 [B] 900,000 [C] 800,000 [D] 0
Problem 3
Joi, Inc. purchased equity securities for P2,800,000. The transaction cost incurred for the
purchase of the investment was P200,000. The entity opted to carry the investment at fair value
through other comprehensive income. On December 31, 2016, the unrealized holding loss
reported in the statement of financial position was P400,000. On December 31, 2017, the fair
value of the securities declined to P1,200,000.
3. How much is the unrealized loss that should be presented as a component of other
comprehensive income for 2017? [A] 1,400,000 [B] 1,200,000 [C] 1,000,000 [D] 1,800,000
4. What is the balance of unrealized loss presented in the statement of financial position as
of December 31, 2017? [A] 1,400,000 [B] 1,200,000 [C] 1,000,000 [D] 1,800,000
Problem 4
On June 1, 2017, Sugar Corp. purchased 10,000 shares of Oli Company for P55/share. Sugar
incurred transaction costs of P20,000. The fair market value of the shares by the end of 2017
is P59/share; and by the end of 2018, P52/share. Dividend declared by Oli in 2018 was
P3/share. Sugar sold all shares for P60/share on Feb. 14, 2019.
Case 1
The entity carried the investment at fair value through profit or loss.
5. How much is the unrealized gain to be presented in profit or loss for 2017? [A] 20,000 [B]
40,000 [C] 60,000 [D] 70,000
6. How much net income (loss) related to the investment must be presented in the income
statement in 2018? [A] (70,000) [B] 70,000 [C] (40,000) [D] 30,000
7. How much is the gain (loss) from disposal? [A] 10,000 [B] 80,000 [C] 70,000 [D] 0
Case 2
The entity carried the investment at fair value through other comprehensive income.
8. What amount of unrealized gain must be presented as a component of other comprehensive
income for 2017? [A] 20,000 [B] 40,000 [C] 60,000 [D] 70,000
9. What amount of unrealized loss must be presented in the statement of financial position
as of December 31, 2018? [A] 30,000 [B] 50,000 [C] 70,000 [D] 0
10. How much net income (loss) related to the investment must be presented in the income
statement in 2018? [A] (70,000) [B] 70,000 [C] (40,000) [D] 30,000
11. How much is the gain (loss) from disposal? [A] 10,000 [B] 80,000 [C] 70,000 [D] 0
Problem 5
On January 2, 2017, Single Corporation purchased 5-year 10% bonds of Taken Co., with face
value totalling to P5,000,000, at 92. Single incurred an additional P39,500 as direct costs,
resulting to a yield rate of 12%. Interest is paid by Taken every December 31.
Lord Gen A. Rilloraza, CPA
The bonds are quoted on December 31, 2017 and 2018, at 95 and 91, respectively. The entity
sold the bonds on January 3, 2019 at 92.
Case 1
The company has a business model of holding the financial asset to collect contractual cash
flows consisting of principal payments and interest payments on the outstanding principal.
12. What is the initial cost of the investment? [A] 5,000,000 [B] 4,600,000 [C] 4,639,000 [D]
5,039,000
13. How much income related to the investment must be presented in the 2017 income
statement? [A] 500,000 [B] 556,740 [C] 563,549 [D] 463,950
14. What is the carrying value of the investment as of December 31, 2018? [A] 4,696,240 [B]
4,759,789 [C] 4,750,000 [D] 4,550,000
15. How much is the gain or loss on disposal? [A] gain 159,789 [B] loss 159,789 [C] gain 50,000
[D] loss 96,240
Case 2
The company has a business model of holding the financial asset to collect contractual cash
flows consisting of principal payments and interest payments on the outstanding principal, and
to sell the financial asset.
16. What is the initial cost of the investment? [A] 5,000,000 [B] 4,600,000 [C] 4,639,000 [D]
5,039,000
17. What is the carrying value of the investment as of December 31, 2017? [A] 4,696,240 [B]
4,759,789 [C] 4,750,000 [D] 4,550,000
18. How much unrealized gain or loss must be presented as a component of other
comprehensive income for 2017? [A] gain 53,760 [B] gain 150,000 [C] loss 209,789 [D] loss
263,549
19. How much unrealized gain must be presented in the statement of financial position as of
December 31, 2018? [A] gain 53,760 [B] gain 150,000 [C] loss 209,789 [D] loss 263,549
20. How much is the gain or loss on disposal? [A] gain 159,789 [B] loss 159,789 [C] gain 50,000
[D] loss 96,240
Case 3
The company carried the financial asset at fair value through profit or loss.
21. What is the initial cost of the investment? [A] 5,000,000 [B] 4,600,000 [C] 4,639,000 [D]
5,039,000
22. How much income related to the investment must be presented in the 2017 income
statement? [A] 500,000 [B] 556,740 [C] 563,549 [D] 460,500
23. How much income related to the investment must be presented in the 2018 income
statement? [A] 500,000 [B] 556,740 [C] 563,549 [D] 460,500
24. What is the carrying value of the investment as of December 31, 2018? [A] 4,696,240 [B]
4,759,789 [C] 4,750,000 [D] 4,550,000
25. How much is the gain or loss on disposal? [A] gain 159,789 [B] loss 159,789 [C] gain 50,000
[D] loss 96,240
Problem 6
On January 1, 2018, Baby Co. purchased a 10-year 9% P1,000,000 bonds of Lakay Inc. for an
amount resulting to a yield rate of 10%. Interest is collected by Baby every December 31.
Accounting 602 – Investments
The effective rate of the bonds on December 31, 2018 is 8%; 12% on December 31, 2019; and
11% on December 31, 2020.
Note: use four decimal places for PV factors (i.e. x.xxxx)
Case 1
The company carried the investment at amortized cost, then subsequently reclassified the
investment at fair value through other comprehensive income on December 31, 2019.
26. What is the interest income for 2019? [A] 93,851 [B] 94,237 [C] 94,660 [D] 90,000
27. What is the carrying value of the investment as of December 31, 2019? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
28. What is the carrying value of the investment as of January 1, 2020? [A] 946,602 [B] 850,984
[C] 951,262 [D] 905,798
29. How much is the gain or loss on reclassification to be presented in the income statement?
[A] loss 95,618 [B] gain 95,618 [C] loss 5,618 [D] 0
30. How much is the unrealized gain or loss to be presented as a component of other
comprehensive income for 2020? [A] loss 95,618 [B] gain 95,618 [C] loss 45,464 [D] gain
50,154
31. How much is the unrealized gain or loss to be presented in the statement of financial
position as of December 31, 2020? [A] loss 95,618 [B] gain 95,618 [C] loss 45,464 [D] gain
50,154
32. What is the carrying value of the investment as of December 31, 2020? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
Case 2
The company carried the investment at amortized cost, then subsequently reclassified the
investment at fair value through profit or loss on December 31, 2019.
33. What is the carrying value of the investment as of December 31, 2019? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
34. How much is the gain or loss on reclassification to be presented in the income statement?
[A] loss 95,618 [B] gain 95,618 [C] loss 5,618 [D] 0
35. How much is the interest income for 2020? [A] 93,851 [B] 94,237 [C] 94,660 [D] 90,000
36. How much is the unrealized gain or loss to be presented in the income statement for 2020?
[A] loss 95,618 [B] gain 54,814 [C] loss 45,464 [D] gain 50,154
37. What is the carrying value of the investment as of December 31, 2020? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
Case 3
The company carried the investment at fair value through other comprehensive income, then
subsequently reclassified the investment at amortized cost on December 31, 2019.
38. What is the carrying value of the investment as of December 31, 2019? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
39. What is the carrying value of the investment as of January 1, 2020? [A] 946,602 [B] 850,984
[C] 951,262 [D] 905,798
40. How much is the gain or loss on reclassification to be presented in the income statement?
[A] loss 95,618 [B] gain 95,618 [C] loss 5,618 [D] 0
41. How much is the interest income for 2020? [A] 93,851 [B] 94,237 [C] 94,660 [D] 90,000
42. What is the carrying value of the investment as of December 31, 2020? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
Lord Gen A. Rilloraza, CPA
Case 4
The company carried the investment at fair value through other comprehensive income, then
subsequently reclassified the investment at fair value through profit or loss on December 31,
2019.
43. What is the carrying value of the investment as of January 1, 2020? [A] 946,602 [B] 850,984
[C] 951,262 [D] 905,798
44. How much is the gain or loss on reclassification to be presented in the income statement?
[A] loss 95,618 [B] gain 95,618 [C] loss 5,618 [D] 0
45. How much is the interest income for 2020? [A] 93,851 [B] 94,237 [C] 94,660 [D] 90,000
46. How much is the unrealized gain or loss to be presented in the income statement for 2020?
[A] loss 95,618 [B] gain 54,814 [C] loss 45,464 [D] gain 50,154
47. What is the carrying value of the investment as of December 31, 2020? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
Case 5
The company carried the investment at fair value through profit or loss, then subsequently
reclassified the investment at fair value through other comprehensive income on December 31,
2019.
48. What is the interest income for 2019? [A] 93,851 [B] 94,237 [C] 94,660 [D] 90,000
49. What is the carrying value of the investments as of January 1, 2020? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
50. How much is the gain or loss on reclassification to be presented in the income statement?
[A] loss 95,618 [B] gain 95,618 [C] loss 5,618 [D] 0
51. How much is the interest income for 2020? [A] 102,118 [B] 85,098 [C] 94,660 [D] 90,000
52. What is the carrying value of the investment as of December 31, 2020? [A] 946,602 [B]
850,984 [C] 863,102 [D] 905,798
53. How much is the unrealized gain or loss to be presented as a component of other
comprehensive income for 2020? [A] loss 95,618 [B] gain 42,696 [C] loss 45,464 [D] gain
50,154
Case 6
The company carried the investment at fair value through profit or loss, then subsequently
reclassified the investment at amortized cost on December 31, 2019.
54. What is the carrying value of the investments as of January 1, 2020? [A] 946,602 [B]
850,984 [C] 951,262 [D] 905,798
55. How much is the gain or loss on reclassification to be presented in the income statement?
[A] loss 95,618 [B] gain 95,618 [C] loss 5,618 [D] 0
56. How much is the interest income for 2020? [A] 102,118 [B] 85,098 [C] 94,660 [D] 90,000
57. What is the carrying value of the investment as of December 31, 2020? [A] 946,602 [B]
850,984 [C] 863,102 [D] 905,798