FINANCIAL

INSTRUMENTS
(PFRS 9)
CAMILLE GAYE LAGADON
PRFS 9, paragraph 5.1.1, provides that at
initial recognition, an entity shall measure
financial asset at fair value plus in the case
of financial asset not at fair value through
profit or loss, transaction costs that are
directly attributable to the acquisition of the
financial asset.
As a rule, transaction costs that are directly
attributable to the acquisition of the
financial asset shall be capitalized as cost of
the financial asset.
However, if the financial asset is held for
trading or if the financial asset is measured
at fair value through profit or loss,
transaction cost are expensed outright.

INITIAL INSTRUMENT
OF FINANCIAL ASSET
 PFRS 9, paragraph 5.2.1, provides
that after initial recognition, an
entity shall measure a financial asset
at:

FAIR VALUE THROUGH PROFIT OR

LOSS

FAIR VALUE THROUGH OTHER

COMNPREHENSIVE INCOME

AMORTIZED COST
SUBSEQUENT MEASUREMENT
 1. Financial assets held for trading or
popularly known as “trading securities”.
2. All other investments in quoted equity
instruments.
3. Debt investments that are irrevocably
designated on initial recognition as at fair
value through profit or loss.
4. All debt investments that do not satisfy
the requirements for measurement at
amortized cost and at fair value through
other comprehensive income.

FINANCIAL ASSETS AT F@FVTPL

 1. It acquired principally for the purpose of selling or
repurchasing it in the near future.

2. On initial recognition, it is part of a portfolio of

identified financial assets that are managed together
and for which there is evidence of a recent actual
pattern of short-term profit taking.

3. It is a derivative, except for a derivative that is a

financial guarantee contact or a designated and an
effective hedging instruments.

In other words, trading securities are debt and equity

securities that are purchased with the intent of selling
them in the “near term” or very soon. They are
classified as current assets.

FINANCIAL ASSET HELD FOR TRADING

The term equity security
encompasses any instrument
representing ownership shares and
right, warrants or options to acquire
or dispose of ownership shares at a
fixed or determinate price. It
represents ownership interest in an
entity.
Ownership shares include ordinary
shares, preference shares and rights
or options to acquire ownership
shares.
EQUITY SECURITY
A debt security is any security
that represents a creditor
relationship with an entity. It
has a maturity value and a
maturity date.

E.g corporate bonds, BSP

treasury bills, commercial
papers and other debt
instruments with maturity.
DEBT SECURITY
ILLUSTRATION:
During 2019, an entity purchased marketable equity securities at a total cost of 5,000,000 pesos. The equity
securities qualify as financial asset held for trading. The entity also paid 50,000 pesos as commission to the broker.
JOURNAL; ENTRY:
Trading Securities 5,000,000
Commission Expense 50,000
Cash 5,050,000
Observe that the commission paid to the broker is not capitalized as cost of the investment but treated as outright
expense.
On December 31, 2019, the trading securities have a total fair value of 6,000,000 pesos. The increase in the value is
recorded as follows:
Trading Securities 1,000,000
Unrealized Gain-TS 1,000,000
The unrealized gain is classified in the income statement as other income.
On December 31.2019 the SFP will report the TS AT FAIR VALUE OF 6,000,000 pesos with a disclosure of the
cost of 5,000,000 pesos.
On December 31,2020 the TS have a fair value of 4,500,00 pesos. The decrease in fair value is recorded as follows:
Unrealized Loss-TS 1,500,00
Trading Securities 1,500,00
The unrealized loss is reported in the income statement as other expense.
On December 31,2020, the trading securities will be carried at 4,500,00 pesos, with disclosure of the cost of
5,000,000 pesos.
On December 31, 2021, the trading securities
are sold for 5,200,000 pesos. The sale is simply
recorded as follows:

Cash 5,200,000
Trading securities 4,500,00
Gain on sale of trading securities 700,000

On disposal of a financial asset the difference

between the carrying amount and the
consideration received is recognized as gain or
loss on disposal to be reported in the income
statement.

SALE OF TRADING SECURITIES

 other comprehensive income or OCI subsequent changes
in fair value of an investment in equity instrument that
is not held for trading,
This irrevocable approach is designed to impose
discipline in accounting for nontrading equity
investment. The amount recognized in other
comprehensive income is not reclassified to profit or
loss under any circumstances. However, on
derecognition, the amount may be transferred to
retained earnings. If the investment in equity
instruments is held for trading, the election to present
gain and loss in other comprehensive income is not
allowed. If the investment inequity instrument is held
for trading, subsequent changes in fair value are always
included in profit or loss or reported in the income
statement.

FINANCIAL ASSET AT F@FVTOCI

ILLUSTRATION
During 2019, an entity purchased marketable equity securities at a total cost of
1,000,000 pesos. The entity paid commission and taxes of 100,00 pesos.
The equity securities do not qualify as financial asset held for trading. The entity made
an irrevocable election to present unrealized gain and loss in other comprehensive
income.
JOURNAL ENTRY
Financial asset-FVOCI 1,100,000
Cash 1,100,00
A financial asset measured at FVOCI shall be recognized initially at fair value plus
transaction cost directly attributable to the acquisition. Thus, the commission and
taxes of 100,000 pesos are capitalized as cost of the investment.
On December 31,2019, the securities have a total market value of 1,300,000 peso. The
increase in market value is:
Financial asset-FVOCI 200,000
Unrealized gain-OCI 200,000
The unrealized gain is presented as component of OCI in the 2019 statement of
comprehensive income.
The financial asset- FVOCI on December 31,2019 is carried at the market value of
1,300,000 pesos, with the disclosure at the cost of 1,100,000 pesos.
The financial asset- FVOCI is normally classified as noncurrent asset.
 On July 1,2020, the securities are sold for 2,000,000 pesos.
JOURNAL ENTRY:
Cash 2,000,000
Financial asset-FVOCI 1,300,000
Retained earning 700,000
Gain or loss from disposal of equity investment measured at
FVOCI is recognized directly in retained earnings. Moreover, the
cumulative gain or loss previously recognized in OCI is also
transferred to retained earnings. Accordingly, the cumulative
gain of 200,000 pesos is transferred to retained earnings.
Unrealized gain-OCI 200,000
Retained earnings 200,000
The amount recognized in OCI is not reclassified to profit or loss
under any cirscumtances.
Sale price 2,000,000
Historical cost 1,100,000

Actual gain on disposal 900,000

SALE OF EQUITY INVESTMENT-FVOCI

 1. The business model is to hold the financial
asset in order to collect contractual cash flows
on specified date.
2. The contractual cash flows are solely
payments of principal and interest on the
principal amount outstanding.

The business model is to collect contractual

cash flows if the contractual cash flows are
solely payments of principal and interest. In
such case, the financial asset shall be
measured at amortized cost.

DEBT INVESTMENT AT AMORTIZED COST

 1. The business model is achieved both by
collecting contractual cash flows and by selling
the financial asset.
2. The contractual cash flows are solely payments
of principal outstanding.

Note that the business model includes selling the

financial asset in addition to collecting
contractual cash flows. In this case, interest
income is recognized using the effective interest
method as in amortized cost measurement.
On derecognition, the cumulative gain and loss
recognized in OCI shall be reclassified to profit or
loss.

DEBT INVESTMENT AT FAIR VALUE THROUGH OCI