FINANCIAL ASSET AT FAIR VALUE (FVPL and FVOCI)

Definition of investments:

Purposes of investments (ACOP)

a. For accretion of wealth
b. Capital Appreciation (such as land and real estate and direct investments in gold, diamonds and
other precious commodities)
c. For ownership control (Subsidiaries and Associates)
d. For protection as in the case of interest in life insurance contract

Examples of investments
• Trading securities or financial asset at fair value through (expected to be realized within 12
months after the reporting period
• Financial asset at fair value through other comprehensive
• Investment in nontrading equity securities
• Investment in bonds or financial asset at cost
• Investment in subsidiary
• Investment property
• Investment in fund
• Investment in joint venture

Statement classification:
1. Current investments are investments that are by their very nature readily realizable and are
intended to be held for not more than one year.

2. Noncurrent or long-term investments are intended to be held for more than one year or are not
expected
to be realized within twelve months after the end of the reporting period.

Definition of financial asset is any asset that is:

a. Cash, cash deposits (gold bullion is a not a financial asset but, rather a financial commodity)
b. A contractual right to receive cash or another financial asset from another entity.
c. A contractual right to exchange financial instrument with another entity under conditions that are
potentially favorable.
d. An equity instrument of another entity.

Not considered financial assets

• Intangible assets
• Physical assets such as inventory and property, plant and equipment
 o Control of such physical and intangible assets creates an opportunity to generate an
inflow of cash or another financial asset but it does not give rise to a present right to
receive cash or another financial asset.
• Prepaid expenses for which the future economic benefit is the receipt of goods or services rather
than the right to receive cash or another financial asset are not also financial assets.
• Leased assets are not also financial assets because control of such assets does not give rise to a
present right to receive cash or another financial asset.

Classification of financial assets

Under PFRS 9, paragraph 4.1.1, financial assets are classified into three, namely:

1. Financial assets at fair value through profit or loss (FVPL) —include both equity securities and
debt securities.
2. Financial assets at fair value through other comprehensive income (FVOCI) — include both equity
securities and debt securities.
3. Financial assets at amortized cost — include only debt securities.

The classification depends on the business model for managing financial assets which may be:
a. To hold investments in order to realize fair value changes.
b. To hold investments in order to collect contractual cash flows.

Equity security?
Any instrument representing ownership shares and right, warrants or options to acquire or
dispose of ownership shares at a fixed or determinable price.

Share is the ownership interest or right of a shareholder in an entity. The share is evidenced by an
instrument called share certificate. This right pertains to the share in earnings, election of directors,
subscription for additional shares and share m net assets upon liquidation.

Equity securities do not include redeemable preference shares, treasury shares and convertible debt.

Debt security?
Any security that represents a creditor relationship with an entity. A debt security has a maturity
date and a maturity value.

Examples of debt securities include the following:

a. Corporate bonds
b. BSP treasury bills
c. Government securities (Treasury bills of 1 year or less term and treasury bonds of 2 years
or more term)
d. Commercial papers
e. Preference shares with mandatory redemption date or are redeemable at the option of
the holder
 MEASUREMENT OF FINANCIAL ASSET:
Initial Measurement Subsequent Measurement
FVPL Fair Value
FVPL, FVOCI and Amortized Cost
Not FVPL Fair Value + directly attributable transaction cost*
*Includes commissions, transfer taxes and duties and levies by regulatory agencies and securities agencies

Financial Assets at Fair Value through Profit or Loss (FVPL)

1. Financial assets held for trading or popularly known as "trading securities".

a. acquired principally for the purpose of selling (near term)
b. 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 takin
c. It is a derivative, except for a derivative that is a financial guarantee contract or a
designated and an effective hedging instrument.

2. All other investments in quoted equity instruments.

3. Financial assets that are irrevocably designated on initial recognition as at fair value through
profit or loss. (“Fair Value Option”)
• This fair value option is applicable to investments in bonds and other debt instruments
which can be irrevocably designated as at fair value through profit or loss even if the
financial assets satisfy the amortized cost or fair value through other comprehensive
income measurement.

4. All debt investments that do not satisfy the requirements for measurement at amortized cost and
at fair value through other comprehensive income.

Equity investment at Fair Value through OCI (FVOCI)

At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an irrevocable
election to present in other comprehensive income or OCI subsequent changes in fair value of an
investment in equity instrument that is not held for trading.

• 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 equity or
retained earnings.
• If the investment in equity instrument is held for trading, subsequent changes in fair value are
always included in profit or loss.

Debt investment at Amortized Cost

PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at amortized cost if both of the
following conditions are met:
a. The business model is to hold the financial asset in order to collect contractual cash flows on
specified date.
 b. The contractual cash flows are solely payments of Principal and interest on the principal amount
outstanding.

Debt investment at Fair Value through OCI (FVOCI)

PFRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
a. The business model is achieved—both by collecting contractual cash flows and by selling the
financial asset.
b. The contractual cash flows are solely payments of principal and interest on the principal
outstanding.

• 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 other comprehensive income
shall be reclassified to profit

Fair value - of an asset is the price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date.
The best evidence of fair value in descending hierarchy is the quoted price of identical asset in an
active market, the quoted price of similar asset in an active market and the quoted of identical and similar
asset in an inactive market.

Quoted price - Most often, the fair value of securities is the quoted price in the securities market, for
example, the Philippine Stock Exchange. If the quoted price pertains to a share or equity security, it means
pesos per share.
For example, if the investment in 10,000 shares of an entity costing P800,000 is quoted at 90, the
market value thereof is P900,000

If the quoted pertains to a bond or debt security, it means percent of the face amount of the bond.
For example, if the investment in bond with face amount of P2,000,000 costing P1,700,000 is
quoted at 90, the market value is (2M x 90%) P1,800,000

Gain and loss — Financial asset at fair value

Under PFRS 9, paragraph 5.7.1, gain and loss on financial asset measured at fair value shall be presented
in profit or loss, except:

a. 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
b. When the financial asset is a debt investment that is measured at fair value through other
comprehensive income

Unrealized gain and loss arise from investments that are reported at fair value. In determining fair value,
no deduction is made for transaction costs that may be incurred on disposal of the financial asset.

Fair value > carrying amount = Unrealized Gain

Fair value > carrying amount = Unrealized Loss
 Gain and loss that result from actually selling the investments are known as realized gain and realized loss.

Gain and loss — Financial asset at amortized cost

Unrealized gain and loss on financial asset at amortized cost are not recognized simply because such
investments are not reported at fair value.

PFRS 9, paragraph 5.7.2, provides that gain and loss on financial asset measured at amortized cost shall
be recognized in profit or loss when the financial asset is derecognized, sold, impaired or reclassified, and
through the amortization process.

EQUITY INVESTMENTS (FVPL and FVOCI)

Illustration 1
1. On January 1, 2019, an entity purchased marketable equity securities for the equity securities
qualify as financial asset held for trading. The entity also paid P50,000 as commission to the
broker.
2. On December 31, 2019, the trading securities have a fair value of P6,000,000
3. On December 31, 2020, the trading securities have a fair value of P4,500,000
4. On December 31, 2021, the trading securities are sold for P5,200,000.

Journal Entries:
FVPL FVOCI
1 2
Jan. 1, 2019 Trading securities 5,000,000 Financial asset-FVOCI 5,050,000
Commission expense 50,000 Cash 5,050,000
Cash 5,050,000
Trading securities 1,000,000 Financial asset-FVOCI 950,000
Dec. 31, 2019
3 4
Unrealized gain-TS 1,000,000 Unrealized gain-FVOCI 950,000
Unrealized loss-TS3 1,500,000 Unrealized loss-FVOCI4 1,500,000
Dec. 31, 2020
Trading securities 1,500,000 Financial asset-FVOCI 1,500,000
Cash 5,200,000 Cash 5,200,000
Dec. 31, 2021
Trading securities 4,500,000 Financial asset-FVOCI 4,500,000
Gain on sale of TS5 700,000 Retained Earnings6 700,000

Retained Earnings6 550,000

Unrealized loss-FVOCI 550,000
1
May be recorded as Financial Asset-FVPL.
2
Under the standard, transaction cost directly attributable to the acquisition is included in the
measurement
3
The unrealized gain or loss is reported in the income statement as other income or other expense.
4
Unrealized gain or loss-FVOCI is presented as a component of other comprehensive income in the
statement of comprehensive income
5
PFRS 9, paragraph 3.2.12, provides that on derecognition of a financial asset the difference between the
carrying amount and the consideration received shall be recognized in profit or loss.
6
Under PFRS 9, Gain or loss on disposal plus the related cumulative gain or loss are recognized in Retained
Earnings.
 Note: There must be a disclosure regarding the cost of the investment

Illustration 2
1. On January 1, 2019, an entity acquired trading securities with the following market value on Dec.
31, 2019
Cost Market - 12/31 Gain (loss)
ABC preference shares 200,000 150,000 -50,000
XYZ ordinary shares 800,000 950,000 150,000
RST ordinary share 1,000,000 1,100,000 100,000
MNO Bonds 3,000,000 2,500,000 -500,000
5,000,000 4,700,000 -300,000

2. On Jan. 15, 2020, the ABC preference share is sold for P80,000.
3. On Dec. 31, 2020, the following information were provided
Carrying Amount Market - 12/31 Gain (loss)
XYZ ordinary shares 950,000 1,000,000 50,000
RST ordinary share 1,100,000 1,500,000 400,000
MNO Bonds 2,500,000 2,400,000 -100,000
4,550,000 4,900,000 350,000

Journal Entries:
FVPL FVOCI
Jan. 1, 2019 Trading securities 5,000,000 Financial asset-FVOCI 5,000,000
Cash 5,000,000 Cash 5,000,000
Dec. 31, 2019 Unrealized loss-TS 300,000 Unrealized loss-FVOCI 300,000
Trading securities 300,000 Financial asset-FVOCI 300,000
Cash 80,000 Cash 80,000
Jan. 15, 2020
Loss on TS 70,000 Retained Earnings 70,000
Trading securities 150,000 Financial asset-FVOCI 150,000

Retained Earnings 50,000

Unrealized loss-FVOCI 50,000
Trading securities 350,000 Financial asset-FVOCI 350,000
Dec. 31, 2020
Unrealized gain-TS 350,000 Unrealized gain-FVOCI 350,000

IMPAIRMENT
1. No assessment of impairment is necessary for Equity investments at Fair Value (FVPL or FVOCI)
2. For Debt Investments, PFRS 9 provides than an entity shall recognize Expected Credit Loss (ECL)
on Debt Investments:
a. Measured at Amortized Cost
b. Measured at FVOCI
The loss allowance shall be at an amount equal to the lifetime EECL if the credit risk on financial
instrument has increased significantly since initial recognition. Amount of impairment loss can be
measured as the difference between carrying amount and present value of estimated future cash
flows discounted at the original effective rate.