(1) financial asset at fair value
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8/6/2019 (1) Financial Asset at Fair Value
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8/6/2019 (1) Financial Asset at Fair Value
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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
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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.
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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
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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.
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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
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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.
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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.
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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
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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
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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)
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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
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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.
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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)
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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
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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.
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Classification of financial assets
� Financial assets at fair value
� Financial assets at amortized cost
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Financial assets at fair value
-include BOTH equity securities and debt securities
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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
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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
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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
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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.
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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
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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
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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)
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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
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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
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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.
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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
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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
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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
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Cumulative unrealized gain
= original cost
- market value
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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
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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
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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
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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
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impairment
Financial assets at fair value:
not necessary
Financial assets at amortized cost:
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tainting