Financial Investments:

 A Financial Asset is any asset that is:

a. Cash;
b. An equity instrument of another entity;
c. A contractual right:
i. To receive cash or another financial asset from another entity; or
ii. To exchange financial assets or financial liabilities with another entity under conditions that
are potentially favorable to the entity or
d. A contract that will or may be settled in the entity’s own equity instruments and is:
i. A non-derivative for which the entity is or may be obliged to receive a variable number of
the entity’s own equity instruments; or
ii. A derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity’s own equity instruments. For
this purpose, the entity’s own equity instruments do not include instruments that are
themselves contracts for the future receipt or delivery of the entity’s own equity instruments.

 Non-financial Assets All other assets that did not qualify as financial assets are considered non-
financial assets.

Example of Financial Assets:

 Cash and Currency - Cash
 Deposit of Cash – Contractual right
 Ar/ Nr/ Loans receivable – Contractual right
 Option to purchase shares of another entity less than market price – exchanges that will result
to favorable gain

Example of Non-financial Assets:

 Intangible assets
 Physical assets such as Inventory or PPE – Not cash
 Prepaid expenses -
 Leased assets – does not give rise to a present right to receive cash

INITIAL RECOGNITION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

 When the entity becomes party to the contractual provisions of the instrument.

CLASSIFICATION OF FINANCIAL ASSETS

 Debt instruments shall be classified at Amortized Cost (AC), Fair Value through Other
Comprehensive Income (FVOCI) or Fair Value through Profit or Loss (FVPL).
 Equity instruments shall be classified at Fair Value through Other Comprehensive Income
(FVOCI) or Fair Value through Profit or Loss (FVPL).

Summary of Financial Assets Classification

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INITIAL MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
At fair value, plus for those financial assets and liabilities not classified at fair value through profit or
loss, directly attributable transaction costs.
 Fair value - is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date
 Directly attributable transaction costs - incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability.

However, if the financial asset or liability is classified at fair value through profit or loss, transaction
cost would immediately be recognized as an expense.

Transaction Costs:
Include fees and commissions paid to agents, advisers, brokers, and dealers, levies by
regulatory agencies and securities exchanges, and transfer taxes and duties.
*Do not include debt premiums or discounts, financing costs or internal administrative or holding
costs.

Fair Value:
 Fair Value Measurement (PFRS 13) is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date.
 Fair value hierarchy categorizes into three levels of inputs to valuation techniques: ( level 1 input
is highest)
1. Quoted prices in active markets for identical assets or liabilities.
2. Quoted prices in active markets for similar assets or liabilities.
3. Quoted prices in inactive markets for identical assets or liabilities.

SUBSEQUENT MEASUREMENT OF FINANCIAL ASSETS

 Debt instruments shall be classified at Amortized Cost (AC), Fair Value through Other
Comprehensive Income (FVOCI) or Fair Value through Profit or Loss (FVPL).
 Equity instruments shall be classified at Fair Value through Other Comprehensive Income
(FVOCI) or Fair Value through Profit or Loss (FVPL).

Changes in Fair value Since Initial Measurement

a. AC – Changes in fair values are not recognized.
b. FVOCI – Changes in fair values are recognized in other comprehensive income and accumulated in
shareholders’ equity.
c. PVPL – Changes in fair values are recognized in profit or loss

DEBT INSTRUMENTS
Financial Assets at Amortized Cost (FA measured @ AC if entity did not elect fair value option)

Requisites for  The asset is held to collect its contractual cash flows and
Classification  The asset’s contractual cash flows represent Solely Payments of Principal and
Interest on the principal amount outstanding.

Profit or Loss  Effective interest income

Implications  Impairments losses and reversal gains
 Gain or loss on derecognition

Statement of  Measured at amortized cost

financial  Classified as a non-current asset unless maturity is within 12 months after the
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 position end of the reporting period

Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for  The objective of the business model is achieved both by collecting contractual
Classification cash flows and selling financial assets; and
 The asset’s contractual cash flows represent SPPI.

Profit or Loss  Effective interest (income)

Implications  Impairments losses and reversal gains
 Gain or loss on derecognition including reclassification adjustments (PAS 1)

OCI  Changes in fair value due to subsequent measurement

Statement of  Measured at fair value after amortization for the effective interest
Financial  Cumulative gain or loss on fair value in Equity
Position  Since PFRS 5 excludes the scope for financial assets, FVOCI are non current
asset unless maturity is within 12 months after the end of the reporting period

Note that both amortization is applied under the effective interest method before applying the
FV measurement requirement for the FVOCI classification

Financial Assets at Fair Value Through Profit or Loss

Requisites for  This is a “residual category” if none of the two previously mentioned (AC and
Classification FVOCI) business models apply or if any of the two business model apply but
the contractual cash flows are NOT SPPI for example if interest will include a
profit participation.
 If the two requisites for the AC and FVOCI category are met but the entity
elects to measure debt instruments at FVPL to eliminate an “accounting
mismatch” because financial liabilities are measured at FVPL.

Profit or Loss  Nominal interest (income)

Implications  Direct transaction cost incurred on acquisition
 Gain or loss on changes in fair value on subsequent measurement
 Gain or loss on derecognition

Statement of  Measured at fair value

Financial  Under the assumption the Financial asset is held for trading, FVPL shall be
Position classified as a current asset (PAS 1)

EQUITY INSTRUMENTS
Financial Assets at Fair Value Through Profit Or Loss

Requisites for  Both held for Trading or Non Trading

Classification

Profit or Loss  Dividends

Implications  Direct transaction cost incurred on acquisition
 Gain or loss on changes in fair value on subsequent measurement
 Gain or loss on derecognition

Statement of  Measured at fair value

Financial  Under the assumption the financial asset is held for trading, FVPL shall be
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Position classified as a current asset (PAS 1)

Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for  An irrevocable election to present in OCI an investment in equity

Classification instruments that is not held for trading

Profit or Loss  Dividends

Implications

OCI  Changes in fair value due to subsequent measurement

 Gain or loss on derecognition and may be transferred within Equity
(Retained Earnings)

Statement of  Measured at fair value

Financial  Cumulative gain or loss on fair value in Equity
Position  Non trading investments are classified under the non-current assets section
of the statement of financial position

Note that PFRS 9 has eliminated the impairment loss category for equity instruments

RECLASSIFICATIONS OF DEBT INSTRUMENTS

Original New category Accounting impact

category

Fair value is measured at reclassification date.

Amortized cost FVPL Difference from carrying amount should be
recognized in profit or loss.

Fair value at the reclassification date becomes its

FVPL Amortized Cost
new gross carrying amount

Fair value is measured at reclassification date.

Difference from amortized cost should be
Amortized cost FVOCI
recognized in OCI. Effective interest rate is not
adjusted as a result of the reclassification.

Fair value at the reclassification date becomes its

new amortized cost carrying amount. Cumulative
FVOCI Amortized cost
gain or loss in OCI is adjusted against the fair value
of the financial asset at reclassification date.

Fair value at reclassification date becomes its new

FVPL FVOCI
carrying amount.

Fair value at reclassification date becomes carrying

FVOCI FVPL amount. Cumulative gain or loss on OCI is
reclassified to profit or loss at reclassification date

Interest and Dividend Revenues

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 Income from investments in financial assets accounted for in accordance with PFRS 9 such as
interest revenue from investments in debt securities and dividend revenues from investments in
equity securities are recognized in profit or loss.

IMPAIRMENT OF FINANCIAL ASSETS

A single set of an impairment model will be applied to:
a. Financial assets measured at amortised cost including trade receivables
b. Financial assets measured at fair value through OCI
c. Loan commitments and financial guarantees contracts where losses are currently accounted
for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets
d. Lease receivables within the scope of IFRS 16 (Leases)
e. Contract assets within the scope of IFRS 15 (Revenue from Contracts with Customers)

The impairment model follows a three-stage approach based on changes in expected credit losses of
a financial instrument that determine:
a. The recognition of impairment, and
b. The recognition of interest revenue

*FA-FVPL and Equity Instruments under OCI are not subject to impairment

THREE STAGE APPROACH TO IMPAIRMENT

Stage 1 – Applied at initial recognition and subsequent measurement when there is no significant
increase in credit risk

a. As soon as a financial instrument is originated or purchased, 12-month expected credit losses

are recognised in profit or loss and a loss allowance is established.
b. Entities continue to recognise 12 month expected losses that are updated at each reporting
date
c. Effective interest is based on the gross carrying amount rather than the carrying amount net of
allowance for impairment.

Stage 2 – Applied at subsequent measurement when there is a significant increase in credit risk.

a. If the credit risk increases significantly and the resulting credit quality is not considered to be
low credit risk, full lifetime expected credit losses are recognised.
b. Lifetime expected credit losses are only recognised if the credit risk increases significantly from
when the entity originates or purchases the financial instrument.
c. Effective interest is based on the gross carrying amount rather than the carrying amount net of
allowance for impairment.

Stage 3 – Applied at subsequent measurement when there is credit impairment.

a. If the credit risk of a financial asset increases to the point that it is considered credit-impaired,
interest revenue is calculated based on the net amortised cost.
b. Financial assets in this stage will generally be individually assessed.
c. Lifetime expected credit losses are still recognized on the financial assets.

Summary of recognition of impairment and interest revenue:

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A simplified model applies for:
• Trade receivables or contract assets without a significant financing component or when the
PFRS 15 practical expedient is applied for the effects of a significant financing component to those
with maturities of less than 12 months; and
• Other long-term trade receivables or contract assets with a significant financing component
and lease receivables if the entity chooses as its accounting policy to measure the loss allowance at an
amount equal to lifetime expected credit losses.

In estimating ECLs, entities must consider a range of possible outcomes and not the ‘most likely’
outcome. The standard requires that at a minimum, entities must consider the probability that:
• A credit loss occurs; and
• No credit loss occurs.

Financial Assets Measurement Summary

Derecognition of Financial Asset

The following criteria should be met in order for an entity to derecognize a financial asset:
a. The contractual rights to the cash flows from the asset expire. or
b. The entity has transferred its rights to receive the cash flows from the asset and transferred
substantially all the risk and rewards.
c. If the entity does not retain control of the asset

The recognition for the gains and losses from derecognition will depend if the financial asset is a debt
instrument or equity instrument and its classification as AC, FVOCI or FVPL.

Reclassification of Financial Assets

PFRS 9 requires an entity to reclassify financial assets, when and only when, an entity’s business
model for managing those financial assets have changed.

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PFRS 9 shall apply the reclassification PROSPECTIVELY from the reclassification date. The entity shall
not restate any previously recognized gains, losses or interest including impairment gains or losses.
Reclassification date is defined as the first day of the first reporting period following the change in
business model.

MEASUREMENT OF CREDIT LOSSES

Credit losses are the present value of all cash shortfalls. Expected credit losses are an estimate of
credit losses over the life of the financial instrument.

Factors in measuring credit losses:

a. The probability-weighted outcome: expected credit losses should represent neither a best or
worst-case scenario. Rather, the estimate should reflect the possibility that a credit loss occurs
and the possibility that no credit loss occurs.
b. The time value of money: expected credit losses should be discounted to the reporting date.
c. Reasonable and supportable information that is available without undue cost or effort.

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FINANCIAL LIABILITIES

Classification Subsequent Measurement

 Amortized Cost Amortized cost using the effective interest

method of amortization

 FVPL for financial liabilities that

are:
a. Held for trading At fair value with all gains and losses
b. Derivative financial liabilities recognized in profit or loss
c. Designated at initial
recognition at FV

 Financial guarantee contracts Higher amount between the amount

and determined in accordance with IAS 37 and
 Commitments to provide a loan the amount initially recognized minus
at a below market interest rate cumulative amortization recognized.

 Financial liabilities resulting Amortized cost of the rights and obligations

from the transfer of a financial retained of the fair value of the rights and
asset obligations retained by the entity when
measured on a stand alone basis.

DERECOGNITION

FINANCIAL LIABILITIES

a. A financial liability is derecognised only when extinguished

b. An exchange between an existing borrower and lender of debt instruments with substantially
different terms or substantial modification of the terms of an existing financial liability of part
thereof is accounted for as an extinguishment
c. The difference between the carrying amount of a financial liability extinguished or transferred
to a 3rd party and the consideration paid is recognized in profit or loss.

FINANCIAL ASSETS