GEN 009: ENTREPRENEURIAL MIND
LESSON 1: ACCOUNTING FOR INVESTMESTS
Investments are assets hold by an entity for the accretion of wealth through distributions such as interest, royalties,
dividends and rentals, for capital appreciation or for other benefits to the investing entity such as those obtained
through trading relationship. These are assets not directly identified with the operating activities of an entity and
occupy only an auxiliary relationship to the central revenue producing activities of the entity.
PURPOSE AND EXAMPLES OF INVESTMENTS
Purposes Examples
To earn profits 1. Held for trading securities
2. Investment in equity securities measured at FVOCI
3. Investment in debt securities mandatorily measured at
FVOCI
4. Investment in debt securities measured at amortized cost
5. Investment property
To secure certain operating or financing 1. Investment in Associates
arrangements or beneficial relationship with 2. Investment in Subsidiary
another entity 3. Investment in Joint Venture
Meeting Business Requirements Investment in Long-term Fund
a. Bond sinking fund
b. Preference share redemption funds
c. Asset replacement funds
d. Business expansion funds
Protection for possible future losses 1. Contingency or insurance funds and similar reserves
2. Cash surrender value on life insurance
3. Certain derivatives designated as hedging instruments
Bonds are loan taken out by the company; represents a promise by a borrower to pay the lender
Insurance is a legal agreement providing protection; guarantees compensation
FINANCIAL INSTRUMENTS
Financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity. It is a contract between parties that hold monetary value. Characteristics:
1. There must be a contract
2. There are at least 2 parties to the contract
3. The contract shall give rise to a financial asset of one entity and a financial liability or equity instrument of
another entity
Financial Instruments Examples Non-financial instrument
1. Financial Assets a. Cash and Cash equivalents a. Physical assets
a. Cash b. Receivables b. Intangible assets
b. An equity instrument of another c. Advances to suppliers
c. Investments in equity and
entity d. Prepaid assets
debt instruments of other
c. A contractual right to receive cash e. Prepaid interest (May only be
entities disclosed as FA if it is not
and another financial asset from
another entity d. Sinking fund and other related to any financial
d. A contractual right to exchange long-term funds composed liability)
financial instruments with another of cash and other financial f. Entity’s own equity securities
entity under conditions that are assets g. Obligations arising from
potentially favorable or Commodity contracts not to be
e. A contract that will or may be settled settled net in cash or other
in the entity’s own instruments and is financial instruments
not classified as the entity’s own
instrument
2. Financial Liability a. Payables (Accounts, Notes, a. Unearned revenues and
a. A contractual obligation to deliver warranty obligations to be
cash and another financial asset to Loans and bonds payable) settled by future delivery of
another entity b. Lease Liabilities goods or provision of services
b. A contractual obligation to exchange c. Held for trading liabilities b. Constructive obligations
financial instruments with another and derivative liabilities c. Obligations arising from
entity under conditions that are d. Redeemable preference statutory requirements
potentially unfavorable or shares issued d. Obligations arising from
c. A contract that will or may be settled e. Security deposits and other Commodity contracts not to be
in the entity’s own instruments and is returnable deposits settled net in cash or other
not classified as the entity’s own financial instruments
instrument
3. Equity instruments is any contract that Note: Only equity
evidences a residual interest in the assets of instruments of other entities
an entity after deducting all of its liabilities can qualify as financial assets
INITIAL RECOGNITION
We recognize financial assets only when the entity becomes a party to the contractual provision of the instrument.
CLASSIFICATION OF FINANCIAL ASSETS
[Link] cost
[Link] Value through Other Comprehensive Income (FVOCI)
[Link] Value through Profit or Loss (FVPL)
C. By designation If it is designated initially at
BASIS OF CLASSIFICATION FA-FVPL)
A. The entity’s business model for managing the financial asset D. Irrevocable election at initial measurement at
B. The contractual cash flow characteristics of the financial asset FA-FVOCI which is not held for trading
Business Model refers to how an entity manages its financial assets in order to generate cash flows. That is whether
to:
[Link] financial assets in order to collect contractual cash flows over the life of the instrument (Hold to collect)
[Link] financial assets to collect the contractual cash flows but also to sell them to realize FV gains when an
opportunity arises (Hold to collect and sell)
THE DIFFERENT TYPES OF FINANCIAL ASSETS (SECURITIES)
1. Debt securities – Debt instrument that is considered investment on the part of the purchaser
[Link] (Fair Value through Profit or Loss)
o Held for trading
o Designated as FVTPL
[Link] (Fair Value Thru Other Comprehensive Income) if both are met
o Business model is for both collecting contractual cash flows and selling financial assets.
o The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments
of principal and interest.
[Link] (Fair Value at Amortized Cost) if both are met
o Business model is for both collecting contractual cash flow
o The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments
of principal and interest
2. Equity Securities
[Link] (Default classification in investment in equity securities which includes Held for Trading Securities)
[Link] (Irrevocable election)
3. Derivatives
[Link] (Not used as hedging instrument)
SUMMARY OF CLASSIFICATION OF
FINANCIAL ASSETS
