Chapter 15: Financial Assets @ Fair Value

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Financial Assets
● Are assets with qualifications.
● Must be CONTRACTUAL → ONLY MONEY must be received.

Examples Definition
Cash or Currency Represents the medium of exchange and is therefore the basis
on which all transactions are measured and recognized in
financial statements.
Deposit of Cash with a bank Represent the contractual right OF THE DEPOSITOR to obtain
or similar financial institution cash from the bank or to draw a check against the balance in
favor of a CREDITOR in payment of a financial liability.

● Depositor - a person who keeps money in a bank account.

● Creditor - a person or company to whom money is owed.

Not Gold Bullion. (it is a commodity and is highly liquid, there is

no contractual right to receive cash or another financial asset.)
a. Trade Accounts FA representing a CONTRACTUAL RIGHT to receive
Receivable, cash in the future.

b. Notes Receivable, Exchange of FI with another entity, conditions are

potentially:
c. Loans Receivable
● FAVORABLE - result to gain or additional cash
d. Bonds Receivable inflow
● Example: An option held by the market
holder to purchase shares of another entity
at LESS THAN market price.

● UNFAVORABLE - result to loss or additional cash

outflow

Trading Securities ● Investment in shares or other equity instruments

issued by other entities.

Nonfinancial assets
a. PHYSICAL ASSETS
o Inventories
o PPE
o Biological assets - a living animal or plant.
o Investment Property
b. INTANGIBLE ASSETS
o Patent
o Trademark
c. PREPAID EXPENSES
o Future economic benefit is the receipt of goods or services
o Rather than the right to receive cash or another FA
o Advances to supplier
d. RIGHT OF USE ASSET OR LEASED ASSET
o Control of the underlying asset does not give rise to a PRESENT RIGHT TO RECEIVE CASH or
another FA.
SUMMARY
FVPL FVOCI

is held for trading. Is not held for trading.

Initial Measurement measured at fair value through profit or measured at fair value through OCI.
loss

+ transaction costs are capitalized as

cost → directly attributable to the
+ transaction costs are expensed acquisition of the financial asset.
outright. → Other Costs like Broker's
fee, Commission Fee, etc.

Example: If an investor invested P1,000,000 with If an investor invested P1,000,000 with

P100,000 commission fee. P100,000 broker's fee.

→ The investment will be recorded at → The investment will be recorded at

P1,000,000. P1,100,000.

Recognition of P & L (Income statement) OCI

CHANGES in fair
value (due to gain or
loss in trading, value
in stock, etc.)
(Unrealized Gain and
Losses)

Selling of Financial P & L (Income statement) Retained Earnings

Asset
→ Trading Securities → Equity Securities
(Gain and Losses on
sale)

NOTES: → Loss and Gain - YEARLY BASIS → OCI - YEARLY BASIS

→ NO CUMULATIVE gain and loss → SCE – CUMULATIVE gain and loss

→ RE – YEARLY BASIS

Tasks:
1. Recognize Investment
2. Recognize Increase and Decrease in FV
3. Recognize the Sale OF TS/FVOCI
 Problems

Problem 15-1: Template Company - FVPL

1. Recognize Investment
January 1, 2022 Trading Securities 830,000

Cash 830,000

2. Changes Fair Value/ Market Value at year-end (Year 1)

December 31, Unrealized Loss - PL 60,000
2022 (P830,00 - P770,000 - decrease)
Trading Securities 60,000

3. What if: In April 2023, Investment are now valued at P750,000*

● 770,000 - 750,000 = 20,000

● What is the Journal Entry? NONE → We simply IGNORE this.
● We only account changes at the END OF THE YEAR.

4. Sold all the B Ordinary Shares for 140,000

June 30, 2023 Cash 140,000

Loss on sale 20,000

TS - B Ordinary 160,000

5. Changes in Fair Value/ Market Value at year-end (Year 2)

MV (Year 1) MV (Year 2)
 A Ordinary 300,000 320,000
4,000 shares x P80
C Preference 310,000 360,000
2,000 shares x P180
Total 610,000 680,000

December 31, Trading Securities 70,000

2023 680,000 - 610,000 = 70,000 (increase)

Unrealized Gain - PL 70,000

● How much is the loss to be counted in for 2022? Answer → P60,000

● What is the total gain or loss to be recognized in 2023 → P70,000

● What is the cumulative gain or loss → 0.

- Gain or loss on sale DOES NOT COUNT.
- Since Trading securities are recorded at FVPI, Income statement accounts are closed at every
year-end.
- It does not cumulate. Gain or loss is YEARLY BASIS for FVPL.

Problem 15-2: Spark Company - FVPL

1. Acquisition (Purchase)
January 1, 2022 Trading Securities 1,450,000

Cash 1,450,000

2. Changes in FV at year-end (Year 1)

December 31, Unrealized loss - PL 200,000
2022 (1,450,000- 1,250,000)

TS 200,000

3. Sold one-half of Aurora Company ordinary for 375,000

 October 1, 2023 Cash 375,000

TS 325,000
(650,000/2=325,000)
Gain on sale 50,000

4. Changes in FV at year-end (Year 2)

MV (Year 1) MV (Year 2)
Aurora Company Ordinary 325,000
(650,000-325,000)
Bora Company Preference 200,000
Cara Company Bonds 400,000
Total 925,000 800,000

December 31, Unrealized Loss - PL 125,000

2023 (925,000 - 800,000)
Trading Securities 125,000

● How much is the loss in 2022? → P200,000

● How much is the loss in 2023? → P125,000

● What is the cumulative gain or loss → 0.

Problem 15-4: Transitory Company - FVOCI

1. Acquisition (Purchase)
January 1, 2022 Equity Securities/FVOCI 1,200,000

Cash 1,200,000

2. Changes in FV at year-end (Year 1)

 December 31, 2022 Unrealized Loss - OCI 150,000
(1,200,000-1,050,000)
FVOCI 150,000

3. Changes in FV at year-end (Year 2)

December 31, 2023 FVOCI 50,000

(1,050,000-1,100,000)
Unrealized Gain - OCI 50,000

4. What If: In March 1, 2024; Moon shares are sold for 250,000

March 1, 2024 Cash 250,000

FVOCI 220,000
Retained Earnings 30,000

5. Accordingly, the CUMULATIVE GAIN OR LOSS of MOON SHARES previously recognized in OCI
is also transferred to RETAINED EARNINGS.

Cost (Year 1) MV (Year 1) MV (Year 2)

Moon Company 200,000 120,000 220,000

● 200,000 - 120,000 = 80,000 (loss)

● 120,000 - 220,000 = 100,000 (gain)
● 100,000 - 80,000 = 20,000 - RE - UNREALIZED GAIN

Unrealized Gain 20,000

RE 20,000

● Reverse entry if loss*

Problem 15-5: Aborigine Company - FVOCI

1. Acquisition (Purchase)
January 1, 2022 FVOCI 4,000,000

Cash 4,000,000

2. Recognize the decrease in value (Year 1)

Purchased Unrealized Loss (January 1, 2022) MV (December 31, 2022)

4,000,000 (500,000) - given 3,400,000

● 4,000,000-500,000=3,500,000
● MV must be 3,500,000
3,500,000 3,400,000

● 3,500,000 - 3,400,000 = 100,000

● Unrealized loss is 100,000 since 500k is already accounted for previously.

December 31, 2022 Unrealized loss - OCI 100,000

FVOCI 100,000

3. Sale of ABC Ordinary Share on July 1, 2022

July 1, 2023 Cash 2,100,000

 FVOCI 2,000,000
Retained Earnings 100,000

4. Recognize the Change in FV (Year 2)

MV (Year 1) MV (Year 2)
XYZ Ordinary share 1,200,000 1,000,000
RST Preference share 200,000 150,000
Total 1,400,000 1,150,000

December 31, 2023 Unrealized Loss - OCI 250,000

(1,400,000 - 1,150,000)
FVOCI 250,000

● How much is the 2022 OCI? → P100,000 - loss

● How much is the 2023 OCI? → P250,000 - loss

● How much is the 2023 Statement of Changes in Equity→ P350,000 - loss

● SCE - cumulative gain and loss

● How much is the 2022 Statement of Changes in Equity → P100,000 - loss

● How much is the 2022 Retained Earnings → 0.

● How much is the 2023 Retained Earnings → P100,000