DON HONORIO VENTURA STATE UNIVERSITY

COLLEGE OF BUSINESS STUDIES

Bacolor, Pampanga

CHAPTER 13 – FINANCIAL ASSET AT FAIR VALUE

LEARNING OBJECTIVES:

At the end of this chapter, the student should be able:

1. To define a financial asset

2. To know the classifications of financial assets based on the business model of managing
financial assets

3. To know the initial and subsequent measurement of financial assets

4. To identify the financial assets that can be measured at fair value through profit or loss,
other comprehensive income

CONCEPT OF INVESTMENT IN THE BOOK “RICH DAD, POOR DAD BY ROBERT KIYOSAKI”

Business

Real Property Stocks

Expenses

DEFINITION OF INVESTMENTS

IAS defines Investments as follows:

Investments are assets held by an entity for the accretion of wealth through distribution such as
interest, royalties, dividends and rentals for capital appreciation or for other benefits to investing
entity such as those obtained through trading relationships.

Investments 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.

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COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

PURPOSE OF INVESTMENTS

a. For accretion of wealth or regular income through interest, dividends, royalties and rentals

b. For capital appreciation as in the case of investments in land and real estate held for
appreciation and direct investments in gold, diamonds, and other precious commodities

c. For ownership control as in the case of investments in subsidiaries and associates

d. For meeting business requirements as in the case of sinking fund, preference share
redemption fund, plan expansion fund, and another non- current fund

e. For protection as in the case of interest in life insurance contract in the form of cash
surrender value.

STATEMENT CLASSIFICATION

Investments are classified either as current or non- current assets

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

Non- Current 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 A FINANCIAL ASSET

A Financial Asset is any asset that is:

a. Cash’

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.

Note:

• Cash or currency is a financial asset because it represents the medium of exchange and is
therefore the basis on which all transactions are measured and recognized in financial
statements

• Financial assets representing a contractual right to receive cash on the future includes trade
accounts receivable, notes receivables and loans receivables

• In case of exchanges of financial instruments with another entity, conditions are potentially
favorable when such exchanges will result to gain or additional cash inflow to the entity.

• Investments in shares or other equity instruments such as trading securities can be

classified as financial assets.

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

NOT CONSIDERED FINANCIAL ASSETS

1. Physical assets such as inventory and property, plant and equipment are not financial assets

2. Intangible Assets

3. Prepaid Expenses

4. Leased Assets

CLASSIFICATION OF FINANCIAL ASSETS

Under PFRS 9, Paragraph 4.1.1, financial assets are classified int three, namely:

Financial Assets at fair value Include both Equity and Debt

through Profit or Loss Securities

Financial Assets at Fair value Include both Equity and Debt

through OCI (Other Securities
Comprehensive Income)

Financial Assets at amortized Include only debt securities

cost

EQUITY SECURITIES VS. DEBT SECURITIES

EQUITY SECURITIES DEBT SECURITIES

Encompasses any instrument representing A debt security is any security that

ownership shares and rights to acquire or represents a creditor relationship with an
dispose of ownership shares at a fixed or entity
determinable future price.

The owners of equity securities are legally A debt security has a maturity date and a
known as shareholders. maturity value

A share is the ownership interest or right of Examples includes:

a shareholder of an entity. The share is
evidenced by an instrument called share a. Corporate Bonds
certificate.
b. BSP Treasury Bills

c. Government Securities

d. Commercial papers

Equity securities do not include redeemable

preference shares, treasury shares and
convertible debt.

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

INITIAL MEASUREMENT OF FINANCIAL ASSETS

PFRS 9 paragraph 5.11 provides that at initial recognition, an entity shall measure a financial asset
at fair value plus, transaction costs that are directly attributable to the acquisition of a financial
asset.

The fair value of a financial asset at initial recognition is normally the transaction price, meaning
the fair value of the consideration given.

As a rule, transaction costs that are directly attributable to the acquisition of the financial asset shall
be capitalized as cost of the financial asset.

However, if the financial asset is held for trading of if the financial asset is measured at fair value
through profit or loss, transaction costs are expensed outright.

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.

Transaction costs do not include debt premiums or discounts, financing costs and internal
administrative or holding costs.

SUBSEQUENT MEASUREMENT OF FINANCIAL ASSETS

1. Fair value through profit or loss (FVPL)

2. Fair value through other comprehensive income (FVOCI)

3. Amortized Cost

FINANCIAL ASSET HELD FOR TRADING

Appendix A of PFRS 9 provides that a financial asset is held for trading if:

a. it is acquired principally for the purpose of selling or repurchasing it in the 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
taking

Trading securities are normally classified as current assets.

FAIR VALUE

Appendix A of PFRS 9 defines Fair Values as 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 is the quoted price of identical asset in an active market, the quoted
price of similar asset in an active market and the quoted price of identical and similar asset in an
inactive market.

An active market is a market in which transactions take place with sufficient regularity and volume
to provide pricing information in an ongoing basis.

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COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

Simply stated, fair value is the price agreed upon by a buyer and a seller in an arm’s length or
orderly transaction.

QUOTED PRICE

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 securities, it means pesos per share.

For example, if the investment in 10,000 shares of an entity costing P 800,000 is quoted at 90,
market value thereof is P 900,000, computed by multiplying 10,000 shares by P 90 per share.

If the quoted price 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 P 2,000,000, costing P 1,700,000 id
quoted at 90, the market value is P 1,800,000, computed by multiplying the face amount of P
2,000,000 by 90%.

GAIN AND LOSS- FINANCIAL LOSS AT FAIR VALUE

Under PFRS 9, Paragraph 5.7.1, gain and loss on financial asset measured at fair value shall be
present in profit or loss.

In other words, unrealized gains and loss on financial asset held for trading and other financial
asset measured at fair value are reported in the income statement.

If the FAIR VALUE is higher than CARRYING UNREALIZED GAIN

AMOUNT

If the FAIR VALUE is lower than CARRYING UNREALIZED LOSS

AMOUNT

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COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

Gain and loss that result from actually selling the investments are known as REALIZED GAINS AND
REALIZED LOSS.

Illustration 1: TRADING SECURITIES (TS)

On January 1, 2021, an entity purchased marketable equity securities for P 5,000,000. The equity
securities qualify as financial asset held for trading. The entity also paid P 50,000 as commission to
the broker.

2021

Jan 1 Trading Securities P 5,000,000

Commission Expense 50,000

Cash P 5,050,000

The acquisition may be debited to “Financial Asset -FVPL”.

FVPL means that the financial asset is measured at fair value through profit or loss.

The commission paid to the broker is not capitalized as cost of the investment but treated as
outright expense.

On December 31, 2021, the trading securities have a fair value of P 6,000,000. The increase in value
is recorded as follows:

2021

Dec 31 Trading Securities P 1,000,000

Unrealized Gain- TS P 1,000,000

The unrealized gain is classified in the income statement as other income.

But if on December 31, 2021, the trading securities have a fair value of P 4,500,000. The decrease in
fair value is recorded as follows:

2021

Dec 31 Unrealized Loss- TS P 1,500,000

Trading Securities P 1,500,000

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

The unrealized loss is classified in the income statement as other expense.

SALE OF TRADING SECURITIES (TS)

In continuation, On December 31, 2022. The trading securities are sold for P 5,200,000.

2022

Dec 31 Cash P 5,200,000

Trading Securities P 4,500,000

Gain on sale of trading 700,000

securities

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.

Illustration 2: TRADING SECURITIES (TS)

On January 1, 2022, an entity acquired trading securities with the following market value on
December 31, 2022.

Cost Market Gain (Loss)

Faith Preference share 280,000 170,000 (110,000_

Hope Preference share 800,000 940,000 140,000

Love Preference share 1,300,000 1,600,000 300,000

TOTAL 2,380,000 2,710,000 330,000

The acquisition on January 1, 2021 is recorded:

2022

Jan 1 Trading Securities P 2,380,000

Cash P 2,380,000

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

On December 31, 2022, the net increase in market value is recorded:

2022

Dec 31 Trading Securities P 330,000

Unrealized Gain- TS P 330,000

Observed that the unrealized gain and unrealized loss are offset against the other and only the net
amount is recorded. This offsetting is permitted by the standard.

On December 31, 2022, the statement of financial position will report the trading securities at fair
value of P 2,710,000.

EQUITY INVESTMENT AT FAIR VALUE THROUGH OCI

Illustration 1:

On January 1, 2021, an entity purchased marketable equity securities for P 1,000,000. The entity
paid commission and taxes of P 100,000.

The equity securities do not qualify as financial asset held for trading. The entity made an
irrevocable election to present unrealized gain and loss in other comprehensive income.

2021

Jan 1 Financial Asset- FVOCI P 1,100,000

Cash P 1,100,000

FVOCI means that the financial asset is measured at fair value through Other Comprehensive
Income.

Under PFRS 9, paragraph 5.1.1, a financial asset measured at fair value through other
comprehensive income shall be recognized at fair value plus transaction cost directly attributable
to the acquisition.

Thus, the commission and taxes of P 100,000 are capitalized as cost of the investment.

On December 31, 2021, the securities have a market value of P 1,300,000. The increase in market
value is recorded as:

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

2021

Dec 31 Financial Asset- FVOCI P 200,000

Unrealized gain- OCI P 200,000

The unrealized gain is presented as component of other comprehensive income in the 2021
Statement of Comprehensive Income.

The financial asset- FVOCI is normally classified as Non- Current Asset.

In addition, on December 31, 2022, the securities have a market value of P 1,600,000. The increase
in market value is recorded as:

2022

Dec 31 Financial Asset- FVOCI P 300,000

Unrealized gain- OCI P 300,000

SALE OF EQUITY INVESTMENT – FVOCI

On July 1, 2023, the securities are sold for P 2,000,000. The journal entry to record the sale is:

2023

July 1 Cash P 2,000,000

Financial Asset- FVOCI P 1,600,000

Retained Earnings 400,000

Gain or loss on disposal of equity investment measured at fair value through other comprehensive
income is recognized in retained earnings in accordance with PFRS 9, paragraph 5.7.1b.

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 DON HONORIO VENTURA STATE UNIVERSITY
COLLEGE OF BUSINESS STUDIES
Bacolor, Pampanga

REFERENCES:

Millan, Zeus Vernon. (2020). Intermediate Accounting 1A. Baguio City: Bandolin Enterprise

Valix Conrado T & Valix Christian Aris M. (2020). Intermediate Accounting. Manila: GIC
Enterprises & Co. Inc.

CPAR, RESA, ICARE Review Materials in Intermediate Accounting or Financial Accounting

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