The document discusses investment and financial instruments. It defines key terms like financial assets, financial liabilities, equity instruments, debt instruments, fair value, and business models. It explains how financial assets and liabilities are initially recognized and classified. It also summarizes the subsequent measurement of financial assets at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.
The document discusses investment and financial instruments. It defines key terms like financial assets, financial liabilities, equity instruments, debt instruments, fair value, and business models. It explains how financial assets and liabilities are initially recognized and classified. It also summarizes the subsequent measurement of financial assets at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.
The document discusses investment and financial instruments. It defines key terms like financial assets, financial liabilities, equity instruments, debt instruments, fair value, and business models. It explains how financial assets and liabilities are initially recognized and classified. It also summarizes the subsequent measurement of financial assets at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.
The document discusses investment and financial instruments. It defines key terms like financial assets, financial liabilities, equity instruments, debt instruments, fair value, and business models. It explains how financial assets and liabilities are initially recognized and classified. It also summarizes the subsequent measurement of financial assets at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.
1. Identify financial assets 2. State the classifications of
and financial liabilities. financial assets and their initial and subsequent measurements.
3. Explain how fair value is 4. Account for
measured. investments in equity securities. •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.” (PAS 32)
FINANCIAL •Financial instruments include both financial
assets and financial liabilities. INSTRUMENTS •Financial instruments include equity instruments of another entity but exclude an entity’s own equity instruments. An entity’s own equity instruments are neither assets nor liabilities, but rather equity. FINANCIAL ASSETS A financial asset is any asset that is: a. Cash; b. Equity instrument of another entity; or c. Contractual right to receive cash or another financial asset or to exchange financial instruments with another entity under conditions that are potentially favorable. d. A contract that will or may be settled in the entity's own equity's own equity instrument and is not classified as the entity's own equity instrument. EXAMPLES 1. Cash and Cash equivalents Cash on hand, in bank, short-term money market placements, and cash funds) 2. Receivables Accounts, notes, loans, and finance lease receivables. 3. Investments in equity or debt instruments of other entities Held for trading securities, investments in subsidiaries, associates, joint ventures, investments in bonds, and derivative assets. 4. Sinking fund and long-term funds composed of cash and other financial assets. Financial Liability A financial liability is any liability that is:
01 a. a contractual obligation to deliver cash or another asset to another entity; or financial
b. a contractual obligation to exchange financial instruments with
another entity under conditions that are potentially unfavorable.
C. A contract that will or may be settled in the entity's own equity
instrument and is not classified as the entity's own equity instrument EXAMPLES OF 1. Payable FINANCIAL Accounts, notes, loans, and bonds payable. LIABILITY Accrued interest expense .. interest payable 2. Lease liabilities 3. Held for trading liabilities and derivative liabilities 4. Redeemable preference share issued Classified by the issuer as financial liability rather than 'own' equity instrument Issuer is obliged to deliver cash to investor on redemption date. (Other preference shares are classified as 'own' equity instrument) 5. Security deposits and other returnable deposits Equity Instrument Is "any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities." E.g., Stock Equity = Assets - Liabilities
Equity Instrument Other entities -Can qualify as financial asset Entity's own -Equity of the issuing entity. -Neither asset nor liability Equity Interest DEBT INSTRUMENT Not limited to corporation represents a right upon -is any contract that Interest in partnership or the holder to receive cash from the issuer association ownership interest is thereof or an obligation upon to pay cash to an equity security the holder thereof. Junior interest in a special purpose Debtor creditor relationship between vehicle is also an equity security entities As long as the instrument -E.g., treasury bills, receivables, payables, represents an equity interest in redeemable preference shares, investments another entity, it is a financial in bonds, and bonds payable. asset. Financial Liability Debt Security Debt instrument that is considered as an investment on the part of the purchase - E.g., investment in bonds and commercial paper
Equity Instrument - Evidences a residual interest in the net asset of an entity - E.g., shares of stock Equity Securities - Equity instruments that are classifiable as investments. - E.g., investment in shares of stocks Debt Instrument - Represents debtor-creditor relationship (lending transaction) - E.g., receivables, payables, and bonds Debt Securities - Debt instruments that are classifiable as investments - E.g., investment in bonds Initial recognition and Classification Financial assets are recognized only when the entity becomes a party to the contractual provisions of the instrument. Basis of classification Financial assets are classified based on:
1. the entity’s business model for managing the financial assets;
and 2. the contractual cash flow characteristics of the financial asset. Equity vs. Debt Instruments Only debt instruments can be classified under the Amortized Cost or FVOCI (mandatory) measurement categories. Equity instruments are measured at FVPL, unless the entity makes an irrevocable election on initial recognition to measure them at FVOCI. A debt instrument that is not measured at amortized cost or at FVOCI is measured at FVPL. Business Model How an entity manages its financial assets in order to generate cash flow A matter of fact, observable through entity's activity rather than merely assertion Determined by key management personnel; does not depend on management's intentions for individual instrument Not an instrument-by-instrument approach to classification Results from a higher level of aggregation Business Model 1. Hold to collect Hold financial asset in order to collect the contractual cash flows over the life of the instrument
2. Hold to collect and sell
Hold financial asset to collect the contractual cash flows but also sell them to realize their fair value gains whenever an opportunity arises BUSINESS MODELSS BUSINESS MODELSS BUSINESS MODELSS BUSINESS MODELSS INITIAL MEASUREMENT Financial assets are initially measured at fair value + transaction cost FVPL asset are initially measured at fair value. Transaction cost are expensed immediately
Fair value The transaction price (i.e., fair value of the consideration given
Transaction cost "Incremental cost", attributed to the acquisition, issue or disposal of financial A or L. Includes fees and commission paid to agents DO NOT include debt premiums or discounts, financing cost or internal administrative or holding cost.
Incremental cost One that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument •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 Fair Value measurement date.” (PFRS 13)
Measurement •Fair value is based on the market price of the asset in
a: a. principal market; or b. the most advantageous market (in the absence of a principal market)
•The market price used in measuring fair value is not
adjusted for any transaction costs, but is adjusted for any transport costs. Requirements of fair value measurement
PFRS 13 requires an entity to determine the following when measuring fair
value: a. The particular asset or liability being measured. b. The market in which an orderly transaction would take place for the asset or liability. c. The appropriate valuation technique(s) to be used in measuring fair value. d. For a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a stand-alone basis. SUBSEQUENT MEASUREMENT After initial recognition, financial assets are measured at a. Amortized cost b. Fair value through other comprehensive income (FVOCI) c. Fair value through profit or loss (FVPL)
Gains and Losses
FVLP -Gains and Losses on fin. Asset measured at FVLP are recognized in profit or loss
FVOCI- mandatory -Gains and Losses on fin. Asset mandatorily measured at FVOCI are recognized in other comprehensive income (except for impairment gains or losses and foreign exchange gains or losses) until the financial asset is derecognized or classified. FVOCI - election Gains and Losses also recognized in other comprehensive income. When derecognized, cumulative gain or loss previously recognized in other comprehensive income is not subsequently transferred to profit or loss The entity may transfer the cumulative gain or loss within equity, e.g., as a direct transfer to retained earnings (i.e., 'without recycling'). Dividends received are recognized in profit or loss.
Amortized cost -Gains or losses on fin. Asset, recognized in profit or loss. INVESTMENT Examples of investments held to earn profit: Held for trading securities - Profit is realized primarily from short-term fluctuation in fair values. The term "investments" can be defined broadly Investment in equity securities measured at as assets that are held for any of the following FVOIC purposes: - Profit realized from long-term appreciation 1. To earn profit; in fair value; or 2. To secure certain operating or - From dividends financing arrangements or beneficial Investment in debt securities mandatorily relationship with another entity; measured at FVOIC 3. To meet business requirements; or - Profit realized from interest income and/or 4. To serve as protection for possible fair value changes. future loss. Investment in debt securities measured at Amortized Cost o Profit from interest income Investment property Problem Solution Any question or matter involving It is a particular instance or method of doubt, uncertainty, or difficulty. solving. It is an explanation or answer. THANK YOU!
