Regular way purchase or sale of financial assets

• A regular way purchase or sale is a purchase or sale of a financial asset

under a contract whose terms require delivery of the asset within the time

frame established generally by regulation or convention in the marketplace

concerned.

• Trade date accounting vs. Settlement date accounting

a. Under trade date accounting, the financial asset purchased (s0ld) is

recognized (derecognized) at the trade date (i.e., the date the entity

commits to purchase or sell the financial asset).

b. Under settlement date accounting, the financial asset purchased (s0ld) is

recognized (derecognized) at the settlement date (i.e., the date the

ownership of the financial asset is transferred).

Name : ___________________ Score: ____

Section : ___________________

Subject : Intermediate Accounting 1

Class Schedule : ______________

Teacher : Joanne R. Diesca

Date : ______________

Activity

Analysis

Fair value change between trade date & settlement date

• For purchases of FVPL and FVOCI assets (but not amortized cost), the buyer

recognizes the change in fair value between the trade date and the

settlement date.

• For sale transactions, the seller does not recognize the change in fair value

between the trade date and the settlement date

• After initial recognition, financial assets are reclassified only when the

entity changes its business model for managing financial assets.

• Reclassification date is the first day of the first reporting period following the

change in business model that results in an entity reclassifying financial

assets.

Reclassification of debt-type financial assets

Notes on reclassification

• Only debt instruments can be reclassified. Equity instruments (e.g.,

investments in shares of stocks) cannot be reclassified.

• Financial assets cannot be reclassified into or out of the “designated at FVPL”

and “FVOCI - election” classifications.

• The initial measurement is fair value at reclassification date, except for a

reclassification from FVOCI to Amortized cost where the fair value on

reclassification date is adjusted for the cumulative balance of gains and

losses previously recognized in OCI.

Impairment

• The impairment requirements of PFRS 9 apply equally to debt-type financial

assets that are measured either at amortized cost or at FVOCI.

• Impairment gains or losses on debt instruments measured at FVOCI are

recognized in profit or loss. However, the loss allowance is recognized in

OCI and does not reduce the carrying amount of the financial asset in the

statement of financial position.

Dividends

• Only cash and property dividends received from equity securities may be

recognized as dividend revenue.

Stock rights

• Stock rights, being equity instruments, are measured at fair value.

1. Credit risk - The risk that one party to a financial instrument will cause a

financial loss for the other party by failing to discharge an obligation.

2. Liquidity risk - The risk that an entity will encounter difficulty in meeting

obligations associated with financial liabilities that are settled by delivering

cash or another financial asset.

3. Market risk - The risk that the fair value or future cash flows of a financial

instrument will fluctuate because of changes in market prices. Market risk

comprises the following.

a) Interest rate risk

b) Currency risk

c) Other price risk

Refer to textbook, Chapter 11 Problem 5 for the details of the problem.

1. Solutions:

(a) FVPL

Date Trade date accounting Settlement date accounting

Dec.

29,

20x1

FVPL asset 1,000

Payable

1,000

No entry

Dec.

31,

20x1
FVPL asset 750

Unrealized gain – P/L 750

Receivable 750

Unrealized gain – P/L 750

Jan. 3,

20x2

Unrealized loss – P/L 250

Payable 1,000

FVPL asset 1,500

Unrealized loss – P/L 250

Abstractionn

FVPL asset 250

Cash

1,000

Receivable 750

Cash 1,000

(b) FVOCI

Date Trade date accounting Settlement accounting

Dec.

29,

20x1

FVOCI asset 1,000

1,000

No entry

Dec.

31,

20x1

FVOCI 750

Unrealized gain – OCI 750

Receivable 750

Unrealized gain – OCI 750

Jan. 3,

20x2

Unrealized loss – OCI 250

Payable 1,000

FVOCI asset 250

Cash 1,000

FVOCI asset 1,500

Unrealized loss – OCI 250

Receivable 750

Cash 1,000

(c) Amortized cost

Date Trade date accounting Settlement accounting

Dec.
29,

20x1

Amortized cost asset 1,000

Payable 1,000 No entry

Dec.

31,

20x1

No entry No entry

Jan. 3,

20x2

Payable 1,000

Cash

1,000

Amortized cost asset 1,000

Cash

1,000

2. Solutions:

(a) FVPL

Date Trade date accounting Settlement accounting

Dec.

29,

20x1

Receivable 1,000

Loss on sale 200

FVPL asset 1,200

Unrealized loss – P/L 200

Dec.

31,

20x1

No entry No entry

Jan. 3,

20x2

Cash 1,000

Receivable 1,000

Cash 1,000

FVPL asset 1,000

(b) FVOCI

Date Trade date accounting Settlement accounting

Dec.

29,

20x1

Unrealized loss – OCI 200

FVOCI asset 200

Receivable 1,000

FVOCI-asset 1,000

Loss on sale 200

Unrealized loss - OCI 200

Unrealized loss – OCI 200

FVOCI asset 200

31,

20x1

No entry No entry

Jan.

3,

20x2

Cash 1,000

Receivable 1,000

Cash 1,000

FVOCI asset 1,000

Loss on sale 200

Unrealized loss - OCI 200

(c) Amortized cost

Date Trade date accounting Settlement accounting

Dec.

29,

20x1

Receivable 1,000

Loss on sale 200

Amortized cost asset 1,200

No entry

Dec.

31,
20x1

No entry No entry

Jan.

3,

20x2

Cash 1,000

Receivable

1,000

Cash 1,000

Loss on sale 200

Amortized cost asset 1,200

3. Solutions:

(a): Amortized cost to FVPL

Jan.

1,

20x3

FVPL asset

Amortized cost asset

Gain on reclassification – P/L

240,000

200,000

40,000

(b): FVPL to Amortized cost

1,

20x3

FVPL asset

Unrealized gain – P/L

40,000

40,000

Jan.

1,

20x3

Amortized cost asset

FVPL asset

240,000

240,000

(c): Amortized cost to FVOCI

Jan.

1,

20x3

FVOCI asset

Amortized cost asset

Gain on reclassification – OCI

240,000
200,000

40,000

(d): FVOCI to Amortized cost

Jan.

1,

20x3

FVOCI asset

Unrealized gain – OCI

40,000

40,000

Jan.

1,

20x3

Amortized cost asset (squeeze)

Unrealized gain – OCI (10K + 40K)

FVOCI asset

190,000

50,000

240,000

(e): FVPL to FVOCI

Jan.
1,

20x3

FVPL asset

Unrealized gain – P/L

40,000

40,000

Jan.

1,

20x3

FVOCI asset

FVPL asset

240,000

240,000

(f): FVOCI to FVPL

Jan.

1,

20x3

FVOCI asset

Unrealized gain – OCI

40,000

40,000
Jan. FVPL asset 240,000

1,

20x3

FVOCI asset 240,000

Jan.

1,

20x3

Unrealized gain – OCI

Gain on reclassification – P/L

50,000

50,000

4. Solution:

Dec.

31,

20x1

Impairment loss – P/L

Unrealized loss – OCI

Investment in bonds – FVOCI

9,000

21,000

30,000
5. Solutions:

Case 1: Amortized cost to FVPL – Cessation of impairment

Jan.

1,

20x3

FVPL asset

Loss allowance

Loss on reclassification – P/L (squeeze)

Amortized cost asset

490,000

6,000

4,000

500,000

Case 2: FVPL to AC – Commencement of impairment

Jan.

1,

20x3

Unrealized loss – P/L

FVPL asset

to record the change in fair value on

reclassification date

10,000

10,000
Jan.

1,

20x3

Amortized cost asset

FVPL asset

to record the reclassification

490,000

490,000

Jan.

1,

20x3

Impairment loss – P/L

Loss allowance

to record the commencement of

accounting for impairment

4,000

4,000

Case 3: Amortized cost to FVOCI – Retention of impairment

Jan.

1,

20x3

FVOCI asset
Loss allowance

Loss on reclassification - OCI

Amortized cost asset

490,000

6,000

4,000

500,000

Case 4: FVOCI to Amortized cost – Retention of impairment

Jan.

1,

20x3

Impairment loss

Unrealized loss – OCI

FVOCI asset

to recognize the impairment loss and

change in fair value on reclassification date

6,000

4,000

10,000

Jan.

1,

20x3

Amortized cost asset (squeeze)

Loss allowance

Unrealized loss – OCI

to record the reclassification

500,000

490,000

6,000

4,000

Case 5: FVPL to FVOCI – Commencement of impairment

Jan.

1,

20x3

Unrealized loss – P/L

FVPL asset

to record the change in fair value on

reclassification date

10,000

10,000

Jan.

1,

20x3

FVOCI asset

FVPL asset
to record the reclassification

490,000

490,000

Jan.

1,

Impairment loss – P/L

Unrealized gain (loss) - OCI

4,000

4,000

20x3 to record the commencement of

accounting for impairment

Case 6: FVOCI to FVPL – Cessation of impairment

Jan.

1,

20x3

Impairment loss

Unrealized loss – OCI

FVOCI asset

to recognize the impairment loss and

change in fair value on reclassification date

6,000

4,000
10,000

Jan.

1,

20x3

FVPL asset

FVOCI asset

to record the reclassification

490,000

490,000

Jan.

1,

20x3

Loss on reclassification – P/L

Unrealized loss – OCI

to record the reclassification

adjustment to P/L

4,000

4,000

6. Solution:

Dat

e
Cash

Dividend income

400,000

400,000

Dat

Inventory

Dividend income

240,000

240,000

Dat

Investment in FVOCI securities

Unrealized gain – OCI

260,000

260,000

7. Solution:

April

1,

20x1
No entry (Memo entry only)

April

30,

20x1

Cash [(20,000 sh. x 5%) x ₱224]

Investment in stocks (a)

Gain on sale of investment

224,000

110,000

114,000

(a) {2,310,000 x [(20,000 x 5%) / (20,000 x 105%)} = 110,000 cost allocated to

the shares sold

8. Solutions:

Requirement (a): Dividend-on

May 5,

20x1

Investment in FVOCI securities (a)

Dividend income (20 x 20,000 sh.)

Cash (200 x 20,000 sh.)

3,600,000

400,000

4,000,000
May 31,

20x1

Cash

Dividend income

400,000

400,000

(a) (200 purchase price - 20 dividend) x 20,000 sh. = 3,600,000

Requirement (b): Ex-dividend

May 21,

20x1

Investment in FVOCI securities

Cash (200 x 20,000 sh.)

4,000,000

4,000,000

May 31,

20x1 No entry

9. Solution:

Sept. 30,

20x1
Stock rights (1,000 rts. x ₱5)

Unrealized gain – P/L

5,000

5,000

Dec. 31, Stock rights [1,000 x (₱6 - ₱5)] 1,000

20x1 Unrealized gain – P/L 1,000

10. Solution:

T/P

value

of 1

right

FV of share right-on -

Subscription price

No. of rts. needed to purchase one

share + 1

T/P

value

of 1

right

40 - 30

4+1
Theoretical/parity value of 1 right = ₱2

Dec.

25,

20x1

Stock rights (10,000 x ₱2)

Unrealized gain – P/L

20,00

0 20,00