Shown above is an example of a financial asset.

Like other assets, it is suggested to

properly measure its value initially and subsequently depending on classification of the

financial assets that the company hold. But let us know first what are financial instruments.

Financial instruments

Name : ___________________ Score: ____

Section : ___________________

Subject : Intermediate Accounting 1

Class Schedule : ______________

Teacher : Joanne R. Diesca

Date : ______________

Activity

Analysis

• 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 instruments include both financial assets and financial liabilities.

• 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.
Financial liabilities

A financial liability is any liability that is:

a. a contractual obligation to deliver cash or another financial asset to another

entity; or

b. a contractual obligation to exchange financial instruments with another

entity under conditions that are potentially unfavorable.

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 models

Fair Value Measurement

• 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 measurement date.” (PFRS 13)

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.

Formula

Market price (in ‘principal’ or ‘most advantageous’ market) XXX

Less: Transport costs (XXX)

Fair value Xx

Fair value hierarchy

Level 1 Observable inputs that reflect quoted prices

for identical assets or liabilities in active

markets.

Most reliable

 
Least reliable

Level 2 Inputs other than quoted prices included in

Level 1 that are observable for the asset or

liability either directly or through corroboration

with observable data.

Level 3 Unobservable inputs (for example, an

entity’s own data or assumptions).

Financial Assets

1. Twilight Co. has the following assets on December 31, 2021.

Petty cash fund 10,000 Prepaid income tax

10,000

Cash in Bank 40,000 Prepaid assets 4,000

Notes receivable 130,000 Inventory 380,000

Discount on N/R (7,000) Held for trading securities 60,000

Loan receivable 80,000 Investment in associate

40,000

Abstractionn

Loss allowance (4,000) Deferred tax assets 12,000

Advances to suppliers 12,000 Plant expansion fund 75,000

Requirement: Compute for the total amount of financial assets.

1. Solution:
Petty cash fund 10,000

Cash in bank 40,000

Notes receivable 130,000

Discount on note receivable (7,000)

Loans receivable 80,000

Loss allowance on loans receivable (4,000)

Held for trading securities 60,000

Investment in associate 40,000

Plant expansion fund 75,000

Total financial assets 424,000

Fair value measurement

2. Burnham Co. has an asset that is sold in two different active markets.

Price information from he two markets is as follows:

Market #1 Market #2

Market price 270 265

Transaction costs 6 5

Transport costs 10 15

Requirements:

1. If market #2 is the principal market for the asset, howmuch is the

fair value?

2. If neither market is the principal market for the asset, how much is

the fair value?

2. Solutions:

Requirement (a):

Market price in Market #2 265

Less: Transport costs (15)

Requirement (b):

The ‘most advantageous market’ is determined as follows:

  Market #1 Market #2

Market price 270 265

Transaction costs (6) (5)

Transport costs (10) (15)

Sale proceeds 254 245

 Market #1 is the ‘most advantageous market’ because the sale proceeds is

higher. The fair value is measured as follows:

Market price in Market #1 270

Less: Transport costs (10)

Fair value 260

FVPL

3. At the start of 20x1, Agholos Co.’s held for trading securities consist

of 10000 shares of Trucking Co. with fair value per share of P80.

Aglolo’s trading activities relating to Trucking CO.s shares during the

year are summarized below:

 Acquired 5,000 shares at P78 per share. Total transaction cost

(tax) was P18,500.

 Sold 3,000 shares (from those held at the start of the year) at

P82 per shahre. Total transaction cost was P12,300.

Trucking Co. shares have a fair value of P81 per share on Dec.31,

20x1.

Requirements: Provide the journal entries. Determine the total net

gain (loss) from the sale and fair value change during the period.

3. Solution:
Acquisition Held for trading

securities

Taxes and licenses

Cash

390,000

18,500

408,500

Sale Cash [(3,000 x 82) –

12,300]

Loss

Held for trading

sec. (3,000 x 80)

233,700

6,300

240,000

Dec. 31,

20x1

Held for trading

securities

Gain (a)
22,000

22,000

(a) Fair value on 12/31/x1 (10,000 sh. + 5,000 sh. – 3,000

sh.) x ₱81

972,000

Carrying amount (10,000 sh. x ₱80) beg. + 390,000 Dr. –

240,000 Cr.

950,000

Gain 22,000

Realized loss on sale (6,300)

Unrealized gain on fair value change 22,000

Net gain 15,700

 Reconciliation:

Held for trading - beg. 800,000

Acquisitions during the year 390,000

Total 1,190,000

Held for trading - end. 972,000

Net proceeds from sale 233,700

Total 1,205,700

Total net gain from fair value change and

sale

15,700
FVPL vs. FVOCI (election)

Fact pattern for the next three items:

Elements Co. had the following investment transactions:

Dec. 3 20x1 Acquired 12,000 shares of Buffet Corp at P3.00

per share. Elements incurred P1,800 brokerage

commission.

Dec. 31, 2021 Buffet Corp’s shares have a quoted price of P5.00

per share.

Jan. 16, 20x2 Elements Co. sold all the shares at P8.00 per

share. Elements incurred sale transaction costs f

P4,800.

4. Prepare the journal entries assuming the investment is classified as

held ofr trading securities and Elements Co. does not use a fair value

adjustments account.

5. Prepare the journal entries assuming the investment is classified as

held for trading securities and Elements Co. usus a fair value

adjustment account.

6. Prepare the journal entries assuming Elements Co. irrevocable

elected to measure the investment at FVOCI. Elements Co. does not

use a fair value adjustment account.

4. Solution:

12/3/x1

Held for trading securities (12,000 x ₱3) 36,000

Commission expense 1,800

12/31/x1

Held for trading securities [(12,000 x ₱5) – ₱36,000] 24,000

Unrealized gain – P/L 24,000

1/16/x2

Cash [(12,000 x ₱8) – ₱4,800] 91,200

Held for trading securities (12,000 x ₱5) 60,000

Realized gain 31,200

5. Solution:

12/3/x1

Held for trading securities (12,000 x ₱3) 36,000

Commission expense 1,800

Cash 37,800

12/31/x1

Fair value adjustment [(12,000 x ₱5) – ₱36,000] 24,000

Unrealized gain – P/L 24,000

1/16/x2

Cash [(12,000 x ₱8) – ₱4,800] 91,200

Held for trading securities 36,000

Fair value adjustment 24,000

Realized gain 31,200

6. Solution:

12/3/x1

Investment in equity securities – FVOCI 37,800

[(12,000 x ₱3) + ₱1,800]

Cash 37,800

12/31/x1

Investment in equity securities - FVOCI 22,200

1/16/x2

Investment in equity securities - FVOCI 31,200

Unrealized gain – OCI [(12,000 x ₱8) – 4,800] – 60,000 31,200

Cash [(12,000 x ₱8) – 4,800] 91,200

Investment in equity securities – FVOCI 91,200

Unrealized gain – OCI (22,200 + 31,200) 53,400

Retained earnings 53,400