INVESTMENT IN DEBT SECURITIES

CLASSIFIC ATION

at Fair Value through

Profit or Loss (FVPL)

at Fair Value through

Debt Securities Other Comprehensive
income (FVOCI)

AMORTIZED COST
 CLASSIFICATION, MEASUREMENT,
AND PRESENTATION
Classification Initial Subsequent Prese Subject to Interest Balance
Measurement measurement ntatio Amortization income is sheet
n of based on
chang
es in
FV

FVPL Fair value Fair value P/L No Nominal Current

interest asset

FVOCI Fair value Fair value OCI Yes Effective Non-

plus interest current
transaction asset
cost
Amortized Fair value Amortized N/A YES Effective Non-
cost plus cost interest current
transaction asset
cost

3
 CLASSIFICATION, MEASUREMENT,
AND PRESENTATION

The CUMULATIVE unrealized gain or loss on changes

in FV of FVOCI investments is computed as the
DIFFERENCE IN FAIR VALUE AND AMORTIZED
COST of the investment on year end. To compute the
unrealized gain or loss for the year, simply deduct the
cumulative balance this year to the cumulative balance
last year

4
 PROBLEM 1
On May 1, 2021, Kimmy Inc. Purchased a short-term P4,000,000 face value 9% debt
instruments for P3,720,000 including the accrued interest and designated as an
investment to profit and loss which is based on the business model of the entity to
buy and sell portfolio of securities and to make profit for short-term movements in
the market rate of interest. Kimmy Company incurred and paid P50,000 transaction
cost related to the acquisition of the instrument. The debt instrument mature on
January 1, 2023 and pay interest semi-annually on January 1 and July 1. On December
31, the fair market value of the instruments is P3,880,000 and estimated cost to sell of
P40,000. What amount of gain or loss should Kimmy Inc. disclose in the profit or loss
in the statement of comprehensive income for the year ended December 31, 2021?

5
SOLUTION
 PROBLEM 2
On October 1, 2021, an entity with a business model of trading debt securities
purchased a P2,000,000 face value 9% debt instruments with a remaining term of 2
years and three months for P2,174,867. The prevailing market rate of interest at the
time of acquisition was 8%. Interest is being received every December 31. On
December 31, the fair market value of the instruments is P2,072,321 based on
prevailing market rate of 7%. What is the unrealized gain or loss should the entity
report in its December 31, 2021 profit it loss?

7
 PROBLEM 3
On January 1, 2021, Sun Corp. purchased the debt instrument of Moon Company with
a face value of P5,000,000 bearing interest of 8% for P4,621,006 to yield 10% interest
per year. The bonds mature on January 1, 2026 and pay interest annually on December
31. On December 31, 2021, the fair value of the investment is P4,838,014 which is
based on the prevailing market rate of 9%.
a. If the investment is designated as FVPL, what amount of unrealized gain or loss
should the company disclose in their December 31, 2021 profit or loss?
b. If the investment is designated as FVOCI, what amount of unrealized gain or loss
should the company disclose in their December 31, 2021 other comprehensive
income?
c. If the investment is designated as Amortized cost, at what amount should the
investment be reported in the company’s statement of financial position for the
year ended December 31, 2021?

8
SOLUTION
 PROBLEM 4
On January 1, 2021, an entity purchased bonds with face amount of P2,000,000..
The bonds mature on December 31, 2024 and pay 10% interest annually on
December 31 of each year with 12% effective yield. The bonds were quoted at
99 on December 31, 2021 and 110 on December 31, 2022. What is the
a. What is the initial measurement of the bonds?
b. What is the carrying amount of the investment on December 31, 2021 and
2022?
c. What is the unrealized gain or loss to be presented in profit or loss during
2021and 2022?
d. What is the interest income for 2021 and 2022?
Under the following assumptions:
1. FVPL
2. FVOCI
3. Amortized costs
10
SOLUTION
SOLUTION
SOLUTION
 RECLASSIFIC ATION

PFRS 9 provides that an entity shall reclassify financial assets only when it
changes its business model for managing the financial assets.
Rules on Reclassification:
Ø An entity shall apply the reclassification prospectively from the date of
reclassification
Ø Transfers from investments at FVPL or FVOCI to investment at
amortized cost (vice versa) are allowed. The Fair value on the date of
transfer shall be the investment’s deemed cost
Ø For transfers to investment at amortized cost, the prevailing effective
interest rate on the date of transfer shall also become deemed effective
rate.
FROM TO ACCOUNTING
AC FVTPL The FV is measured at the reclassification date. Any gain or loss
arising from a difference
between the previous AC and FV is recognized in P/L.
FVTOCI FVTPL The FA continues to be measured at FV. The cumulative gain or loss
previously
recognized in OCI is reclassified from equity to P/L as a
reclassification adjustment at the reclassification date.
FVTPL AC The FV at the reclassification date becomes its new gross carrying
amount.
FVTPL FVTOCI The FA continues to be measured at FV.
AC FVTOCI The FV is measured at the reclassification date. Any gain or loss
arising from a difference
between the previous AC of the FA and FV is recognized in OCI.
The EIR and the measurement of expected credit losses are not
adjusted as a result of the reclassification.
FVTOCI AC The FA is reclassified at its FV at the reclassification date.
However, the cumulative gain or loss previously recognized in
OCI is removed from equity and adjusted against the FV of the FA at
the reclassification date. As a result, the FA is measured at the
reclassification date as if it had always been measured at
AC. This adjustment affects OCI but does not affect P/L and
therefore is not a reclassification adjustment. The EIR and the
measurement of expected credit losses are not adjusted as a result of
the reclassification.
 PROBLEM 5

On January 1, 2021, an entity purchased bonds with face amount of P3,000,000. The entity
paid P3,097,192. The bonds mature on December 31, 2024 and pay 10% interest annually on
December 31 of each year with 9% effective yield. The entity has a portfolio of commercial
loans that it holds to sell in the short term. On December 31, 2021 , the investment has a
fair value if P3,114,931 which is based on the prevailing market rate if 8.5%. On December
31, 2022, the debt investment has a fair value of P3,106,997 which is based in the prevailing
rate of 8%.
a. Assume that during 2021, there was a change of business model and cash flow
characteristic but they decide to make a reclassification on January 1,2022 to investment at
fair value to other comprehensive income. What amount should the debt investment be
reported on December 31, 2022?
b. Assume that the investment was reclassified at amortized cost, at what amount should
the investment in debt security be valued on December 31, 2022?
c. Assume that on the acquisition date, the security was designated as investment at
amortized cost, but the investment at amortized cost was reclassified on January 1,2022 as
investment at FVPL, at what amount of gain or loss should the company recognize on the
date of transfer?
SOLUTION
SOLUTION
SOLUTION
 REALIZED GAIN OR LOSS

Investment in P/L Investment @ FVOCI Investment

@amortized cost
Net XX Net XX Net XX
proceeds proceeds proceeds
Less: (XX) Less: (XX) Less: (XX)
Carrying AMortized AMortized
amount cost cost

Realized XX(XX) Realized XX(XX) Realized XX(XX)

Gain(loss) Gain(loss) Gain(loss)

NOTE:
Ø Net proceeds shall exclude accrued interest. If the bonds are sold between
interest dates, the selling prices includes accrued interest unless otherwise stated
in the problem
Ø For FVOCI investments, partial disposal will not result to the reclassification of
the investment to investment at amortized cost.
 PROBLEM 6

On January 1, 2021, Holy Company invested in a 4-year 10% bonds with a face
value of P1,500,000 in which interest is to be paid every December 31. The
bonds have an effective rate of 8% and was acquired for P1,599 364. On
December 31, 2021, the fair value of the bonds is P1,600,000. On October 1,
2022, the investment was sold at P1,575,000. What is the gain or loss to be
presented in 2022 income statement if the investment was classified as?
a. FVPL
b. FVOCI
c. Amortized cost
SOLUTION
SOLUTION
 IMPAIRMENT AND REVERSAL OF
IMPAIRMENT

IMPAIRMENT
For financial assets measured at FVPL, the decrease in fair value,
presented in profit or loss, are already considered impairment. Thus,
impairment is not necessary.
For FVOCI investments, the computation of impairment is as follows:
Recoverable amount(fair value @balance sheet date) XX
Amortized cost (XX)
Impairment loss (P/L) XX
 IMPAIRMENT AND REVERSAL OF
IMPAIRMENT

REVERSAL OF IMPAIRMENT
In relation to reversal of previous impairment, it only applies to FVOCI
investments and investments at amortized cost
FVO FAC
CI
FV at balance XX yes no
sheet date Unrealized gain
Amortized XX (OCI)
cost had there
Reversal of
been no impairment (P/L)
yes yes
impairment
Amortized XX
cost (latest)
 PROBLEM 7

On December 31, 2019, Outer company invested in the 5-year binds of inner
company. The bonds have a face value of P2,000,000 with 8% interest payable per
year. Outer company paid P1,848,368 to acquire the instruments at the prevailing
market rate of 10%. The debt security was amortized cost. During 2021, Inner
company’s business deteriorated due to political instability and faltering global
economy. After reviewing all available evidence at December 31, 2021, Outer
company determined that it was probable that Inner company will still be able to
pay the nominal interest but will be unable to pay future interest on bonds. Both
parties agreed with a reduction of principal of P1,600,000 to be paid at maturity.
As a result, Outer decided that the investment was impaired, and that a loss
should be recorded immediately. On December 31, 2022, Inner Company’s
financial condition improves and informed Outer company to pay back
P1,900,000 on maturity instead of the reduced amount of P1,600,000 in
December 31, 2021.
a. How much is the impairment loss to be reported December 31, 2021?
b. What amount of impairment recovery should Outer company report on its
2022 profit or loss?
SOLUTION
SOLUTION
Thank you for
listening!

QUESTIONS?