Chapter 12 Investments in Debt Securities

Objectives
To understand:
1 The characteristics and examples of debt securities.
2 The different classifications of investment in debt securities under PFRS 9.
3 The basis for such classifications.
4 The assessment of business model and the contractual cash flows.
5 The fair value computation of investment in debt securities on initial recognition.

Financial Assets

Investment in Investment in Deriva

Equity Securities Debt Securities

FVTPL FVTPL FV

FVTOCI FVTOCI (by

(irrevocable meeting certain
designation conditions only)
only)

Amortized cost

BASIS FOR CLASSIFYING INVESTMENTS IN DEBT SECURITIES

Business model how an entity manages it investments

Credit risk The risk that one party to a financial instrument will cause a finan
Market Risk The risk that the fair value or future cash flows of a financial instr
Interest rate risk - The risk that the fair value or future cas
Currency risk - The risk that the fair value or future cash f
Other price risk - market risk not classified into either inte

BUSINESS MODEL
Held-for-selling FVTPL
Both HTM and HTS FVTOCI
Held-to-maturity Amortized cost
 Contractual cash flows characteristics

Combining business model and contractual cash flow assessments

Accounting Classification
BUSINESS MODEL PASSED SPPI Test
Held-for-selling FVTPL
Both HTM and HTS FVTOCI
Held-to-maturity Amortized cost

FAIR VALUE OPTION FOR INVESTMENTS IN DEBT SECURITIES

COMPUTING THE FV OF INVESTMENTS IN DEBT SECURITIES

Quoted price Face amount of debt security x quoted price in %

Quoted at 101 means the FV is 101% of the face am

Present value PV of contractual cash flows discounted using the m

Discount rate
DR = Stated rate
DR > Stated rate
DR < Stated rate
securities.
n debt securities under PFRS 9.

e contractual cash flows.

n debt securities on initial recognition.

Financial Assets

Investment in Derivatives
Debt Securities

FVTPL FVTPL (by

default)

FVTOCI (by
meeting certain
conditions only)

Amortized cost

T SECURITIES
es it investments

o a financial instrument will cause a financial loss for the other party by failing to discharge an obligation
ue or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market ris
- The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in fo
- market risk not classified into either interest rate risk or currency risk (i.e., residual risks).
 l cash flow assessments
unting Classification
Failed SPPI Test
FVTPL
FVTPL
FVTPL

T SECURITIES
SECURITIES

of debt security x quoted price in %

means the FV is 101% of the face amount

ual cash flows discounted using the market rate on measurement date
Market rate on the measurement date
FV = face amount
FV < face amount or Discount
FV > face amount or Premium
ge an obligation
et prices. Market risk can be further subdivided to the following:
ecause of changes in market interest rates.
ause of changes in foreign exchange rates.
At the beginning of 2023, STEVE Company acquired a five-year government bon
The bonds bear interest of 10% even though the market rates average 12% on th
Under each of the following independent scenarios, determine the fair value of th

1. The interest is payable every December 31 of each year.

2. The interest is payable every June30 and December 31 of each year.
3. The interest is payable every March 31, June 30, September 30 and Decembe

SCENARIO 1

PV factor of PV Factor Cash Flow

Single payment for 4 periods at 12% 0.635518 6,000,000
Ordinary annuity for 4 periods at 12% 3.037349 600,000

SCENARIO 2

PV factor of
Single payment for 8 periods at 6% 0.627412 6,000,000
Ordinary annuity for 8 periods at 6% 6.209794 300,000

SCENARIO 3

PV factor of
Single payment for 16 periods at 3% 0.623167 6,000,000
Ordinary annuity for 16 periods at 3% 12.561102 150,000
ar government bond with face amount of P6,000,000 and maturity date of December 31, 2026.
average 12% on the acquisition date.
the fair value of the government bonds on January 1, 2023:

each year.
er 30 and December 31 each year.

Initial FV
3,813,108.00
1,822,409.40
5,635,517.40

3,764,472.00
1,862,938.20
5,627,410.20

3,739,002.00
1,884,165.30
5,623,167.30
mber 31, 2026.
Chapter 12A Investments in Debt Securities - FVTPL

Objectives:
To understand:
1 The initial and subsequent measurement of investment in debt securities at FVTP
2 The amount of interest income from investment in debt securities at FVTPL.
3 The FV computation of investment in debt securities on initial recognition depend
4 The accounting for the sale of debt securities accounted for at FVTPL.

Investments in Debt Securities - FVTPL

1 At end of each reporting period, the investments shall be carried at their fair valu
2 Changes in fair value from one reporting date to another shall be reported as unr
Increase in fair value is recognized as unrealized gain while decrease in fair valu
3 Realized gain or loss on actual disposal shall be reported in profit or loss.
4 Interest income is computed using the stated or nominal interest rate multiplied b
5 There shall be no amortization of the premiums or discount amounts as there wil
the initial fair value and the face amount of the debt security.

FV computations not on interest payment date

1 The PV computations are made as of the immediately preceding interest paymen

For example, if the annual interest payments are made every September 30 and
the present value of cash flows shall be computed as of September 30, 2023 (i.e

Despite of this, the readers should take note that we will be using the market rate
since we are actually computing the debt security's fair value as of that date.

2 After computing the initial PV as of the immediately preceding interest payment d

This partial amortization will not be recorded as it is made for the purposes of co

Continuing with the example, the initial PV computed as of September 30, 2023
The adjusted amount is now the fair value of the debt security as of December 3

Acquisition of investment not on interest payment date

Accrued interest from the immediately preceding interest payment date until the
Clean price - fair value of the debt security
Dirty price - fair value of the debt security plus the accrued interest
 The reason for the additional accrued interest is that the seller gave up its right to
the full amount of interest in the immediately succeeding interest payment date, w

Sale of investment on interest payment date

When the investments are sold, any difference between the proceeds received a
will be reported as realized gain or loss in P/L:

Proceeds > CA Realized gain on sale

Proceeds < CA Realized loss on sale

Sale of investment not on interest payment date

Additional amounts related to the accrued interest will be received from the buye
Accrued interest from the immediately preceding interest payment date up to the
 securities at FVTPL.
es at FVTPL.
ecognition depending on different circumstances.

d at their fair values as of those dates.

be reported as unrealized gain or loss in profit or loss.
crease in fair value is recognized as unrealized loss.
ofit or loss.
st rate multiplied by the face amount.
ounts as there will be no tracking of the difference between

ng interest payment date, or if earlier, issue date.

September 30 and its fair value as of December 31, 2023 needs to be computed,
mber 30, 2023 (i.e., the immediately preceding interest payment date).

ng the market rate as of the reporting date

s of that date.

nterest payment date, the initial PV shall be partially amortized until the reporting date.
he purposes of computing the fair value only.

tember 30, 2023 shall be adjusted by partially "amortizing" it up to December 31, 2023.
as of December 31, 2023 reporting date.

ent date until the acquisition date shall be paid to the counterparty in addition to the fair of the debt s

ued interest
gave up its right to receive
st payment date, which the purchaser will receive fully.

oceeds received and the CA

ved from the buyer

ent date up to the date of sale
porting date.

ber 31, 2023.

ion to the fair of the debt security itself.

On October 1, 2023, DAKILA Company purchased a debt security with a face va
The debt security bears interest of 8% payable every September 30 of each year
Determine the fair value as of December 31, 2023 and 2024 assuming the releva

Fair Value as of December 31, 2023

As of this reporting date, the immediately preceding interest payment date was S

PV factor of PV Factor
Single payment for 4 periods at 9% 0.708425
Ordinary annuity for 4 periods at 9% 3.23972

The initial PV amount shall be "partially amortized" from 9/30/2023 to 12/31/2023

Initial PV, 9/30/2023
Add: DR amount (P1,935,205*9%*3/12)
Less: Stated rate amount (P2M*8%*3/12)

Fair Value as of December 31, 2024

As of this reporting date, the immediately preceding interest payment date was S

PV factor of PV Factor
Single payment for 3 periods at 9.5% 0.761654
Ordinary annuity for 4 periods at 9% 2.508907

The initial PV amount shall be "partially amortized" from 9/30/2023 to 12/31/2023

Initial PV, 9/30/2024
Add: DR amount (P1,924,733*9.5%*3/12)
Less: Stated rate amount (P2M*8%*3/12)
 a debt security with a face value of P2,000,000, when the prevailing market rate is 10%.
ery September 30 of each year. Maturity date is on September 30, 2027.
and 2024 assuming the relevant market rates were 9% and 9.50%, respectively.

g interest payment date was September 30, 2023. Consequently, the initial PV as of September 30,

Cash Flow Fair Value

2,000,000.00 1,416,850
160,000.00 518,355
1,935,205

from 9/30/2023 to 12/31/2023

1,935,205
43,542
(40,000)
1,938,747

g interest payment date was September 30, 2024. Consequently, the initial PV as of September 30,

Cash Flow Fair Value

2,000,000.00 1,523,308
160,000.00 401,425
1,924,733

from 9/30/2023 to 12/31/2023

1,924,733
45,712
(40,000)
1,930,445
rate is 10%.

V as of September 30, 2023 is computed as follows:

V as of September 30, 2024 is computed as follows:

 On September 1, 2023, JD Company acquired 12% interest-bearing corporate b
As of December 31, 2023, the bonds had fair value of 102.40.
Under each of the following independent scenarios, determine the journal entries

1 Acquisition price is 101.70 plus accrued interest. Interest is payable every Decem
2 Acquisition price is 110.90 including accrued interest. Interest is payable every December 31 of
3 Acquisition price is 103.25 plus accrued interest. Interest is payable every June3
4 Acquisition price is 103.20 including accrued interest. Interest is payable every D

SCENARIO 1
9/1/2023 Financial asset at FVTPL
Interest receivable
Cash

12/31/2023 Financial asset at FVTPL

Unrealized gain - P/L

SCENARIO 2
9/1/2023 Financial asset at FVTPL
Interest receivable
Cash

12/31/2023 Unrealized loss - P/L

Financial asset at FVTPL

SCENARIO 3
9/1/2023 Financial asset at FVTPL
Interest receivable
Cash

12/31/2023 Unrealized loss - P/L

Financial asset at FVTPL

SCENARIO 4
9/1/2023 Financial asset at FVTPL
Interest receivable
Cash
12/31/2023 Financial asset at FVTPL
Unrealized gain - P/L
12% interest-bearing corporate bonds dated January 1, 2023 and with face amount of P7,000,000, t
alue of 102.40.
rios, determine the journal entries to be made for the year 2023 in relation to the corporate bonds:

. Interest is payable every December 31 of each year.

nterest is payable every December 31 of each year.
. Interest is payable every June30 and December 31 of each year.
erest. Interest is payable every December 31 of each year.

7,119,000.00
560,000.00
7,679,000.00

49,000.00
49,000.00

7,203,000.00
560,000.00
7,763,000.00

35,000.00
35,000.00

7,227,500.00
140,000.00
7,367,500.00

59,500.00
59,500.00

6,664,000.00
560,000.00
7,224,000.00
504,000.00
504,000.00
mount of P7,000,000, to be accounted for at FVTPL.

he corporate bonds:
As of January 1, 2023, GERALDINA Company had the following investments in d

Issuer Face amount Original cost

BBB Company 3,000,000.00 99.80
CCC Company 6,000,000.00 97.60
DDD Company 5,000,000.00 102.40
EEE Company 2,000,000.00 104.80

During 2023, the following transactions occurred:

P3,000,000 of CCC Company's bonds were sold last June 30, 2023 for 10
P2,000,000 of DDD Company's bonds were sold for 103.10 last Septemb
P4,000,000 additional BBB Company's bonds were acquired last October

As of December 31, 2023, the debt securities had the following quoted prices:

Issuer Quoted price

BBB Company 100.20
CCC Company 98.20
DDD Company 104.50
EEE Company 105.20

Determine the journal entries to be made in 2023.

6/30/2023 Cash
Loss on sale - P/L
Interest income (CCC)
Financial assets at FVTPL (CCC)

6/30/2023 Cash
Interest receivable
Interest income (DDD)

9/30/2023 Cash
Gain on sale - P/L
Interest income (DDD)
Financial assets at FVTPL (DDD)
 9/30/2023 Cash
Interest receivable
Interest income (EEE)

10/31/2023 Financial assets at FVTPL (BBB)

Interest receivable
Cash

12/31/2023 Cash
Interest receivable
Interest income (BBB)

Cash
Interest income (CCC)

Interest receivable
Interest income (DDD)

Interest receivable
Interest income (EEE)

Financial asset at FVTPL (BBB)

Unrealized gain - P/L

Unrealized loss - P/L

Financial asset at FVTPL (CCC)

Financial asset at FVTPL (DDD)

Unrealized gain - P/L

Unrealized loss - P/L

Financial asset at FVTPL (EEE)
d the following investments in debt securities, all to be accounted for at FVTPL:

Quoted price Stated rate Interest Payment Date

97.50 9% 31-Dec
98.90 9% 31-Dec
101.90 10% 30-Jun
105.60 12% 30-Sep

e sold last June 30, 2023 for 102.70, including accrued interest.
e sold for 103.10 last September 30, 2023 plus accrued interest.
ds were acquired last October 31, 2023 for 99.70, including accrued interest.

the following quoted prices:

3,081,000.00
21,000.00
135,000.00
PL (CCC) 2,967,000.00

500,000.00
250,000.00
250,000.00

2,112,000.00
24,000.00
50,000.00
PL (DDD) 2,038,000.00
 240,000.00
60,000.00
180,000.00

3,688,000.00
300,000.00
3,988,000.00

630,000.00
300,000.00
330,000.00

270,000.00
270,000.00

150,000.00
150,000.00

60,000.00
60,000.00

401,000.00
401,000.00

21,000.00
L (CCC) 21,000.00

78,000.00
78,000.00

8,000.00
L (EEE) 8,000.00