INVESTMENTS  Equity instruments  residual interest

FINANCIAL INTSTRUMENTS like share of stocks

 – contracts that gives rise financial asset  Equity securities  investments
of one entity; financial liability or d. SINKING FUND AND OTHER LONG
equity instrument of another. TERM FUND
 not own’s equity instruments; own NOT A FINANCIAL ASSET
equity instruments includes” ordinary a. PHYSICAL ASSETS – inventories;
shares, non-redeemable preference biological assets, property plant and
shares, stock optios, and warrants equipment, investment property
(derivates). b. Intangible ASSETS
c. Advances to suppliers – future goods
Financial Asset d. Prepaid Assets
FEATURES: e. Prepaid Interests –usually connected to
Cash financial liability; if not then financial asset
f. Own instruments
Equity Instrument of Another Entity
 Bumili si Corporation A from Corporation
B ng share of stocks Financial Liabilities
 EXPECTED RETURN: Dividends and FEATURES:
Speculation: Increased Value of Stocks
 can be extended Contractual Obligation
 to deliver cash or another
Contractual Rights financial assets
 DEBT INSTRUMENTS - receive cash)  exhange financial instruments
or another financial asset unfavorably
 e.g. bonds (corporate; governement)
 EXPECTED RETURN: Principal Contract
Amount and Interest  will and may be settles in entity’s
 after period; no relationship own equity instruments
 lower kita due to fixed interest rates  not classified as our own equity
instruments
 DERIVATIVE INSTURMENTS -
exchange financial instruments Examples:
favorably a. Payables
 used in hedging or lowering risk b. Lease liabilities
c. Held for trading liabilities and
Contract derivative liabilities
 will and may be settles in entity’s
own equity instruments
 not classified as our own equity
instruments
Classified by
e.g. Share-based compensation (Financial
Asset for employee, Financial Liability for
the issuer as
financial
us)
Examples:
a. CASH AND CASH EQUIVALENTS – cash
on hand, cash in bank, money placement,
cash funds
b. RECEIVABLES – accounts, notes, loans,
finance lease
liability
c. INVETMENT IN EQUITY OR DEBT
INSTRUMENTS OF OTHER ENTITIES of
OTHER ENTITIES – trading securities,
rather than
‘own’ equity
investment in subsidiaries, associates and
joint ventures, investment in bonds,
derivative assets

instrument
 Debt instruments (debtor-creditor
relationship)  right to receive cash
like receivable, payables and bonds
 Debt securities  investments
o Issuer is instrument
obliged to o Issuer is
deliver cash obliged to
to investor on deliver cash
redemption to investor on
date. redemption
o (Other date.
preference o (Other
shares are preference
classified as shares are
‘own’ equity classified as
instrument) ‘own’ equity
Classified by instrument)
the issuer as
 Classified by the issuer as financial
liability rather than ‘own’ equity
instrument
 Issuer is obliged to deliver cash to

financial investor on redemption date.

 (Other preference shares are
classified as ‘own’ equity

liability
instrument)
d. Redeemable preference shares
issued – because issues will deliver cash

rather than
rather than own equity instrument
e. Security deposits and other
returnable deposits
NOT A FINANCIAL LIABILITIES

‘own’ equity a. UNEARNED

b. CONSTRUCTIVE OBLIGATIONS and
WARRANTY
LIABILITIES
NON-FINANCIAL INSTRUMENTS:
Financial
Category Description Instrument?
Statutory
Requirements Imposed by government
Arise from law, not contract

Examples Prepaid taxes, tax

refunds, current tax
payables No
Deferred tax
assets/liabilities No
SSS, Philhealth, Pag-
IBIG payables No
Commodity Settled through
Contracts commodity exchange No
Settled in cash or other
financial instrument Yes
Favorable conditions Asset
Unfavorable conditions Liability

INITIAL RECOGNITION: Only when entity

becomes party .

CLASSIFICATION OF FINANCIAL ASSETS

(equals to SUBSEQUENT MEASUREMENT)

 Financial Asset @ Fair Value

 FVPL
 FVOCI
 Amortized Cost
 BASIS OF CLASSIFICATION
 Test 1: Cash Flow Characteristics
 Test 2: Business Model
 CLASSIFICATION AT AMORTIZED
COST (FAAC = FV + TC)
 Investment in Debt Securities
 SPPI Test
 Hold TO COLLECT
  CLASSIFICATION AT FAIR VALUE Factors for Determining Cash Flow for
THROUGH OTHER COMPREHENSIVE Collections
INCOME (FVOCI  FV + TC)  Frequency, value, and timing of past
 Invest in Debt Securities: Hold to sales
collect and sell.  Reasons for past sales
 Elected/Designate Investment in  Expectations about future sales
Equity Securities activity
 CLASSIFICATION AT FV THROUGH STILL HOLD-TO-COLLECT
PROFIT OR LOSS (FVPL – FV)  increased credit risk
 If no election in Investment in Equity  frequent sale, insignificant value
Securities. assets
 If ‘to sell’ in Investment in Debt  infrequent sales,high-value assets
Securities  sales near maturity
 For trading purposes, Investment in
Derivatives. HOLD-TO-COLLECT-AND-SELL: collect
 EXCEPTIONS contractual cash flow; sell financial assets
CHARACTERISTICS
 frequent significant sales
 core objective: sale
 no sales restriction
STILL-HOLD-TO-COLLECT-AND-SELL
 liquidity management A household managing its
savings account. The household might regularly withdraw funds to cover
monthly expenses like utilities, groceries, and rent.

 interest yield management The trader buys

and sells bonds based on interest rate fluctuations, aiming to profit from these changes

 duration matching – Enough money on pension

funds.

OTHER BUSINESS MODELS: FVPL

INVESTMENT IN DEBT SECURITIES TO
SELL – not ‘hold to collect’ and not ‘hold to
collect and sell’
NOT ELECTED AS FVOCI
HELD FOR TRADING SECURITY
 purpose: sell near-term
 trading portfolio part for short-
term profit making
 derivatives

 CONTRACTUAL CASH FLOW

CHARACTERISTIC
 SPPI Test: solely payment of principal
and interest
 Principal: FV @ initial recognition
 Interest: consideration for time value
of money and credit risks

INITIAL MEASUREMENT: Fair Value +

Transaction Cost except FVPL.

FAIR VALUE MEASUREMENT or MARKET-

TO-MARKET Accounting
 Fair Value – price an asset sold or
liabillity trasnferred in orderly
 BUSINESS MODEL transaction
 management of financial asset to  OTHER MEANING:
generate cash flows o Market Based Measurement:
 matter of fact market participants, not only the
 NOT instrument by instrument entity.
o Market Participant Assumption
HOLD-TO-COLLECT: collect contractual based on current condition and
cash flows risks.
 o Going Concern Assumption: credit  PFRS 13 – used in measuring FV
quality  MAXIMIZES USE of relevant observable
inputs
Term Alternative Definition  MINIMIZES unobservable inputs
Name
Transaction Entry Price Price acquired for Technique Description
Price asset/liability
Market Uses prices and information from similar
Fair Value Exit Price Price to sell asset/transfer Approach asset or liability transactions.
liability
Cost Reflects the current replacement cost of
If different, gain or loss in profit or loss Approach an asset's service capacity.
Income Converts future cash flows or income to a
 REQUIREMENTS OF FAIR VALUE Approach present value based on market expectations.
MEASUREMENT
 ASSET OR LIABILITY
 its characteristics affect FV: (1)
condition (2) location (3)
restrictions
 unit of account (level of
Term Definition Purpose
aggregation and disaggregation)
Maximum price a
depends on nature: (1) standalone Bid buyer is willing to DEMAND: can be used as
(2) group Price pay for an asset fair value for an asset held
Minimum price a SUPPLY: can be used as fair
 MARKET (CURRENT MARKET Ask seller is willing to value for an asset to be
CONDITIONS) Price accept for an asset acquired
 PRINCIPAL MARKET (IF IDENTIFIABLE, Mid-market Pricing is okay (Bid Price + Ask Price/2)
PRICE IS USED AS FV): market w/ Most recent transaction – can alternative FV if
greatest volume and level of activity – there’s economic stability lack of current market data
maraming transaction, mabilis magbenta like mall

 FAIR VALUE HIERARCHY

 THE PRICE
o not adjusted for transaction cost
o adjusted for transport costs.
o FAIR VALUE = Market Price –
Transport Cost – if principal market
is determined.
o TRANSACTION COST Level 1 Inputs Definition
CHARACTERISTICS: quoted prices, active market,
Characteris Meaning identical assets, measurement date
tic Description Frequent, high-volume transaction
Definition Cost to sell asset or transfer liability Active Market takes place, ongoing pricing

Criteria Essential, direct costs of the transaction Most reliable fair value, no
Quoted price adjustment (usually)
Similarity Similar to cost to sell
If a current market price isn't available or doesn't
Excludes transport cost (reduces market accurately reflect the asset's value due to market
price if location is part character of inactivity or recent events, the price should be
Exclusion asset – cost to transfer asset to market) adjusted to better represent its fair value.

Level 2 Input – If level 1 isn’t available.

 IF NOT, THEN MOST ADVANTAGEOUS
Quoted prices for similar assets or liabilities in
MARKET: maximizes the amount of asset 1 active markets
or liabilities – mataas ang offer sa asset or liab na ‘yon
Quoted prices for similar assets or liabilities in
 CHARACTERISTIC of the MOST 2 markets that are not active
ADVANTEGOUS MARKET: Interest rates and yield curves, volatilities,
prepayment speeds, loss severities, credit risks, and
Maximizing Amount Minimizing Amount Paid 3 default rates - cost
Criteria Received (Asset) (Liability)
Sell asset for highest net Transfer liability for lowest net 4 derived from correlation with other observable data
Objective proceeds cost
INACTIVE MARKET:
Market price - transaction costs Market price + transaction
Calculation - transport costs costs + transport costs  Low trading activity (insufficient volume or
frequency)
Choose market with highest Choose market with lowest net
Decision net proceeds cost  Outdated or unreliable prices
 Prices fluctuate wildly and inconsistently
 Limited public information available about the
 VALUATION TECHNIQUES asset
 fluctuation in fair values.
 Investment in equity securities measured at
Level 3 Inputs – If Level 1 and 2 isn’t available. FVOIC
Observability Unobservable inputs o Profit realized from long-term appreciation in fair
value; or
Reflects management's own o From dividends
Source assumptions  Investment in debt securities mandatorily
Development May be developed using expected cash measured at FVOIC
Method flow and PV techniques o Profit realized from interest income and/or fair
value changes.
 Investment in debt securities measured at
SUBSEQUENT MEASUREMENT Amortized Cost
a. Amortized Cost o Profit from interest income
 Investment property
b. FVOCI
Security Measureme Primary Profit
c. FVPL
Classification nt Source
Held for Short-term fluctuation
GAIN OR LOSS Trading FVTPL in fair values
Investment in Long-term
Feature FVPL FVOCI - Mandatory FVOCI - Election Equity appreciation in fair
Initial Securities FVOIC value or dividends
Measureme Fair Value + Transaction Fair Value +
nt Fair Value Cost Transaction Cost Investment in Interest income and/or
Debt Securities FVOIC fair value changes
WITH RECYCLING: WITHOUT
Recognized in Other RECYCLING: Investment in Amortized
Recognized Comprehensive Income Recognized in Other
Gains and in Profit or (except impairment, Comprehensive Debt Securities Cost Interest income
Losses Loss foreign exchange) Income
Investment Fair Value Rental income, capital
Cumulative gain/loss Property Model appreciation
reclassified to Profit Cumulative gain/loss
Derecogniti or Loss (recycling) not reclassified to TO SECURE BENEFICIAL RELATIONSHIP
on N/A with offset to OCI Profit or Loss
Interest
WITH ANOTHER ENTITY
Income Investment Ownership
Dividend Recognized in Profit or Loss Type Level Degree of Influence
Income
Power to participate in
Investment financial and operating
Amortized Cost – FV changes aren’t in Joint Significant policy decisions, but no
recognized. Associates Influence control
Power to govern financial
Investment and operating policies to
in obtain benefits from
Subsidiary Control activities
Contractual agreement to
Investment share control, requiring
in Joint Joint unanimous consent for
Venture Control relevant decisions

PURPOSE OF MEETING BUSINESS

REQUIREMENTS
Fund Type Purpose
To accumulate funds for the
redemption of bonds at
Bond Sinking Fund maturity.
To accumulate funds for the
Preference Share redemption of preference
Redemption Fund shares.
To accumulate funds for replacing
Asset Replacement assets when they wear out or
Fund become obsolete.
To accumulate funds for future
Business Expansion business expansion or
Fund acquisition.

SERVE AS PROTECTION FROM POSSIBLE

LOSS
Type of Reserve/Instrument Purpose
INVESTMENTS – Different meanings. Contingency or insurance Disaster buffer, loss
Ta. TO EARN PROFIT: fund protection
Held for trading securities
o Profit is realized primarily from short-term Cash surrender value on Key employee death
 life insurance benefit
Financial risk
Certain derivatives management

FINANCIAL ASSETS MEASURED AT FVPL

INVESTMENT IN EQUITY SECURITIES
MEASURED AT FVOCI