AC 1101-FINANCIAL

ASSETS
 BASIC CONCEPTS
 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.
 Financial asset – is any asset that is cash, an equity instrument of another entity, a
contractual right to receive cash or another financial asset from another entity under
conditions that are potentially favorable to the entity, or a contract that will or may be
settled in the entity’s own equity instruments.
 Equity instrument – is any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.
 Examples of financial assets and financial liabilities are: (a) currency (cash) is a financial
asset because it represents the medium of exchange; (b) cash deposit with a banks is a
financial asset because it represent the contractual right of the depositor to obtain cash from
the institution or draw a check or similar instrument against the balance in favor of a creditor
in payment of a financial liability; (c) contractual rights to receive cash in the future such as
trade accounts receivable, note receivable, loan receivable, bond receivable, etc.; (d)
contractual obligation to deliver cash in the future such as accounts payable, notes payable,
loan payable, etc.
 Trade receivables – represent what customers owe a business for providing goods
or services, also known as accounts receivable.
 Loans receivable – represent the amount of money that has been lent out by an
entity and is expected to be returned by the borrowers. This kind of financial assets
generate interest income and principal is expected to be repaid in the future.
 Bonds receivable – are receivables arising from an instrument known as a bond.
Bonds are financial instruments where an investor lends money to a company for a
set period of time, in exchange for regular interest payments.
 Examples of equity instruments include non-puttable ordinary shares, some types of
preference shares, warrants or written call options that allow the holder to subscribe
for or purchase a fixed number of non-puttable ordinary shares in the issuing entity
in exchange for a fixed amount of cash or another financial asset. An entity’s
obligation to issue or purchase of its own equity instruments in exchange for affixed
amount of cash or another financial asset in a equity instrument of an entity.
 An entity shall recognize a financial asset in its statement of financial position when,
and only when, the entity becomes party to the contractual provisions of the
instrument. The following are examples of applying the principle as when financial
assets should be recognized:
 a. Unconditional receivables are considered as assets when the entity becomes a
party to the contract and, as a consequence, has a legal right to receive cash.
 b. Assets to be acquired as a result of a firm commitment to purchase or sell goods
or services are generally not recognized until at least one of the parties has
performed under the agreement.
 c. A forward contract that is within the scope of PFRS 9 is recognized as an asset on
the commitment date, instead of on the date on which settlement takes place.
 d. Option contracts that are within the scope of PFRS9 are recognized as assets when
the holder or writer becomes a party to the contract.
 e. Planned future contract, no matter how likely, are not assets and liabilities
because the entity has not become a party to a contract.
 An entity shall classify financial assets as subsequently measured at amortized
cost, fair value through other comprehensive income (FVOCI) or fair value
through profit or loss (FVPL) on the basis of both: (a) the entity’s business
model for managing the financial assets; and (b) the contractual cash flow
characteristics of the financial assets.
 A financial asset shall be measured at amortized cost if both of the following
conditions are meet if both of the following conditions are met: (a) the financial
asset is held within a business whose objective is to hold financial assets in
order to collect contractual cash flows; and (b) the contractual terms of the
financial asset give rise on specific dates to cash flows that are solely payment of
principal and interest on the principal amount outstanding.
 Amortized cost of a financial asset or financial liability – is the amount at
which the financial asset or liability is measured at initial recognition minus principal
repayments, plus or minus the cumulative amortization of any difference between
the initial amount and the maturity amount, and any write-down for impairment or
uncollectability.
 A financial asset shall be measured at fair value through other
comprehensive income (FVOCI) if both of the following conditions are
met: (a) the financial asset is held within the business model whose objective
is achieved by both collecting contractual cash flows and selling
financial assets; and (b) the contractual terms of the financial asset give
rise on specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
 A financial asset shall be measured at fair value through profit or loss
(FVPL) unless it is measured at amortized cost or at fair value through other
comprehensive income. Stated differently, a financial asset can only be
measured at FVPL if it does not meet the conditions for the amortized cost or
the FVOCI classification.
 An entity may make an irrevocable election at initial recognition for particular
investments in equity instruments that would otherwise be measured at FVPL
to present subsequent changes in FVOCI.
 MEASUREMENT (Initial measurement)
 An entity shall initially measure a financial asset at its fair value plus transaction costs
that are directly attributable to the acquisition or issue of the financial asset. However,
in the case of a financial asset at FVPL, it is to be initially measured at fair value but
transaction costs will not be considered.
 The fair value of a financial instrument at initial recognition is normally the transaction
price and is actually the best evidence of such fair value. However, if part of the
consideration given or received is for something other than the financial instrument, an
entity shall measure the fair value of the financial instrument.
 If the entity determines that the fair value at initial recognition differs from the
transaction price, the entity shall account for that instrument at that date as follows:
(a) at fair value measurement required by PFRS 9, if that fair value is evidenced by a
quoted price in an active market for an identical asset or liability or based on an
evaluation technique that uses only data from observable markets; (b) in all other
cases, still a the fair value measurement required by PFRS 9 but adjusted to defer the
difference between the fair value at initial recognition and the transaction price.
 Subsequent measurement
 An entity shall, after initial recognition, measure a financial asset at: (a) amortized cost,
(b) fair value through other comprehensive income (FVOCI); or (c) fair value
through profit or loss.
 Based on the standard, financial assets are to be initially measured at fair value. For
Accounts Receivables, its fair value is usually the transaction price. Subsequently, the
amortized cost for Accounts Receivable is its net realizable value. Net realizable value
of accounts receivable is the amount of cash expected to be collected or the estimated
recoverable amount which can be determined by deducting allowances for sales return,
sales discount, doubtful accounts and freight charge from the gross accounts receivable.
 Loans Receivable are to be initially measured at its fair value plus transaction costs that
are directly attributable to the acquisition or issue of the financial asset. Its fair value will
normally be equivalent to the transaction price or the amount of loan granted. Loans
receivable are to be subsequently measured at amortized cost using the effective interest
method which will take into account principal repayments, amortization of any difference
between the initial carrying amount and the principal maturity amount and any
impairment.
 Effective interest method – is a method of calculating the amortized cost of the
financial instrument and of allocating the interest income or interest expense over
the relevant period.
 DERECOGNITION
 Derecognition – is the removal of a previously recognized asset or liability from an
entity’s statement of financial position. An entity shall derecognize a financial asset
when, and only when: (a) the contractual right to the cash flows from the financial
asset expires, or (b) it transfers the financial asset and the transfer qualifies for
derecognition.
 A financial asset is considered transferred so as to warrant derecognition under only
two situations: First, an entity is considered to have transferred a financial asset if it
transfers the contractual rights to receive the cash flows of the financial asset;
Second, is when, even though it enters in a transaction where it retains the
contractual rights to receive the cash flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one or more recipient in a particular
type of arrangement.
 On derecognition of a financial asset in its entirety, the difference between the carrying
amount (measured at the date of derecognition) and the consideration received (including
any new asset obtained less any new liability assumed) shall be recognized in profit and
loss.
 RECLASSIFICATION
 An entity shall reclassify all affected financial assets when, and only when an entity
changes its business model for managing financial assets. However, an entity shall not
reclassify any financial liability.
 If an entity reclassifies financial asset, it shall apply the reclassification prospectively
from the reclassification date. The entity shall not restate any previously recognized gains,
losses (including impairment gains or losses) or interest.
 From: Amortized cost; To: Fair value through profit or loss. If an entity reclassifies a
financial asset out of the amortized cost measurement category and into the fair value
through profit or loss measurement category, its fair value is measured at the
reclassification date. Any gain or loss arising from a difference between the previously
amortized cost of the financial asset and fair value is recognized in profit or loss.
 From: Fair value through profit or loss; To: Amortized cost. If an entity
reclassifies a financial asset out of the fair value through profit or loss measurement
category and into the amortized cost measurement category, its fair value at the
reclassification date becomes its new gross carrying amount.
 From: Amortized cost; To: Fair value through other comprehensive income. If
an entity reclassifies a financial asset out of the amortized cost measurement category
and into the FVOCI measurement category, its fair value is measured at the
reclassification date. Any gain or loss arising from a difference between the previously
amortized cost of the financial asset and fair value is recognized in OCI. The effective
interest rate and the measurement of expected credit losses are not adjusted as a
result of the reclassification.
 From: FVOCI; To: Amortized cost. If an entity reclassifies a financial asset out of the
FVOCI measurement category and into the amortized cost measurement category, the
financial asset is reclassified at its fair value at the reclassification date. However, the
cumulative gain or loss previously recognized in OCI is removed from equity and
adjusted against the fair value of the financial asset at the reclassification date. This
adjustment affect OCI does not affect profit or loss.
 From: FVPL; To: FVOCI. If an entity reclassifies financial asset out of the FVPL
measurement category and into the FVOCI measurement category, the financial
asset continues to be measured at fair value.
 From: FVOCI; To: FVPL. If an entity reclassifies a financial asset out of the FVOCI
measurement category and into the FVPL measurement category, the financial
asset continues to be measured at fair value. The cumulative gain or loss previously
recognized in OCI is reclassified from equity to profit or loss as a reclassification
adjustment at the reclassification date.
 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.
 GAIN AND LOSSES
 A gain or loss on a financial asset or financial liability that is measured at fair value
shall be recognized in profit or loss unless: (a) it is part of a hedging relationship; (b)
it is an investment in an equity instrument; (c) it is a financial liability designated as
at FVPL; or (d) it is a financial asset measured at FVOCI.
 A gain or loss on a financial asset measured at FVOCI shall be recognized in
other comprehensive income until the financial asset is derecognized or
reclassified. However, impairment gain or losses and foreign exchange gains and
losses on such asset shall be presented in profit or loss.
 When a financial asset measured at FVOCI is derecognized, the cumulative
gain or loss previously recognized in OCI is reclassified from equity to profit or
loss as a reclassification adjustment.
 If the financial asset is reclassified out of the FVOCI measurement category,
the entity shall account for the cumulative gain or loss that was previously
recognized in OCI. Interest calculated using the effective interest method is
recognized in profit or loss.
 Dividends are recognized in profit or loss only when: (a) the entity’s right to
receive payment of dividend is established; (b) it is probable that the economic
benefits associated with the dividend will flow to the entity; and (c) the amount
of the dividend can be measured reliably.
 IMPAIRMENT
 The impairment requirements under PFRS 9 are based on a forward–looking model that is
applied to all financial instruments that are subject to impairment accounting.
 The objective of the impairment requirements is to recognize lifetime expected credit losses
for all financial instruments for which there have been significant increases in credit risk
since initial recognition. As such, PFRS 9 provides that at each reporting date, an entity shall
measure the loss allowance for a financial instrument at an amount equal to the lifetime
expected credit losses if the credit risk on that financial instrument has increased
significantly since initial recognition.
 What class of financial assets shall the impairment requirements of PFRS 9 be
applied? An entity shall apply the impairment requirements provided in PFRS 9 to financial
assets that are measured at amortized cost and to financial assets that are measured at
FVOCI.
 An entity shall recognize a loss allowance for expected credit losses on a financial asset that
is measured at amortized cost or at FVOCI, a lease receivable, a contract asset or a loan
commitment and a financial guarantee contract to which the impairment requirements
apply.
 In applying the impairment requirements for the recognition and measurements of a loss
allowance for financial assets that are measured at FVOCI, the loss allowance shall be
recognized in OCI and shall not reduce the carrying amount of the financial asset in the
statement of financial position.
 How should the loss allowance be determined or estimated? If at the reporting
date, the credit risk on a financial instrument has not increased significantly since initial
recognition, an entity shall measure the loss allowance for that financial instrument at an
amount equal to 12-month expected credit losses and an entity shall, at each reporting
date, measure the allowance for a financial instrument at an amount equal to the lifetime
expected credit losses if the credit risk on that financial instrument has increased
significantly since initial recognition. But if credit risk is no longer significantly greater, the
entity shall measure the loss allowance at an amount equal to 12-month expected credit
losses at the current reporting date.
 When can entities directly write-off from the carrying amount of a financial
asset? An entity shall directly reduce the gross carrying amount of a financial asset when
the entity has no reasonable expectations of recovering a financial asset in its entirety or a
portion thereof. A write-off constitutes a derecognition event.