FAR 3 : Financial Investments Overview

Financial Asset at Fair Value

Investments
● assets held by an entity for the accretion of wealth through distribution such as interest royalties, dividends and rentals, for capital
appreciation or for other benefits to the investing entity such those obtained through trading relationships
● assets not directly identified with the operating activities of an entity and occupy only an auxiliary relationship to the central revenue
producing activities of the entity

Investments are held for diverse reasons such as the following:

a. For accretion of wealth or regular income through interest dividends, royalties and rentals
b. For capital appreciation as in the case of investments in land and real estate held for appreciation
c. For ownership control or significant influence as in the case of investments in subsidiaries and associates
d. For meeting business requirements as in the case of sinking fund, preference redemption fund and plant expansion fund
e. For protection as in the case of interest in life insurance contract in the form of cash surrender value

Specifically, investments include the following:

1. Trading securities or financial assets at fair value through profit or loss (FA-FVPL)
2. Financial asset at fair value through other comprehensive income (FA-FVOCI)
3. Non Trading equity investment
4. Investment in bonds or financial asset at amortized cost
5. Investment in associate
6. Investment in subsidiary
7. Investment property
8. Investment in fund
9. Investment in joint venture
10. Cash surrender value of life insurance

Classification of Investments in the Financial Statement

1. Current Asset - investments that are by their very nature readily realizable and are intended to be held for not more than one year
2. Noncurrent Asset - investments that are not expected to be realized within twelve months after the end of the reporting period

Financial asset is any asset that is:

a. Cash
b. A contractual right to receive cash or another financial asset from another entity.
c . A contractual right to exchange financial instruments with another entity under conditions that are potentially favorable.
d. An equity instrument of another entity

Examples of Financial assets

a. Cash or currency
b. A deposit of cash with a bank
c. Trade accounts receivable, notes receivable, loans receivable and bond investment
d. An option to purchase shares at less than market price
e. Investment in shares, such as trading and non trading equity investment, investment in associate and investment in subsidiary

Examples of Nonfinancial assets

a. Gold bullion deposited in bank
b. Intangible assets
c. Physical assets, such as inventory and property, plant and equipment
d. Prepaid expenses for which the future economic benefit is the receipt of goods or services rather than the right to receive cash or another financial
asset
e. Right of use asset or leased asset

Classification of Financial Assets

1. Financial assets at fair value through profit or loss - include both equity securities and debt securities.
2. Financial assets at fair value through other comprehensive income - include both equity securities and debt securities
3. Financial assets at amortized-cost - include only debt securities.

Business Models used as basis for classification of Financial Assets

a. To realize fair value changes.
b. To collect contractual cash flows
c. To collect contractual cash flows and sell the investment

Equity Security - any instrument representing ownership shares and right, warrants or options to acquire or dispose of ownership shares at fixed or
determinable price. In simple definition an ownership interest in an entity.
Includes:
a. Ordinary Shares
b. Preference Shares
c. Rights or Options
Shareholders - owners of equity securities
Shares - ownership interest or right of a shareholder in an entity
Share Certificate - evidence for owning shares of another entity

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 FAR 3 : Financial Investments Overview

Does not include:

a. Redeemable preference shares
b. Treasury Shares
c. Convertible Debt

Debt Security - any security that represents a creditor relationship with an entity.It has a maturity date and a maturity value.
Examples of debt securities include the following:
a. Corporate bonds
b. BSP treasury bills
c. Government securities
d. Commercial papers
e. Preference shares with mandatory redemption date or are redeemable at the option of the holder

Initial Measurement of Financial Assets

> General Measurement: Fair Value + Transaction Cost
> Except FVPL: Fair Value
> Transaction costs incurred in acquiring trading securities are considered outright expense
Not considered transaction costs:
a. Debt premiums or discounts
b. Financing costs
c. Internal or administrative or holding costs

Subsequent Measurement
> Fair Value through Profit and Loss (FVPL)
> Fair Value through Other Comprehensive Income (FVOCI)
> Amortized Cost

Financial Assets at Fair Value through Profit or Loss

1. Financial assets held for trading or trading securities - measured at FVPL by requirement (it is required by the standard)
2. All Other investments in Quotes Equity Instruments - measured at FVPL by consequence
3. Financial Assets that are irrevocably designated on initial recognition as at fair value through profit of loss - measured at FVPL by irrevocable
decision by option
4. All debt investments that do not satisfy the requirements for measurement at amortized cost and at FVOCI - measured at FVPL by default

Financial Asset held for Trading (Debt and Equity Securities)

1. If acquired with the purpose of selling or repurchasing it in the near term
2. It is part of a portfolio that shows evidence of a recent actual pattern of short-term profit making
3. It is a derivative but not a derivative hedging instrument

Equity Investment at Fair Value through Other Comprehensive Income (FVOCI)

1. Held to collect contractual cash flows and to sell the financial asset - FVPL through irrevocable decision or designation

Debt Investment at Amortized Cost

A debt investment shall be measured at amortized cost if it meets BOTH conditions:
1. The business model is to hold the financial asset to collect contractual cash flows on specified date
2. The contractual cash flows are solely payments of principal and interest
> Simple Definition - A debt investment is to be measured at amortized cost when the entity holds the investment to receive contractual cash flows
and that the cash flows received are principal and interest payments only

Debt Investment at Fair Value through OCI

A debt investment shall be measured at fair value through OCI if BOTH conditions are met:
1. The business model is achieved by both collecting contractual cash flows and by selling the financial asset
2. The contractual cash flows are solely payments of principal and interest
> Simple Definition - A debt investment is to be measured at FVOCI when it is held by the entity to receive contractual cash flows provided that the
cash flows received are interest and principal payments and that the entity intends to sell the debt investment
> During the derecognition of the asset, the cumulative gain or loss in the debt investment is to be reclassified to profit or loss.

Summary of Measurement Rules:

A. Equity Investments
1. Trading Securities - FVPL
2. Not for Trading Securities - FVPL rule
3. Not for Trading Securities - FVOCI
4. All other investments in quoted equity instruments - FVPL
5. Investments in unquoted equity instruments - at cost
6. Investments of 20% to 50% - equity method of accounting
7. Investments of more than 50% - consolidation method

B. Debt Investments

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 FAR 3 : Financial Investments Overview
1. Trading Securities - FVPL
2. Held for collection of contractual cash flows - at amortized cost
3. Held for collection of contractual cash flows - FVPL by irrevocable designation or Fair value options
4. Held for collection of contractual cash flows and for sale of financial assets - FVOCI
5. Held for collection of contractual cash flows and for sale of financial assets - FVPL by irrevocable designation or Fair value options

Fair Value - the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In simple
definition - the price agreed upon by a buyer and a seller in an arm's length or orderly transaction. The buyer and seller must not be forced or not
compelled to enter into the transaction

Evidence of Fair Value Hierarchy:

1. Quoted price of identical asset in an active market
2. Quoted price of similar asset in an active market
3. Quotes price of identical and similar asset in an active market

Active Market - a market in which transactions take place with sufficient regularity and volume to provide pricing information on an ongoing basis

Quoted price
1. Quoted price - the fair value of securities in the securities market
2. Quotes price in reference to a share or equity securities - pesos per share
3. Quotes price in bond or debt security - percent of the face amount of the bond

Gain or Loss - Financial Asset at Fair Value

> Gain or loss in securities held at FVPL are presented in profit or loss, except:
1. lf the investment is a non trading security and it has been irrevocably elected that the unrealized gain or loss is to be presented in other
comprehensive income (OCI)
2. When the debt investment is measured at fair value through other comprehensive income (OCI)

Gain or Loss - Financial Asset at Amortized Cost

> Unrealized gain or loss in financial assets measured at amortized cost is not recognized because these financial assets are not reported it at fair
value
> The gain or loss in financial assets measured at amortized cost shall be classified to FVPL when it is sold or derecognized

Impairment - Equity Investments at Fair Value

>It is not necessary to test equity investments measured through FVPL or FVOCI for impairment

Impairment - Debt Investments

> The entity shall recognize expected credit loss in case of impairment
Expected credit loss is an estimate of credit loss over the life of the financial instrument
Credit Loss - present value of all cash shortfalls
Impairment Loss = Carrying Amount less Present Value of Estimated Future Cash Flows discounted at the original effective rate

Reference: Valix, C.T., Peralta, J.F. & Valix, C.A.M. (2022). Intermediate Accounting (Volume 1). GIC Enterprises & Co., Inc.

PROBLEMS
Problem 1 (ACP)

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 FAR 3 : Financial Investments Overview
Skyline Company equity provided the following with respect to marketable equity securities held as trading.

1. The entity carried the following securities on December 31, 2022:

Cost Market
A ordinary - 4,000 shares 330,000 300,000
B ordinary - 1,000 shares 200,000 160,000
C preference : 2,000 shares 300,000 310,000
830,000 770,000
2. On June 30, 2023, the entity sold all the B ordinary shares for P140,000.
3. On December 31, 2023, the securities are quoted as follows
A Ordinary 80
C Preference 180

Required:
Prepare journal entries to record the transactions

Problem 2 (IAA)
On January 1, 2022, Spark Company purchased the following trading securities:
Fair value
Cost December 31, 2022
Aura Company ordinary 600,000 650,000
Bora Company preference 350,000 200,000
Cara Company bonds 500,000 400,000
On October 1, 2023, the entity sold one-half of Aura Company ordinary for P375,000
On December 31, 2023, the fair value of the remaining securities was P800,000.
Required:
Prepare journal entries to record the transactions

Problem 3 (IAA)
Splendid Company purchased equity securities during 2022 to be held as investments. The cost and market value of the investments are:

December 31, 2022 Cost Market

Trading securities 2,000,000 2,500,000
Securities not held for trading 3,000,000 2,900,000
December 31, 2023
Trading securities 2,000,000 2,200,000
Securities not held for trading 3,000,000 2,300,000
The securities not held for trading are measured at fair value through other comprehensive income by irrevocable election.
Required:
Prepare journal entries for 2022 and 2023

Problem 4 (IAA)
Transitory Company acquired the following equitý securities:
December 31, 2022 Cost Market
Moon Company 200,000 120,000
Star Company 400,000 280,000
Sun Company 600,000 650,000
December 31, 2023
Moon Company 200,000 220,000
Star Company 400,000 300,000
Sun Company 600,000 580,000

The equity securities do not qualify as held for trading.

The entity has elected irrevocably to present changes in fair value in other comprehensive income.
Required:
Prepare journal entries on December 31, 2022 and December 31, 2023.

Problem 5 (IAA)
Abyss Company reported the following accounts in the statement of financial position January 1, accounts 2022:
Financial asset-FVOCI 4,000,000
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 FAR 3 : Financial Investments Overview
Market adjustment for unrealized loss (500,000)
Market Value 3,500,000

An analysis of the investment portfolio revealed the following on December 31, 2022.
December 31, 2022. Cost Market
XYZ ordinary share 1,000,000 1,200,000
ABC ordinary share 2,500,000 2,000,000
RST preference share 500,000 200,000
4,000,000 3,400,000

On July 1, 2023, the ABC ordinary share was sold for P2,100,000. On December 31, 2023, the remaining investments have the following market
value:
XYZ ordinary share 1,000,000
RST preference share 150,000
Required:
Prepare journal entries for 2022 and 2023

Problem 6 (AA)
During 2022, the first year of operations, Beneath Company purchased the following equity securities:
Market value Market value
Cost December 31, 2022 December 31, 2023
Security One 2,200,000 1, 400,000 900,000
Security Two 700,000 1,000,000 1,100,000
Security Three 1,600,000 1,500,000 1,600,000
Security Four 2,000,000 2,500,000 1,200,000

Security One and Security Two are held for trading and Security Three and Security Four are measured as at fair value through other comprehensive
income by election.
During 2022, the entity sold one-half of Security One for P1,000,000, and one-half of Security Four for P1,300,000
Required:
Prepare journal entries for 2022 and 2023.

Problem 7 (IFRS)
At the beginning of current year, Alexis Company purchased marketable equity securities to be held as “trading” for P5,000,000. The entity also paid
transaction costs amounting to P200,000. The securities had a market value of P5,500,000 at year-end and the transaction cost that would be incurred
on sale is estimated at P100,000. No securities were sold during the current year.
What amount of unrealized gain or loss on these securities should be reported in the income statement for the current year?
a. 500,000 gain
b. 500,000 loss
c. 800,000 gain
d. 400,000 gain

Problem 8 (AICPA Adapted)

During 2022, Garr Company purchased marketable equity securities as a trading investment. For the year ended December 31, 2022, the entity
recognized an unrealized loss of P200,000.
There were no security transactions during 2023. The entity provided the following information on December 31, 2023:
Security Cost Market value
A 2,450,000 2,300,000
B 1,800,000 2,700,000
4,250,000 5,000,000
In the 2023 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of P950,000
b. Unrealized loss of P950,000
c. Unrealized loss of P750,000
d. Unrealized gain of P750,000

Problem 9 (AICPA Adapted)

During 2022, Leopard Company purchased marketable equity securities for P1,850,000 to be held as trading investment.
In 2022, the entity appropriately reported an unrealized gain of P250,000 in the income statement.

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 FAR 3 : Financial Investments Overview
There was no change during 2023 in the composition of the portfolio of trading securities. Pertinent data on December 31, 2023 are:
Security Cost Market value
A 600,000 900,000
B 450,000 400,000
C 800,000 1,200,000
What amount of unrealized on these securities should be included in the 2023 income statement?i
a. 400,000
b. 650,000
c. 900,000
d. 700,000

Problem 10 (AICPA Adapted)

During 2022, Latvia Company purchased trading securities with the following cost and market value on December 31, 2022:
Security Cost Market value
A- 1,000 shares 200,000 300,000
B-10,000 shares 1,700,000 1,600,000
C-20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000
The entity sold 10,000 shares of Security B on January 15, 2023 for P150 per share.
What amount should be reported as loss on sale of trading investment in 2023?
a. 200,000 gain
b. 200, 000 loss
c. 100,000 gain
d. 100,000 Ioss

Problem 11 (IFRS)
At the beginning of the current year, Carmela Company acquired a Non trading equity instrument for P4,000,000. The transaction cost incurred
amounted to P700,000.
The equity instrument is irrevocably designated as a financial asset at fair value through other comprehensive.
The fair value of the instrument was P5,500,000 at year-end and the transaction cost that would be incurred on the sale of the investment is estimated
at P600,000.
What amount of gain should be recognized in other income for the current year?
a. 200,000
b. 900,000
c. 800,000
d. 0

Problem 12 (IFRS)
Judicious Company acquired an equity investment a number of years ago for P3,000,000 and classified it as at fair value through other
comprehensive income.
On December 31, 2022, the cumulative loss recognized in other comprehensive income was P400,000 and the carrying amount of the investment was
P2,600,000.
On December 31, 2023, the issuer of the equity instrument was in severe financial difficulty and the fair value of the equity
investment had fallen to P1,200,000.
What cumulative amount of unrealized loss should be reported as a component of other comprehensive income in the statement of changes in equity
for the year ended December 31, 2023?
a. 1,400,000
b. 1,800,000
c. 1,000,000
d. 0

Problem 13 (AICPA Adapted)

During 2022, Faye Company purchased marketable equity securities to be measured at fair value through other comprehensive income
On December 31, 2022, the balance in the unrealized loss on these securities was P100,000.
There were no security transactions during 2023. Pertinent data on December 3 1, 2023 are:
Security Cost Market value
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 FAR 3 : Financial Investments Overview
X 2,100,000 1,600,000
Y 1,850,000 2,00,000
Z 1,050,000 900,000

In the statement of changes in equity for 2023, what amount should be included as cumulative unrealized loss as component
of other comprehensive income?
a. 500,000
b. 300,000
c. 200,000
d. 400,000

Problem 14 (AICPA Adapted)

At the beginning of the current year, Marigold Company began operations. The following information related to the portfolio
of equity securities at year-end:
Trading Non Trading
Aggregate cost 4,000,000 6,000,000
Aggregate fair value 3,700,000 5,500,000
Aggregate lower of cost or market 3,500,000 5,300,000
value applied to each security in the portfolio

The non trading investments are measured at fair value through other comprehensive income by irrevocable election.
What amount should be reported as unrealized loss as a component of other comprehensive income in the statement of comprehensive income for the
current year?
a. 300,000
b. 800,000
c. 500,000
d. 700,000

Problem 15 (AICPA Adapted)

Baguio Company provided the following information at year-end regarding non trading equity investments:
Aggregate cost 1,700,000
Unrealized gains 40,000
Unrealized losses 260,000
Net realized gains during the current year 300,000

The non trading equity investments are measured at fair value through other comprehensive income by irrevocable election
At the beginning of the current year, the entity reported an unrealized loss of P15,000 to reduce the investments to market on a portfolio basis.
In the year-end statement of changes in equity, what amount of unrealized loss should be reported as a component of other comprehensive income?
a. 260,000
b. 220,000
c. 205,000
d. 0

Problem 16 (AICPA Adapted)

During 2022, Strawberry Company purchased marketable equity securities as short-term investment to be measured at fair value
through other comprehensive income. The cost and market value on December 31, 2022 were:
Security Cost Market value
A 1,000 shares 300,000 350,000
B 10,000 shares 1,700,000 1,550,000
C 20,000 shares 3,150,000 2,950,000

The entity sold 10,000 shares of B on January 5, 2023 for P1,450,000. What total amount should be charged to retained earnings as a result of the
sale of equity securities in 2023?
a. 200,000
b. 100,000
c. 250,000
d. 150,000

Problem 17 (AICPA Adapted)

On January 1, 2022. Jerome Company purchased non trading equity investments which are irrevocably designated at FVOCI:

Purchase Transaction Market value

price cost December 31, 2022
Security A 1,000,000 100,000 1,500,000

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 FAR 3 : Financial Investments Overview
Security B 2,000,0000 200,000 2,400,000
Security C 4,000,000 400,000 4,700,000

On July 1, 2023, the entity sold Security C for P5,200,000. What amount of gain on sale should be recognized directly in retained earnings?
a. 800, 000
b. 500,000
c. 300,000
d. 100,000

Problem 18 (IAA)
Lagoon Company purchased the following equity investments during 2022:
Classification Cost Market value
December 31, 2022
Security A Trading 900,000 1,000,000
Security B Trading 1,000,000 1,600,000

On July 31, 2023, the entity sold all of the shares of Security B for P1,100,000. On December 31, 2023, the shares of Security A had a market value
of P600,000. No other activity occurred during 2023 in relation to the trading security portfolio.
What total loss on the trading investments should be reported in the income statement for 2023?
a. 500,000
b. 400,000
c. 900,000
d. 100,000

Multiple choice (IFRS)

1. A debt investment is measured at amortized cost
a. By irrevocable election
b. When the debt investment is managed and evaluated on a document risk-management strategy
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that are solely payments of principal and interest

2. The irrevocable election to present changes in fair value in other comprehensive income is applicable only to
a. Investment in equity instrument not held for trading
b. Investment in equity instrument held for trading
c. Financial asset measured at amortized cost
d. Financial asset measured at fair value

3. Equity investments irrevocably accounted for at FVOCI are

a. Non Trading investments of less than 20%.
b. Trading investments of less than 20%
c. Investments of between 20% and 50%
d. Investments of more than 50%

4. A debt investment shall be measured at fair value through other comprehensive income
a. When the debt investment is held for trading.
b. When the debt investment is not held for trading
c. By irrevocable designation
d. When the business model is to collect contractual cash flows and also to sell the financial asset

5. Which is not a category of financial assets?

a. Financial assets at fair value through profit or loss
b. Financial assets at fair value through other comprehensive income
c. Financial assets at amortized cost
d. Financial assets held for sale

6. Entities are required to measure financial asset based on all of the following, except
a. The business model for managing financial asset
b. Whether the financial asset is a debt or an equity investment.
c. The contractual cash flow characteristics of the financial asset.
d. All of the choices are correct.

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 FAR 3 : Financial Investments Overview
7. Debt investments that meet the business model and contractual cash flow tests are reported at
a. Net realizable value
b. Fair value
c. Amortized cost
d. The lower of amortized cost and fair value

8. Debt investments not held for collection are measured and reported at
a. Amortized cost
b. Fair value
c. The lower of amortized cost and fair value
d. Net realizable value

9. Debt investments at amortized cost are

a. Managed and evaluated based on a documented risk management strategy
b. Trading debt investments.
c. Held for collection debt investments
d. All of these are correct

10. Impairments of debt investments at amortized cost are

a. Based on discounted contractual cash flows
b. Recognized as a component of other comprehensive income.
c. Based òn fair value for non trading investments.
d. Evaluated at each reporting date