Investments (FAR)

Investments
Work of Bestnookit and Tiorosela
Enjoy
Financial asset
Any asset that is cash, has contractual right to receive cash or another financial asset from
another entity or contractual right to exchange financial instrument with another entity that is
potentially favorable (financial liabilities – unfavorable), or an equity instrument of another
entity.
The initial recognition is measured at fair value
Examples of investment
1. Trading securities or financial asset at FVPL
2. Financial asset at FVOCI
3. Investment in nontrading securities
4. Investment in bonds or financial asset at AC
5. Investment in associate (20%-50% interest or expressing significance influence to issuing
entity)
6. Investment in subsidiary (AFAR subject)
7. Investment property (basically a property built for unknown purpose)
8. Investment in fund (sinking fund)
9. Investment in joint venture (AFAR subject)
Equity investments
FVOCI or FVPL
1. Held for trading – FVPL
2. Not held for trading – FVPL
3. Not held for trading – FVOCI by irrevocable election
4. All quoted equity instrument – FVPL
5. All unquoted equity instrument – at cost
6. 20%-50% interest or exercising significance influence – equity method
7. More than 50% or exercising control – consolidation method
Debt investments
1. Held for trading – FVPL
2. Held for collection of contractual cash flows – AC
3. Held for collection of contractual cash flow – FVPL by irrevocable designation
4. Held for collection of contractual cash flows and for sale – FVOCI
1|Bestnookit & Tiorosela

5. Held for collection of contractual cash flows and for sale – FVPL by irrevocable
designation
Technique
Identify first if the financial asset is a debt or an equity instrument, then if problem says
“irrevocable”, it automatically signifies as financial asset at FVOCI if equity and at FVPL if debt.
FVPL
- On initial recognition, transaction cost that is related to acquisition of financial asset is
expensed outright
- The gain or loss recognized in the differences of carrying amounts and fair value is
recognized as other expense in income statement, the profit or loss statement
1. Trading, or equity instrument not held for trade, thus, financial asset – FVPL
- The purpose is selling it in a short-term period
- Short-term profit taking
- Derivative, not designated as hedging
- Entry of initial recognition
Trading securities XXX
Expense XXX
Cash XXX
- Entry if fair value is higher than carrying amount
Unrealized gain- FVPL XXX
- Entry if fair value is lower than carrying amount
Unrealized loss- FVPL XXX
- Entry for the sale of investment
if carrying amount is lower than sale price
Cash XXX
Gain on sale of trading securities XXX
If carrying amount is higher than sale price
Cash XXX
Loss on sale of trading securities XXX
2. Trading debt instrument, or debt instrument designate at FVPL (Comprehensive details)
- It may include a receipt of interest at the acquisition
- If the problem says that 10% bonds held for trade with the face amount of 200 is
acquired for 210 which include interest of 10, supposedly it is acquired on June 30,
entry (Purchase price is given, in other words the 210 is the total disbursement)
Trading securities 200

Interest income 10
Cash 210
- If the problem says that 10% bond with face amount of 200 is acquire at 96 plus
accrued interest, the purchase date is June 30, entry (“for” and “at” is different, it
means that the face amount is purchased at 96%, in other words the total
disbursement is not given)
Trading securities 192
Interest income 10
Cash 202
- Receipt of interest
Cash XXX
Interest income XXX
- Sale, problem says 30 face of bonds is sold at 105 plus accrued interest, supposedly
the sale date is October 31
Cash 32.5
Trading securities (3/20*192) 28.8
Interest income (200*4/12*10%) 1
Gain on sale (30*105% - 28.8) 2.7
- Adjustment at the end of the year
Accrued interest receivable XXX
Interest income XXX
- Changes in fair value
Unrealized gain XXX
3. Debt instruments at FVPL by irrevocable designation
- Even if the financial asset is for sale, may be irrevocably designated as at FVPL
- Interest income is based on nominal rate or stated rate
- It recognized the change in fair value
- Entry of initial recognition
Financial asset – FVPL XXX
Expense XXX
Cash XXX
Cash (nominal rate x face) XXX

Interest income XXX
- Entry in change in fair value
Gain from change in fair value XXX
4. Reclassification from AC to FVPL
- Difference between previous carrying amount and fair value is recognized in P/L

-If the amortization happens prior to change in business model, an account must be
made, the entry would be:
Investment in bonds XXX
Interest income XXX
- If upon change in business model, the FV is higher than carrying amount, entry:
Gain on reclassification XXX
- Then, the reclassification is journalized
Financial asset- FVPL XXX
5. Reclassification from FVOCI to FVPL
- Record first any amortization
Interest income XXX
Financial asset – FVOCI XXX
- Record the change in fair value
Unrealized loss – OCI XXX
- Record the reclassification of financial asset
- Finally, record the reclassification of cumulative unrealized loss or gain
Unrealized loss – P/L XXX
Unrealized loss – OCI XXX
FVOCI
-When the equity security is held not to be trade, may be irrevocable elected as
financial asset at FVOCI
- When the debt instrument is collecting contractual cash flow (SPPI) and to be trade
or for sale
- Cost relatable to the acquisition is recognized as part of the cost of asset
1. Equity security
At acquisition
Cash XXX
Change in fair value
Unrealized gain – OCI XXX
At disposal, the difference between carrying amount and sale price is recognized in
retained earnings
Cash XXX

Retained earnings XXX
At disposal, any cumulative unrealized losses or gains is transferred to retained
earnings
Retained earnings XXX
2. Debt instrument
- At acquisition
Cash XXX
Cash XXX
Interest income XXX
- Amortization
Interest income XXX
- Sale
Cash XXX
Gain on sale XXX
Interest income XXX
3. AC to FVOCI
- There can be only adjustment in carrying amount in terms of amortization and not
changes in fair value prior to change in business model, it is so because at AC,
changes in fair value is not recognized
- Record first any amortization
Interest income XXX
- Record the reclassification by crediting the carrying amount to FVOCI
Financial – FVOCI XXX
4. Reclassification FVPL to FVOCI
- The unrealized gain – FVPL is not cumulative in its nature since it is already
recognized and closed in the income statement
- Prior to reclassification, recognized first any change in fair value

Unrealized gain – FVPL XXX
- On the date of reclassification
AC
- Only applies to debt instrument since equity security do not have amortization
- Does not recognized changes in fair value
- The business model is to collect contractual cash flows (SPPI)
1. Debt instrument at AC
- Premium, or effective interest rate is lower than nominal rate, or quoted price is
higher than face value, adjusting entry:
Interest income XXX
Investments in bonds XXX
- Discount, or effective interest rate is higher than nominal rate, or quoted price is
lower than face value, adjusting entry
Interest income XXX
- Acquisition, if bought on interest date
Cash XXX
Cash XXX
Interest income XXX
- Adjustment for accrued interest, when interest payment date differs from end date
of the year
Accrued interest XXX
Interest income XXX
2. FVOCI to AC
- The cumulative gain or loss recognized in OCI is eliminated and adjusted against the
investment value on reclassification date
- Record first amortization and recognize the changes in fair value
Interest income XXX

- Reclassification
Investments in bonds XXX

- Elimination of cumulative gains or losses
Debt investments (Comprehensive)
Method of amortization
1. Straight line method
- Provides equal amount of amortizations
- The acquisition cost is always given in the problem
- Determine the period of bond by identifying the date of bonds and date of maturity
- Divide the total amortization, whether discounts or premiums, by the period of the
bond
Illustration
Bond with face amount of 2,000 is acquired for 1,800 on April 30. The date of bond
is January 1 of same year, interest of 12% is payable semiannually.
Acquisition date
Investment in bonds 1,720
Interest income 80
Cash 1,800
Face value 2,000

Acquisition price -1,720
Discount 280
Supposedly that period of bond is 4 years

280 discount/4 years = 70 per year amortization of discount
Note that for all of the years, the per year amortization is always equal
2. Bond outstanding method
- Applicable to serial bonds
- Serial bond provides for periodical collection of both interest and principal amount
- The effect is that the amortization is decreasing in terms of amount because the
principal amount is also decreasing
Illustration
Bond with face amount of 10,000 is acquired at 105 on April 30. The date of bond is
January 1 of same year, interest of 12% is payable semiannually and principal
payment of 2,000 at the end of year for 5 years
Acquisition date
Investment in bonds 10,500
Interest income 400
Cash 10,900

Face value 10,000
Acquisition price 10,500
Premium 500
Year 1 10,000 10/30 167.67
Year 2 8,000 8/30 133.33
Year 3 6,000 6/30 100
Year 4 4,000 4/30 66.67
Year 5 2,000 2/30 33.33
30,000 500
Note that the amortization decreases as the principal also decreases

3. Effective interest method
- Remember this formula
1 ÷ (1 + 𝑖)𝑛 − 1
𝑃𝑉 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 =
𝑖
𝑃𝑉 𝑜𝑓 1 = 1 ÷ (1 + 𝑖)𝑛
𝑊ℎ𝑒𝑟𝑒
𝑖 = 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑒
𝑛 = 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
- PV of ordinary annuity is for future interest payments, future interest payments =
nominal rate x face amount
- PV of 1 is for the principal, which is actually the face amount
- Provides comparison of interest income and interest received
- Interest received = Nominal rate x Face value
- Interest income = Effective rate x Carrying amount
- Premium amortization decreases the carrying amount and discount amortization
increases the carrying amount, this is based on the mechanics interest income minus
interest received, the result will be added to carrying amount
- Another mechanics, on the basis of premium effective rate is lower than nominal
rate thus the result is that the interest received is always higher than interest
income.
- The principle is that, in the case of premium, it is considered as a loss on the part of
buyer, it may look like that the loss is amortized throughout the life of the bond
Illustration
8% bond with face value of 20,000 is acquired for 18,672. The effective rate is 10%.
Interest will be paid semiannually on June 30 and December 31. The life is 2 years.
Amortization table
Jan 1, Year 1 18,672

Jun30, Year 1 1,600 1,867.2 267.2 18,939.2
Dec31, Year 1 1,600 1,893.92 293.92 19,233.12
Jun 30, Year 2 1,600 1,923.312 323.312 19,556.432
Dec31, Year 2 1,600 1,955.6432 355.6432 20,000
Take note, there is a discrepancy of 87.9248, fret lightly, the purpose is for
illustration
Evidences that you are right
1. Interest received among the periods of payment is equal just like in illustration,
1,600
2. If it is a premium, interest income is lower than interest received
3. The difference between interest income and interest received will result into
positive numbers
4. Interest income is in increasing sequence as the carrying amount is also in
increasing sequence
5. Carrying amount must equal the face value.
Mechanics
Indeed, entity will earn an interest income upon receipt of interest payment,
however, it does not stop there, at the end of the year amortization is journalized.
1. Interest received provides the periodical interest receipts
2. Interest income provides what must be the total interest income earned in one
period from holding of the bond
3. Amortization provides the amount that should be adjusted at the end of the
year, it corrects the amount of income that should be earned during the year.
- Serial bond, other than term bonds
- When it comes to serial bonds, PV of 1 is for the sum of interest collected and the
installment, interest received is based on outstanding value from deduction of
annual collection.
Illustration
8% bonds with face amount of 12,000 is acquired 12,435.68. Effective yield is 6% for
a period of three years. Both interest and three equal annual installments be
collected every end of the year.
Year 1 12,435.68
Year 1 960 746.1408 213.8592 4,000 8221.8208
Year 2 640 493.309248 146.690752 4,000 4075.130048
Year 3 320 244.5078029 75.49219712 4,000 0
Take note, there is a discrepancy of -0.362171712, fret lightly, the purpose is for
illustration
Evidence that you are right

1. All column except principal payment is in decreasing order
2. If it is a discount, interest income is higher than interest received
3. The difference between interest income and interest received will result into
negative numbers
4. From the carrying amount, it should reach zero or at least near zero
Amortization along with changes in fair value
- Applicable to financial asset that is debt on hold to collect contractual cash flows
(SPPI) and for trade
- At FVOCI
Illustration
Face amount of bonds, 100,000
Date of issue and acquisition, January 1 Year 1
Nominal rate, 12%
Effective rate, 8%
Interest payable annually, December 31
Date of maturity, December 31 Year 3
PV of ordinary annuity in 3 period = 2.577096987

PV of 1 in 3 period = 0.793832241
100,000 x 12% x 2.577096987 = 30,925.16385
100,000 x 0.793832241 = 79,383.2241
Present value = 110,308.388
Jan 1 Year 1 110,308.388
Dec 31 Year 1 12,000 8,824.67104 3,175.32896 107,133.059
Dec 31 Year 2 12,000 8,570.644723 3,429.355277 103,703.7037
Dec 31 Year 3 12,000 8,296.296298 3,703.703702 100,000
- Note that even if fair value changes which result to changes in carrying amount,
schedule of amortization is absolute and will not be affected by changes in fair
value
- Acquisition
Financial asset – FVOCI 110,308.388
Cash 110,308.388
- Take note always if the acquisition date is in between interest date
- On Dec 31, Year 1, the entry for amortization and interest received
Cash 12,000
Interest income 12,000
Interest income 3,175.32896

- Supposedly that the bond has quoted price in the market of 105
10 | B e s t n o o k i t & T i o r o s e l a
Fair value 105,000
Carrying amount 107,133.059
Unrealized loss 2,133.059
Unrealized loss – OCI 2,133.059

- On year 2 supposedly the bond is quoted at 120
Cash 12,000

Fair value 120,000

Unrealized gain 18,429.35528

Unrealized gain – OCI 18,429.35528
- On June 30 year 3 the bond was disposed at 110

Fair value 110,000

Unrealized gain 18,429.35528
Gain on disposal 6,577.50338
Cash 116,000
Unrealized gain – OCI 18,429.35528
Gain on disposal 6,577.50338
Equity investment (Comprehensive)
Dividends
1. Cash dividend
- A holder of an equity security who has right to claim dividends when declared will
recognize the dividend as revenue as his right to receive dividends is established
- The right to receive a dividend is established when entity declared a dividend
- Cash dividend does not affect the investment account
- Declaration date
Dividend receivable XXX
Dividend income XXX
- Payment date
Cash XXX
Dividend receivable XXX
- Sale of investment prior to record date
Cash XXX
Investment in shares XXX
Dividend income XXX
Gain on sale (or loss) XXX
2. Dividend in kind
- It includes financial asset such as note receivable or accounts receivable and PPE, as
long as it is noncash asset
- Property received is measured at fair value
- Non-financial asset dividend
Noncash asset XXX
Dividend income XXX
- Financial asset dividend
Illustration
Bestnookit owned 50,000 unquoted shares of Tiorosela accounted under cost
method. Carrying amount of investment is 1,000,000. FV is 12, a shareholder
received 5000 shares from Tiorosela
On perspective of shareholder
Investment in shares 60,000
Dividend income 60,000
3. Liquidating dividend
- Not an income
- Return of investment
Cash XXX
Investment in shares XXX
4. Share dividends
- GR 51765, share dividend is not a matter of right but of consensus
- IAS term, bonus issue
- No entry
- Not an income
- Share dividend of the same class
Format
Shares Cost per share Total cost
Original shares XXX XXX XXX
Dividend shares XXX
XXX XXX XXX
- Share dividend different from those held
Format
Market value Fraction Allocated cost
1 class of shares XXX X/X XXX
1 class of shares XXX X/X XXX
XXX XXX
5. Shares received in lieu of cash dividends
- Dividends are income at fair value of shares received
- In absence of fair value, income is equal to cash dividends that would have been
received
Illustration
Shareholder owns 100 shares costing 10,000, received 10 shares in lieu of cash
dividend of 12 per share. FV is 100
Receipt of 10 shares
In absence of FV
6. Cash received in lieu of share dividends
- As if approach, share dividend is assumed to be received and subsequently sold at
the cash received
- In as if approach, gain or loss may be recognized but not in BIR approach
Illustration
Shareholder owns 100 shares costing 11,000, received 1,000 cash dividends in lieu of
10 shares originally declared as 10% share dividend
As if approach
Cost of 11,000 applies now to 110 shares, 100 original shares plus 10 share dividend
that is assumed received. Cost of share now is 100
It will be assumed that the 150 cash dividend is the amount received by shareholder
in an assumed situation that share is received and subsequently sold.
Cash 1,000
Loss on investment 500
BIR approach
Cash 1,500
Share right
1. Accounted for separately
- Classified the share right as an equity instrument separate from original shares but
related to the same
- Share right is derived from shares
- In absence of FV, share right is measured on theoretical and parity value
- Classified as current asset
Illustration
A shareholder owns 10,000 shares costing 1,000,000. The BOD approved on Dec 15
Year 1 to issue share rights to shareholders of record on January 15 Year 2, entitling
the holder to acquire one share at 100 par for every 5 shares held, the right will
expire on March 31, Year 2.
FV of shares 150
FV of right 10
Receipts of share right
Share right (10,000 x 10) 100,000
Exercise of the share rights
10,000 share rights with right to acquire new shares on 5 to 1 basis, therefore 2,000
shares can be acquired
2000 shares x 100 par value = 200,000 is the cash price
Cash 200,000
Share rights 100,000
Sold for 150,000 or expired
Cash 150,000
Gain on sale 50,000
Loss on share rights 100,000

Two formula of theoretical or parity value (or an assumed fair value)
a. Right on
𝐹𝑉 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 𝑟𝑖𝑔ℎ𝑡𝑜𝑛 − 𝑠𝑢𝑏𝑠𝑐𝑟𝑖𝑝𝑡𝑖𝑜𝑛 𝑝𝑟𝑖𝑐𝑒
= 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑛𝑒 𝑟𝑖𝑔ℎ𝑡
𝑁𝑜. 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠 𝑡𝑜 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 1 𝑠ℎ𝑎𝑟𝑒 + 1
b. Ex-right
𝐹𝑉 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 𝑒𝑥𝑟𝑖𝑔ℎ𝑡 − 𝑠𝑢𝑏𝑠𝑐𝑟𝑖𝑝𝑡𝑖𝑜𝑛 𝑝𝑟𝑖𝑐𝑒
= 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑛𝑒 𝑟𝑖𝑔ℎ𝑡
𝑁𝑜. 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠 𝑡𝑜 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 1 𝑠ℎ𝑎𝑟𝑒
2. Not accounted separately
- Share right is an embedded derivative, thus, for what is the value of original shares,
share right is affected because it is not accounted separately
Using same illustration
Receipt of shares
Memo: received 10,000 share rights to subscribe for one share for every five rights
held, or 2,000 shares
Exercise of rights
Cash 100,000
Sale – no gain or loss is recognized
Cash 150,000
When expired – only memo entry
Investment in associates
- Has significant influence, meaning the power to participate in financial and
operating policy decision but nor control or joint control over those policies
- 20% - 50% interest is presumed to have a significant influence, thus may be rebutted
- What is important is that it has significant influence
- A dividend is a return of investment
- Investment in associate includes other long term interest in associate such as long
term receivable, loans and advances, and investment in preference share. Trade
receivables and other long term receivables for which adequate collateral exist such
as secured loans are excluded
- Using equity method
Acquisition – at cost
Investment in associate XXX
Cash XXX
Share in net income
Investment income XXX
Received of share dividend – does not affect the interest (as usual)
A memo only
Share in dividends
Cash XXX
- Please refer to Problem 17-3, Intermediate Accounting 1 2020 Edition Valix Peralta
Valix. Excess of cost over carrying amount
Acquisition cost ₱ 1,700,000.00
Carrying amount (40%*(3,000,000+1,000,000) -₱ 1,600,000.00
Excess of cost over carrying amount ₱ 100,000.00
Jan-01 Investment in associate ₱ 1,700,000.00

Cash ₱ 1,700,000.00
Dec-31 Investment in associate (650,000 x 40%) ₱ 260,000.00

Investment income ₱ 260,000.00
Cash (150,000 x 40%) ₱ 60,000.00

Investment in associate ₱ 60,000.00
Investment in associate (40% x 1,300,000) ₱ 520,000.00

Revaluation surplus- investee ₱ 520,000.00
Acquisition ₱ 1,700,000.00
Share on net income ₱ 260,000.00
Share on cash dividend -₱ 60,000.00
Share on revaluation surplus ₱ 520,000.00
Carrying amount ₱ 2,420,000.00
- Please refer to Problem 17-2 by same book. Excess of net fair value over cost
Requirement 1
Acquisition cost ₱ 3,500,000.00
Carrying amount of net asset (7,000,000 x 40%) -₱ 2,800,000.00
Excess of cost over carrying amount ₱ 700,000.00
Excess attributable to equipement (1,500,000 x 40%) -₱ 600,000.00
Excess attributable to inventory (500,000 x 40%) -₱ 200,000.00
Excess net fair value over cost -₱ 100,000.00
Investment in associate ₱ 3,500,000.00

Cash ₱ 3,500,000.00
Investment income (600,000/4) ₱ 150,000.00




Investment income ₱ 1,600,000.00
Cash ₱ 400,000.00
Requirement 2
Share in net income ₱ 1,600,000.00
Amortization of excess attributable to equipment -₱ 150,000.00
Amortization of excess attributable to inventory -₱ 200,000.00
Excess net fair value over cost ₱ 100,000.00
Net of investment income in the current year ₱ 1,350,000.00
- Heavy losses
Illustration
An investor owns 5,000,000 cost of shares with 40% of equity interest, three
consecutive years suffers from losses, 4,000,000, 6,000,000, and 3,000,000. On the
fourth year and fifth year, net profit is 5,000,000 and 7,000,000.
Entry on first three years
Loss on investment 1,600,000
Investment in associate 1,600,000

- Note that there still a deficit of 200,000, however, investment is already zero
- On the fourth and fifth year
Investment in associates 1,800,000
Gain on investment 1,800,000
Investment in associates 2,800,000

Gain on investments 2,800,000
- Take note that on fourth year, the total share must be 2,000,000, however, it was
netted with deficit of 200,000 on previous year net loss
- When recoverable amount is lower than carrying amount of investment, the
investment is tested for impairment
- Recoverable amount is higher between fair value less cost of disposal and present
value
- Please refer to Problem 17-15 of same book
Net income ₱ 5,000,000.00

Cumulative preference shares 10% -₱ 200,000.00
₱ 4,800,000.00
Mulitply by 50% 50%
- Upstream transactions, sale of an asset from associate to investor, investor being

the buyer and associate being the seller
- Unrealized profit from such transaction must be eliminated first before recognizing
the share of investor in associate’s net income
Illustration
Investor acquired 30% of equity security exercising significant influence costing
6,000,000. All asset and liability are measured at fair value. On the same year of
acquisition, investee earned 20,000,000. The investee sold inventories costing
2,000,000 for 3,000,000 to investor. The inventory is unsold by investor at the end of
the year.
Share in net income 6,000,000
Share in unrealized profit 300,000
Investor’s share 5,700,000

Investment income 5,700,000
The unsold inventory is sold in the next year and the profit is 18,000,000. Also,
during the year the investee sold an equipment with carrying amount of 8,000,000
for 10,000,000 to investor.
The equipment has remaining life of 10 years
Net income 18,000,000

Realized profit on inventory 1,000,000
Unrealized profit on PPE 2,000,000
Realized profit on PPE 200,000
Adjusted net income 17,200,000
X 30% 5,160,000

Investment income 5,160,000
- Cease of significant influence, investor has ceases to have significant influence over
the investee, thus equity method is discontinued
- Or the equity method is not applicable on the investment
The investment is accounted by the following:
a. Financial asset at FVPL
b. Financial asset at FVOCI
c. Unquoted equity – at cost
- Associate held for sale – PFRS 5, lower of carrying amount or FV minus cost of
disposal
- No significant influence
a. Fair value
b. Cost method
- Investment in associate acquired in stages – applicable standard is IFRS 3 business
combination
Fair value approach
i. Existing interest in the associate is remeasured at fair value with any
change in fair value included in profit or loss – applicable to FVPL
ii. If existing interest is at FVOCI, any unrealized gain or loss is reclassified to
retained earnings
iii. FV of existing interest and cost of additional interest constitutes the
initial measurement of investment in associates
iv. Cost of investment minus carrying amount of net assets equals excess of
cost over carrying amount or excess of fair value over cost
- Before reclassifying a quoted or unquoted equity instrument into investment in
associate, or vice versa, there will be always a remeasurement of retained or existing
interest
- Gain on remeasurement is part of P/L
- Problem 18-4 of same book
Requirement 1
10% interest in Fox ₱ 2,400,000.00
20% interest in Fox ₱ 5,000,000.00
₱ 7,400,000.00
Net fair value asset 30% x 20,000,000 -₱ 6,000,000.00
Attributable to goodwill ₱ 1,400,000.00
Requirement 2
Cash ₱ 5,000,000.00
Investment in shares ₱ 400,000.00

Gain on remeasurement ₱ 400,000.00

Investment in shares ₱ 2,400,000.00
May-01 Received 500 shares from Dale as 10% share dividend of 5,000 shares. Now the shares are 5,500.
Nov-01 Cash ₱ 110,000.00

Dividend income ₱ 110,000.00
Dec-31 Investment in associate ₱ 1,800,000.00

Cash ₱ 1,500,000.00
Dale Company, 5,500 ordinary shares 1% ₱ 1,250,000.00

Ever Company, 10,000 ordinary shares 2% ₱ 1,600,000.00
₱ 2,850,000.00
Fox Company, 75,000 ordinary shares 30% ₱ 7,700,000.00
Noncurrent assets
Investment in shares ₱ 2,850,000.00
- Problem 18-6
2020
Cash ₱ 8,000,000.00
Dec-31 Investment in associate ₱ 1,500,000.00

Cash ₱ 600,000.00
2021
Jun-30 Investment in associate ₱ 1,800,000.00
Jul-01 Cash ₱ 6,000,000.00

Gain on sale of investment ₱ 650,000.00
Acquisition ₱ 8,000,000.00
Income 2020 ₱ 1,500,000.00
Dividend -₱ 600,000.00
Income half of 2021 ₱ 1,800,000.00
Carrying amount 30% ₱ 10,700,000.00
Divided by 2 15% ₱ 5,350,000.00
Sale price ₱ 6,000,000.00
Gain on sale ₱ 650,000.00
Investment in associates (6,500,000-5,350,000) ₱ 1,150,000.00

Gain on remeasurement at FV ₱ 1,150,000.00
Financial asset- FVOCI ₱ 6,500,000.00

Investment in associates ₱ 6,500,000.00
Oct-01 Cash (15% x 2,500,000) ₱ 375,000.00

Dividend income ₱ 375,000.00
Dec-31 Unrealized loss- OCI ₱ 600,000.00

Financial asset- FVOCI ₱ 600,000.00
1 Investment income (30% x 1,500,000) ₱ 450,000.00
2 Acquisition ₱ 2,000,000.00
Dividend -₱ 150,000.00
Carrying amount at 2020 ₱ 2,300,000.00
3 Investment income (30% x 1,000,000) ₱ 300,000.00

Dividend income (15% x 1,000,000) ₱ 150,000.00
Gain on sale of investment (2,000,000 -1,300,000) ₱ 700,000.00
Gain on remeasurement (2,200,000 - 1,300,000) ₱ 900,000.00
Change in FV (2,400,000 - 2,200,000) ₱ 200,000.00
Total income ₱ 2,250,000.00
Account titles
1. Trading securities
- Trading equity security
- Trading debt instrument
2. Financial asset – FVPL
- Debt instrument SPPI irrevocably designated
- Debt instrument SPPI and for trade irrevocably designated
- Not held for trade equity security
3. Financial asset – FVOCI
- Debt instrument SPPI and for trade
- Equity instrument not held for trade irrevocably elected
4. Investment in bonds
- At AC
5. Investment in shares
- Unquoted
- Nonmarketable
6. Investment in associate
Investment property
- A property held by a lessee under finance lease is an investment property, while, a
property held by a lessee under operating lease is not an investment property
- A property leased out by a lessor under finance lease is not an investment property,
while, a property leased out by a lessor under operating lease is an investment
property
- An immovable and land and building property which:
i. For undetermined use
ii. For long-term capital appreciation
iii. Leased out under operating lease
iv. Vacant but held to be leased out under operating lease
v. Property being constructed to be used as investment property
- An owner-occupied property or OOP is not investment property but PPE or
inventory depending on their usage:
i. For production, storage, occupied by employees whether they pay rent at
market rate – PPE
ii. Property constructed in order to be sold under ordinary course of business –
inventory
iii. Any property held to be used as OOP
iv. OOP awaiting disposal
v. Property being developed on behalf of third parties
vi. Property leased out under finance lease
Lease
- A contract or part of contract that conveys the right to use of underlying asset for a
period of time in exchange for consideration
- Underlying asset is the subject of lease which the right of use has been provided by
lessor to lessee
- Lessee is the entity that obtains the right of use of an underlying asset
- Lessor is the entity that provides the right of use of an underlying asset
1. Operating lease
- Lessee may or may not apply operating lease accounting if the lease is short-term or
if the underlying asset is of low value
- Short-term lease, a lease with a term of 12 months or less, a lease with purchase
option is not a short-term lease
- Determination that underlying asset is of low value rest on professional judgment
- Lessee shall assess the underlying asset based on the value of asset when it is new
regardless of age of the asset being leased
- Underlying asset does not qualify as a low value if the nature of the asset is not
typically of low value when new
Illustration
A car now in its fifth year of use is now cost 90,000 but its historical cost or the cost
when it is new is 200,000, the assessment will be based on 200,000 and not on
90,000
- Accounting for operating lease – lessee
i. Lessee shall recognize the lease payments as rent expense in either a
straight-line basis over the lease term or another systematic basis
ii. Lessee shall apply another systematic basis if such basis represents more the
pattern of lessee’s benefit
iii. The periodic rentals are recognized as rent expense
- On the part of lessor, annual rental is recorded as rent income
- Security deposit is recognized as liability
- Lease bonus or incentive is recognized as unearned income and shall be amortized
over the lease term
- Depreciation is a deduction to the carrying amount while deferred initial direct cost
is added to the carrying amount, the deferred initial direct cost is amortized over the
lease term
2. Finance lease
- A lease that transfers the substantially all of the risks and rewards incidental to
ownership of an underlying asset
- Lessee shall recognize the right of use of asset and a lease liability
- Right of use asset is an asset that represents the right of a lessee to use an
underlying asset over the lease term in a finance lease
- The initial measurement of right of use asset comprises:
i. PV of lease payments
ii. Lease payments made to lessor such as lease bonus, less any lease incentive
received
iii. Initial direct cost incurred by lessee
iv. Estimate of cost of dismantling and restoring the underlying asset for which
the lessee has a present obligation
- Lease incentive is payment made by lessor to lessee associated with lease or the
reimbursement or assumption by the lessor of the cost of the lessee, this will be
deducted to the cost of right of use asset
- Initial direct cost is incremental cost of obtaining a lease that would not have been
incurred if the lease had not been obtained, leasehold improvement is excluded
form cost of right of use asset
- The subsequent measurement of right of use asset is cost model (cost – depreciation
– impairment losses)
- Right of use asset is presented as a separate item under non-current asset, or in the
appropriate line item within which related underlying asset would be presented if
owned.
- Lessee shall depreciate the right of use asset if the lease transfers ownership of the
underlying asset to lessee at the end of the term and lessee is reasonably certain to
exercise a purchase option
- If there is no transfer of ownership or there is no certainty of exercise of purchase
option, the lessee shall depreciate right of use asset over shorter of useful life or
lease term
- Lease liability measurement, PV of lease payments – lease payment is discounted
using interest rate implicit in the lease desired by lessor or in absence, the
incremental borrowing rate of the lessee
- Lease payment comprises:
i. Fixed lease payments or periodic rental
ii. Variable lease payments
iii. Exercise of purchase option, if lessee is certain to exercise the option
iv. Amount expected to be payable by the lessee under residual value guarantee
v. Termination penalties if the lease term reflected exercise of termination
option
- Residual value guarantee, guarantee made to lessor by a party unrelated to the
lessor that the value of an underlying asset at the end of the lease term will be at
least a specified amount
- Unguaranteed residual value, portion of residual value of the underlying asset, the
realization of which by the lessor is not assured or is guaranteed solely by a party
related to the lessor
- Executory cost like maintenance, taxes, and insurance related to underlying asset is
expense when incurred
- On the part of lessor, the lease is either direct financing lease or sale type lease
- Direct financing lease recognizes only interest income because of absence of
manufacturer or dealer profit or loss
- Sale type lease recognizes interest income and gross profit on sale because of
presence of manufacturer or dealer profit or loss
Partly OOP and partly investment
- Part of the property is for capital appreciation and another is OOP, if can be leased
or sold separately, the part that is for capital appreciation is recognized as
investment property
- If cannot be sold separately, all of the property is recognized as investment property
when OOP is insignificant
Property leased to an affiliate, parent or subsidiary
- For an individual entity perspective, such property leased out under operating lease
or held under finance lease is an investment property
- For a group perspective, such property is OOP
Measurement
- Initial measurement – at cost, including transaction cost
- Cost is the purchase price and any direct attributable cost, professional fees,
property transfer taxes, and other similar transaction cost
- Start up cost is excluded from the cost of property unless necessary to bring the
property to its condition necessary for intended use
- Operating losses incurred before the investment property achieves the planned level
of occupancy, these are excluded from the cost of property
- Abnormal amounts of wasted material, labor or other resources incurred in
construction are excluded from the cost of property
- Subsequent measurement – Fair value model (at fair value) or cost model (Carrying
amount less depreciation and impairment)
- If FV cannot be determined because of first time acquisition of investment property
or such existing property become an investment property, cost model is used, thus
the residual value is assumed to be zero
- When cost model is used, the FV is not recognized but disclose
Transfer of use
- Commencement of owner occupation or development with view to owner
occupation – investment property to OOP
- Commencement of development with view to sale – investment property to
inventory
- End of owner occupation – OOP to investment property
- Inception of an operating lease to another entity, meaning the property will be
leased out to another entity under operating lease – OOP to investment property
- When cost model is used, transfers between OOP, inventory, or investment property
will be the carrying amount
- Transfer from investment property to OOP or inventory, when fair value model is
used, the FV shall be deemed cost of the now OOP and inventory
- Transfer from OOP to investment property where it will use fair value model as
measurement of investment property, any difference between FV and carrying
amount of the property shall be accounted for revaluation of PPE
- Transfer from inventory to investment property where it will use fair value model as
measurement of investment property, remeasurement to FV shall be included in P/L
- If investment property under construction is completed and the investment
property is to be measured using fair value model, difference between FV and the
carrying amount of finished property shall be included in P/L
Derecognition
- An investment property is derecognized when:
a. It is on disposal
b. It is permanently withdrawn from use
c. No future economic benefits are expected from it
- Cost model
Land held by the parent for undetermined use 5,000,000
Vacant building held by parent to be leased out under operating 3,000,000
lease
Building owned by subsidiary for which it provides security and 1,500,000
maintenance to lessees
Property under construction for use as an investment property 6,000,000
Investment property 15,500,000
- Requirement 2
Property held in ordinary course of business PPE, the use is OOP
Property held by parent for production PPE, the use is OOP
Land leased by the parent to subsidiary under operating PPE, consolidated
lease financial statement
Land held for future factory site PPE, the use is OOP
Machinery leased out to unrelated party under PPE, investment
operating lease property should be
land or building that is
immovable
- Problem 22-6
- Fair value model
2020, FV 6,000,000
2021, FV 5,900,000
Loss 100,000
- Cost model
5,800,000 divided by 40 years 145,000
- Problem 22-9 of the same book
- Initial measurement of investment property
Cost (200,000,000 x 9/10) 180,000,000
Irrevocable taxes (20,000,000 x 9/10) 18,000,000
Legal cost (1,000,000 x 9/10) 900,000
Initial cost 198,900,000
- Initial measurement of land under PPE
Cost (200,000,000 x 1/10 x20%) 4,000,000
Irrevocable taxes (20,000,000 x 1/10 x 20%) 400,000
Legal cost (1,000,000 x 1/10 x 20%) 20,000
- Initial measurement of building under PPE
Cost (200,000,000 x 1/10 x 80%) 16,000,000
Irrevocable taxes (20,000,000 x 1/10 x 80%) 1,600,000
Legal cost (1,000,000 x 1/10 x 80%) 80,000
- Gain in increase in FV
FV (25,000,000 x 9) 225,000,000
Carrying amount 198,900,000
Gain 26,100,000
- Depreciation
17,680,000 divided by 50 years 353,600
- Problem 22-10
- From OOP to investment property
Carrying amount, 2020 20,000,000
FV, 2020 35,000,000
Revaluation surplus 15,000,000
- From inventory to investment property
Carrying amount, 2020 10,000,000
FV, 2020 15,000,000
Gain 5,000,000
Cash surrender value
- This applies to an insurance of life of an officer and the beneficiary is the entity itself,
officer of entity is the insured and the entity is the beneficiary
- Life insurance policy has cash surrender value and loan value
- Cash surrender value is the amount which the insurance firm will pay upon the
surrender and cancelation of life insurance policy
- Requisites
i. Policy is a life policy
ii. Premiums for three full years have been paid
iii. Policy is surrendered at the end of third year or anytime thereafter
- Cash surrender value commences to accrue at the end of the third year
- It is therefore a noncurrent investment
- Loan value is the amount that the insured can borrow with cash surrender value as a
collateral security
- Loan value is not deducted from cash surrender value but accounted as an ordinary
obligation which must be paid
- Cash surrender value is the excess from fixed annual premium
- Such excess is necessary to balance deficiency of the premium to meet annual risk
during the later years
2021
- Payment of annual premium
Life insurance expense 80,000
Cash 80,000
2022
- Payment of annual premium
Cash 80,000
- Receipt of dividend, this is a deduction to the expense rather than to be treated as
income
Cash 5,000
- Initial recognition of cash surrender value, this is applicable to the three years thus a
portion of it is credited to life insurance policy the prior two years is credited to
retained earnings
Cash surrender value 42,000
Retained earnings 28,000
2023
Cash 80,000
Cash 6,000

- If on half of the year 2023, the president die
- To recognize the cash surrender value at the time of death
Balance on Dec 31 2023 47,000

Balance on Dec 31 2022 42,000
Increase 5,000
Multiplied by 6/12 2,500 – the value that accrued as of the half of year
- Receipt of proceeds
Cash 5,000,000
Gain on life insurance settlement 4,915,500
Face of policy 5,000,000

Unearned life insurance (80,000 x 6/12) 40,000
Gain 4,915,500
- Correction entry
- The right value of cash surrender on December 31 2020 is 85,000, it is because on
June 30 of same year, the value is 80,000, and on June 30 of the next year, the value
is 90,000 – that is why the difference of 10,000 is multiplied by 6/12 or one-half, in
order not to overstate the cash surrender value by 5,000
Prepaid life insurance 14,000
- The unexpired premium is adjusted, the annual premium payment of 30,000 reflects
the year starting June 30 of current year and the next year
- It can be fairly assumed that the dividend is for the whole year, thus the 2,000 is
multiplied by 6/12 or one-half
Interest expense 4,500
Interest payable 4,500
- April 1 – December 31 is 9 months, 50,000 x 9/12 x 12% is 4,500
Dividend receivable 2,000
- Dividend from life insurance policy is not an income but a deduction to life insurance
expense
- Presentation
CA
Prepaid life insurance 14,000
NCA
Liabilities
Loan payable 50,000
Interest payable 4,500

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Investments

Work of Bestnookit and Tiorosela

1|Bestnookit & Tiorosela

2|Bestnookit & Tiorosela

Cash (nominal rate x face) XXX

3|Bestnookit & Tiorosela

4|Bestnookit & Tiorosela

5|Bestnookit & Tiorosela

Financial asset – FVOCI XXX

6|Bestnookit & Tiorosela

Face value 2,000

Supposedly that period of bond is 4 years

7|Bestnookit & Tiorosela

Note that the amortization decreases as the principal also decreases

8|Bestnookit & Tiorosela

9|Bestnookit & Tiorosela

PV of ordinary annuity in 3 period = 2.577096987

Interest income 3,175.32896

Unrealized loss – OCI 2,133.059

Interest income 3,429.355277

Fair value 120,000

Financial asset – FVOCI 18,429.35528

- On June 30 year 3 the bond was disposed at 110

Fair value 110,000

Loss on share rights 100,000

Jan-01 Investment in associate ₱ 1,700,000.00

Dec-31 Investment in associate (650,000 x 40%) ₱ 260,000.00

Cash (150,000 x 40%) ₱ 60,000.00

Investment in associate (40% x 1,300,000) ₱ 520,000.00

Investment in associate ₱ 3,500,000.00

Investment income (600,000/4) ₱ 150,000.00

Investment income ₱ 200,000.00

Investment in associate ₱ 100,000.00

Investment in associate ₱ 1,600,000.00

Loss on investment 1,000,000

Investment in associates 2,800,000

Net income ₱ 5,000,000.00

- Upstream transactions, sale of an asset from associate to investor, investor being

Investment in associate 5,700,000

Net income 18,000,000

Investment in associate 5,160,000

Investment in shares ₱ 400,000.00

Investment in associate ₱ 2,400,000.00

Nov-01 Cash ₱ 110,000.00

Dec-31 Investment in associate ₱ 1,800,000.00

Dale Company, 5,500 ordinary shares 1% ₱ 1,250,000.00

Dec-31 Investment in associate ₱ 1,500,000.00

Jul-01 Cash ₱ 6,000,000.00

Investment in associates (6,500,000-5,350,000) ₱ 1,150,000.00

Financial asset- FVOCI ₱ 6,500,000.00

Oct-01 Cash (15% x 2,500,000) ₱ 375,000.00

Dec-31 Unrealized loss- OCI ₱ 600,000.00

- Problem 18-9 of same book

3 Investment income (30% x 1,000,000) ₱ 300,000.00

Cash surrender value 5,000

Balance on Dec 31 2023 47,000

Face of policy 5,000,000

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