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Investment in debt instrument – 2014 Version, Effective Jan.

2018

Measurement Summary
Category Initial End of the reporting Changes in fair vale
period
FA@FVTPL Fair Value Fair Value Profit or Loss
FA@FVTOCI – equity Fair Value + Transaction Fair Value Other Comprehensive
cost Income
FA@FVTOCI – debt Fair Value + Transaction Fair value Other Comprehensive
cost Income
FA@AC Fair Value + Transaction Amortized cost using Ignore
cost effective interest method

Investment in Debt Instruments: FA@AC

The amortized cost of a financial asset is the amount at which the financial asset is measured at initial recognition
minus principal repayments, plus or minus the cumulative amortization using the effective interest method of
any difference between that initial amount and the maturity amount, and adjusted for any loss allowance.

Formula:
Initial measurement (FV + TC) Pxxx
Principal repayments xxx
Discount or (Premium) Amortization xxx
Gross Carrying Amount xxx
Loss allowance xxx
Amortized cost Pxxx

1. Proforma entry to record the acquisition of bond investment:


FA@AC : Bond Investment xxx
Cash xxx
Discount on bond investment xxx
#
2. Proforma entry to record interest income on bond investment:
Cash xxx
Discount on bond investment xxx
Interest Income xxx
#
Derecognition (Sale of bond investment)
In accordance with IFRS 9, on derecognition of a financial asset, the difference between:
(a) the carrying amount (measured at the date of derecognition) and
(b) the consideration received (including any new asset obtained less any new liability assumed) shall be
recognized in profit or loss.

3. Proforma entry to record interest income on bond investment*:


Cash xxx
Discount on bond investment xxx
Interest Income xxx
#
*The measured the carrying amount at the date of derecognition.

4. Proforma entry to record the sale of bond investment:


Cash xxx
FA@AC: Bond Investment xxx
Gain on sale – P&L xxx
#

Investment in Debt Instruments: FA@FVTOCI


Financial asset under this category is held in a business model the objective of which is achieved by both
collecting contractual cash flows and selling financial assets. The financial asset is measured at fair value in the
statement of financial position changes in fair value are recognized in other comprehensive income and amortized
cost information is provided through profit or loss.

1. Proforma entry to record the acquisition of bond investment:


FA@FVTOCI: Bond Investment xxx
Cash xxx
Discount on bond investment xxx
#
2. Proforma entry to record interest income on bond investment:
Cash xxx
Discount on bond investment xxx
Interest Income xxx
#
3. Proforma entry to record fair value adjustment:
FA@FVTOCI: Bond Investment xxx
Fair value adjustment gain – OCI xxx
#
Derecognition (Sale of bond investment) – In accordance of IFRS 9
Reclassification Adjustment for Debt Investment in FVOCI
When the financial asset is derecognized the cumulative gain or loss previously recognized in other
comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. This reflects
the gain or loss that would have been recognized in profit or loss upon derecognition if the financial asset had
been measured at amortized cost.

4. Proforma entry to record interest income on bond investment:


Cash xxx
Discount on bond investment xxx
Interest Income xxx
#
5. Proforma entry to record fair value adjustment:
FA@FVTOCI: Bond Investment xxx
Fair value adjustment gain – OCI xxx
#
6. Proforma entry to record the sale of bond investment:
Cash xxx
FA@FVTOCI Bond Investment xxx
#
7. Proforma entry to record reclassification adjustment:
Fair value adjustment gain – OCI xxx
Gain on sale – P&L xxx
#

Investment in Debt Instruments: FA@FVTPL

1. Proforma entry to record the acquisition of bond investment:


FA@FVTPL: Bond Investment xxx
Cash xxx
#
2. Proforma entry to record interest income on bond investment:
Cash xxx
Interest Income xxx
#
3. Proforma entry to record fair value adjustment:
FA@FVTPL: Bond Investment xxx
Fair value adjustment gain – P&L xxx
#
4. Proforma entry to record the sale of bond investment:
Cash xxx
FA@FVTPL: Bond Investment xxx
Gain on sale – P&L xxx
#

I. On 2 January 2015 Entity A purchased P1,000,000 10% bonds for P1,051,510 (including broker's commission
of P20,000) when the prevailing market interest is at 8%. Interest is payable annually every December 31. The
bonds mature on 31 December 2017. The prevailing market rate for the bonds is 9% at 31 December 2015. The
entity does not expect any credit losses on this type of investment.

Case 1: The entity's business model for this type of investment is to hold the asset to collect the contractual
cash flows that are solely payments of principal and interest on the principal amount outstanding.

Case 2: The entity's business model for this type of investment is achieved by both collecting contractual cash
flows and selling financial assets.

Case 3: The entity's business model for this type of investment is managed on a fair value basis.

Answer the following for each case:


1. At what amount should the investment be initially recorded at?
2. Unrealized gain(loss) to be recognized in profit or loss on December 31, 2015?
3. How much is the gain(loss) to be recognized in other comprehensive income in 2015?
4. How much is the interest income to be recognized in 2015?
5. How much is the cumulative gain(loss) to be recognized in the 2015 statement of financial position?
6. Carrying value as of December 31, 2015

II. On January 1, 2015, Rudolf company purchased serial bonds with face value of P3,000,000 and stated rate
of 12% payable every December 31. The bonds are to be held as financial assets at amortized cost with a 10%
effective rate. The bonds mature at an annual installment of P1,000,000 every December 31.
What is the present value (purchase price) of the serial bonds on January 1, 2015?

III. Javier Company had an investment in bonds purchased at par for P4,000,000. On December 31, 2015, the
remaining life of the bonds 3 years with annual interest payment at 10% payable at the end of each year. It
was determined that the issuer will be unable to make all payments according to the contractual terms. Javier
projected expected cash flow for this investment to be P500,000 on December 31, 2016. P1,000,000 on
December 31, 2017 and P3,000,000 on December 31, 2018. The market rate of interest for similar instruments
on December 31, 2015 is 12%.
How much should be recognized as impairment loss on December 31, 2015?
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.agp 2/14/17