Financial Assets at Fair Value

AC 1201
• Classification of financial assets:
• 1. Financial assets at fair value through profit or loss – include both equity
securities (e.g. investment in stocks) and debt securities (e.g. investment in bonds).
• 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.
• Financial assets are recognized initially at fair value plus transaction costs that
directly attributable to the acquisition of financial assets.
• If financial asset is held for trading or if the financial asset is measured at FVPL,
transactions costs are expensed outright.
• Subsequent measurement:
• a. Fair value through profit or loss (FVPL)
• b. Fair value through other comprehensive income (FVOCI)
• c. Amortized cost
• Measurement of equity investments:
• 1. Held for trading - at FVPL
• 2. Not held for trading – as a rule, at FVPL
• 3. Not held for trading – at FVOCI by irrevocable election.
• 4. All other investments in quoted equity instruments – at FVPL
• Measurements of debt investments:
• 1. Held for trading – at FVPL
• 2. Held for collection of contractual cash flows – at amortized cost
• 3. Held for collection at contractual cash flows – at FVPL by irrevocable
designation or fair value option.
• 4. Held for collection of contractual cash flows and for sale of the financial assets
– at FVOCI
• 5. Held for collection of contractual cash flows and for sale of the financial asset
– at FVPL by irrevocable designation or fair value option.
• Gain and loss – Financial assets at fair value
• Unrealized gain and loss on financial assets held for trading and other financial
assets measured at fair value are reported in the income statement
• Unrealized gain or loss arise from investments that are reported at fair value
• If the fair value is higher than carrying amount, the difference is an unrealized
gain.
• If the fair value is lower than carrying amount, the difference is an unrealized
loss.
• Gain or loss that result from actually selling the investments are known as
realized gain and realized loss.
• Gain and Loss – Financial assets at amortized cost
• Unrealized gain and loss on financial asset at amortized cost are not recognized
because such investments are not reported at fair value except when it is
derecognized, sold, impaired or reclassified.
• Illustration:
• On January 1, 2020, an entity purchased marketable equity securities for P5,000,000. The equity securities
qualify as financial assets held for trading. The entity also paid P50,000 as commission to the broker.
• On December 31, 2020, the trading securities have a fair value of P6,000,000.
• On December 31, 2021, the trading securities have a fair value of P4,500,000.
• Required:
• a. What is the entry to record the acquisition of trading securities on January 1, 2020?
• b. What is the entry to record the increase in value on December 31, 2020?
• c. What is the entry to record the decrease in fair value on December 31, 2021?
• Answer:
• a. Trading securities 5,000,000
• Commission expense 50,000
• Cash 5,050,000
• b. Trading securities 1,000,000
• Unrealized gain – TS (6,000,000 – 5,000,000) 1,000,000
• C. Unrealized Loss – TS (6,000,000 – 4,500,000) 1,500,000
• Trading securities 1,500,000
• Sale of trading securities
• Illustration: Using the same example, on December 31, 2022, the trading securities are sold for P5,200,000. What
is the entry to record the sale?
• Answer:
• Cash 5,200,000
• Trading securities (at fair value) 4,500,000
• Gain on sale of trading securities (5,200,000 – 4,500,000) 700,000
• Another Illustration:
• On January 1, 2020, an entity acquired trading securities with the following market value on December 31, 2020:
• Cost Market Gain(loss)
• ABC preference share 200,000 150,000 (50,000)
• XYZ ordinary share 800,000 950,000 150,000
• RST ordinary share 1,000,000 1,100,000 100,000
• MNO bonds 3,000,000 2,500,000 (500,000)
• 5,000,000 4,700,000 (300,000)
• On January 15, 2021, the ABC preference shares is sold for P80,000.
• On December 31, 2021, the remaining trading securities have the carrying amount of P4,550,000 and market
value of P4,900,000.
• Required: What are the journal entries of the following:
• a. To record the acquisition on January 1, 2020?
• b. To record the net decrease in market value on December 31, 2020?
• c. To record the sale of ABC preference share n January 15, 2021?
• d. To record the net increase in market value of the remaining securities on December 31, 2021?
• Answers:
• a. Trading securities (cost) 5,000,000
• Cash 5,000,000
• b. Unrealized loss – TS (5,000,000 – 4,700,000) 300,000
• Trading securities 300,000
• c. Cash 80,000
• Loss on sale of TS (150,000 – 80,000) 70,000
• Trading securities 150,000
• d. Trading securities 350,000
• Unrealized gain – TS (4,900,000 - 4,550,000) 350,000
• Equity investment at fair value through OCI
• Illustration:
• On January 1, 2020, an entity purchased marketable equity securities for P1,000,000. The
entity paid commission and taxes of P100,000.
• The equity securities do not qualify as financial assets held for trading. The entity made an
irrevocable election to present unrealized gain or loss in other comprehensive income.
• On December 31, 2020, the securities have a market value of P1,300,000.
• On December 31, 2021, the securities have a market value of P1,600,000.
• On July 1, 2022, the securities are sold for P2,000,000.
• Required: What are the journal entries for the following:
• a. To record the acquisition on January 1, 2020.
• b. To record the increase in market value on December 31, 2020.
• c. To record the increase in market value on December 31, 2021.
• d. To record the sale of securities on July 1, 2022.
• Answers:
• a. Financial assets – FVOCI (1,000,000 + 100,000) 1,100,000
• Cash 1,100,000
• Note: The commission and taxes of P100,000 are capitalized as cost of investment.
• b. Financial assets – FVOCI 200,000
• Unrealized gain – OCI (1,300,000 – 1,100,000) 200,000
• Note: The financial asset-FVOCI on December 31, 2020 is carried at the market value of
• P1,300,000
• c. Financial assets – FVOCI 300,000
• Unrealized gain – OCI (1,600,000 – 1,300,000) 300,000
• Note: The financial asset – FVOCI on December 31, 2021 is carried at the market value of
• P1,600,000 and the total unrealized gain is P500,000 (200,000 + 300,000)
• d. Cash 2,000,000
• Financial assets – FVOCI 1,600,000
• Retained earnings 400,000
• Note: Gain or loss on disposal of equity investment measured as FVOCI is recognized in retained
• earnings. The cumulative gain or loss previously recognized in OCI is also transferred to
• retained earnings in accordance with PFRS 9. Accordingly, the cumulative unrealized gain
• of P500,000 is transferred to retained earnings.
• Another Illustration:
• On January 1, 2020, an entity purchased marketable equity securities for P2,000,000. The
securities do not qualify as financial assets held for trading.
• The entity elected to present changes in fair value in other comprehensive income.
• On December 31, 2020, the securities have a market value of P1,800,000
• On December 31, 2021, the securities have a market value of P1,300,000.
• On July 1, 2022, the securities are sold for P1,200,000.
• Required: What are the journal entries for the following:
• a. To record the acquisition on January 1, 2020.
• b. To record the decrease in market value on December 31, 2020.
• c. To record the decrease in market value on December 31, 2021.
• d. To record the sale of securities on July 1, 2022.
• Answers:
• a. Financial assets – FVOCI 2,000,000
• Cash 2,000,000
• b. Unrealized loss – OCI (2,000,000 – 1,800,000) 200,000
• Financial asset – FVOCI 200,000
• Note: The December, 2020 SFP will report the financial asset - FVOCI at market value of
P1,800,000. The unrealized loss is reported as a deduction as component of OCI in the 2020
statement of comprehensive income.
• c. Unrealized loss – OCI (1,800,000 – 1,300,000) 500,000
• Financial asset – FVOCI 500,000
• Note: The December, 2021 SFP will carry the financial asset – FVOCI at a market value of
P1,300,000. The unrealized loss of P500,000 will be reported in the 2021 statement of
comprehensive income. The accumulated loss of P700,000 will appear in the statement of
changes in equity.
• d. Cash 1,200,000
• Retained earnings 100,000
• Financial assets – FVOCI 1,300,000
• Note: The cumulative unrealized loss of P700,000 previously recognized is charged to
retained earnings
• Problem 1: Splendid Co. purchased equity securities during 2020 to be held as investments. The cost and market
value of the investments are:
• December 31, 2020 Cost Market
• Trading securities 2,000,000 2,500,000
• Securities not held for trading 3,000,000 2,900,000
• December 31, 2021
• 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 OCI by irrevocable election.
• Required: Prepare journal entries for 2020 and 2021.
• Answers:
• 12/31/20: Trading securities 500,000
• Unrealized gain – TS (2,500,000 – 2,000,000) 500,000
• Unrealized loss – OCI (2,900,000 – 3,000,000) 100,000
• Financial assets – FVOCI 100,000
• 12/31/21: Unrealized loss – TS (2,200,000 – 2,500,000) 300,000
• Trading securities 300,000
• Unrealized loss – OCI ( 2,300,000 – 2,900,000) 600,000
• Financial assets – FVOCI 600,000
• Problem 2: During 2020, Haggard Company purchased marketable equity securities for P1,850,000
to be held as trading investments.
• In 2020, the entity appropriately reported an unrealized loss of P200,000 in the income statement.
• There was no change during 2020 in the composition of the portfolio of trading securities. Pertinent
data on December 31, 2021 are:
• Security Cost Market value
• A 600,000 700,000
• B 450,000 400,000
• C 800,000 900,000
• Required:
• What amount of unrealized gain on these securities should be included in the 2021 income
statement?
• Answer:
• Total market value – 12/31/21 2,000,000
• Total market value – 12/31/20 (1,850,000 – 200,000) 1,650,000
• 350,000
• Problem 3:
• During 2020, Knickknack Company purchased marketable equity securities to be measured at fair value
through OCI.
• On December 31, 2020, the balance in the unrealized loss on these securities was P200,000.
• There was no security transactions during 2021. Pertinent data on December 31, 2021 are:
• Security Cost Market value
• X 2,100,000 1,600,000
• Y 1,850,000 2,000,000
• Z 1,050,000 900,000
• Required:
• In the statement of changes in equity for 2021, what amount should be included as cumulative unrealized
loss as component of other comprehensive income?
• Answer:
• Total market value, 12/31/21 4,500,000
• Total market value, 12/31/20 (5,000,000 – 200,000) 4,800,000
• Unrealized loss, 12/31/21 ( 300,000)
• Unrealized loss, 12/31/20 ( 200,000)
• Total unrealized loss, 12/31/21 ( 500,000)