Investments in Equity and Debt Instruments

Flashcards on Investments in Equity and Debt Instruments

Financial instrument

Any contract that gives rise to a financial asset of one entity (holder) and a financial liability or equity instrument of another entity (debtor).

Contractual cash flow test

holder’s purpose is for collection of dividends and interest.

Business model test

holder’s purpose depends on the decision of entity’s management

Investments

Debt or equity instruments of another entity mainly held for passive income, proving one’s financial flexibility.

Equity Instruments

Shares of stocks bought by an investor from a corporation.

Equity Instruments - Financial Asset at Fair Value through Profit or Loss (FA-FVPL)

Measured at fair value through profit or loss (FVPL).

Equity Instruments - Financial Asset at Fair Value through Other Comprehensive Income (FV-OCI)

Measured at fair value through other comprehensive income (FVOCI).

Equity Instruments – Investment in Associate

PAS 28 Investment in Associates and Joint Ventures lays out the guidelines on the treatment, FS presentation and disclosure

Significant influence

Investor owns at least 20% of the outstanding shares of the investee.

FA-FVPL

Always recorded at fair value

FA-FVOCI

Recorded at fair value but takes into account the changes in its “would be” carrying amount computed under the effective interest method.

FA-AC

Recorded always at amortized cost under the effective interest method

Bond Investment

Investor purchases BONDS issued by the borrower whereby investor earns interest from bond investment.

Bond Investments (Initial Recording)

Always recorded at FAIR VALUE, which is also their PRESENT VALUE at the date of acquisition.

Equity Instruments (Represents)

Ownership

Debt Instruments (Represents)

Loan

Nominal rate, coupon rate, face rate

Periodic interest to be received by investor.

Market-dictated effective rate

Periodic interest income to be recorded by investor

Nominal rate

Stated rate or advertised rate without taking into account how often the interest is actually added (compounded)

Effective rate

Real interest you actually earn or pay in a year, after compounding is considered.

Discount on Bond Investment

Effective rate > Nominal rate