Chapter 10
The definitions for the terms:
Financial Assets at Amortized Cost
Financial assets that are held to collect contractual cash flows, where those cash flows consist solely of payments of principal and interest. These are measured at amortized cost using the effective interest method.
Investments in Bonds
The purchase of bonds as an investment, typically for income generation through interest payments.
Bonds
Debt instruments issued by entities (corporations, governments) to raise capital, promising periodic interest payments and repayment of principal at maturity.
Types of Bonds
Private Bonds – Bonds issued by private corporations rather than government entities.
Term Bonds – Bonds that mature on a single date.
Serial Bonds – Bonds that mature in installments over a series of dates.
Registered Bonds – Bonds issued in the owner's name, requiring record-keeping of ownership.
Coupon Bonds – Bonds with detachable coupons for periodic interest payments. Ownership is often anonymous.
Zero-Coupon Bonds – Bonds issued at a discount with no periodic interest payments, but redeemed at face value at maturity.
Callable Bonds – Bonds that can be repurchased (called) by the issuer before maturity.
Convertible Bonds – Bonds that can be converted into shares of the issuing company.
Investment in Bonds Measured at Amortized Cost
An investment in bonds accounted for at amortized cost, meaning the carrying amount is adjusted for interest income and amortization of discounts/premiums using the effective interest method.
Fair Value Through Profit or Loss (FVPL)
Financial assets measured at fair value, with changes in value recognized in profit or loss.
Fair Value Through Other Comprehensive Income (FVOCI)
Financial assets measured at fair value, but changes in value are recorded in other comprehensive income instead of profit or loss.
Amortized Cost
The cost of a financial asset, adjusted for interest income and the amortization of any discount or premium over its lifetime.
Amortization
The gradual reduction of a bond discount or premium over time, adjusting the carrying value of the bond to its face value by maturity.
Bond Discount
Occurs when bonds are issued below their face value, meaning investors pay less than the bond’s principal amount.
Bond Premium
Occurs when bonds are issued above their face value, meaning investors pay more than the bond’s principal amount.
Effective Interest Method
A method of amortizing bond premiums or discounts that spreads interest expense/income over the life of the bond using a constant rate of return.
Effective Interest Rate
The rate that exactly discounts estimated future cash flows to the initial carrying amount of the bond.
Amortization of Discount or Premium
The process of systematically allocating bond discounts or premiums as interest income or expense over the bond’s life.
Recognition of Interest Income / Investment Income
Interest income from bonds is recognized using the effective interest method, based on the carrying amount of the bond.
Interest Income
The revenue earned from interest payments on financial assets such as bonds.
Interest Receivable
An asset account representing earned but not yet received interest.
Illustration 1: Acquisition at a Discount
Example of purchasing a bond at a discount, showing how it affects financial statements.
Financial Statement Presentation
The manner in which bond investments, discounts, premiums, and interest income are reported in financial statements.
Unamortized Bond Discount/Premium
The remaining portion of a bond’s discount or premium that has not yet been amortized.
Illustration 2: Acquisition at a Premium
Example of purchasing a bond at a premium, demonstrating its accounting treatment.
Unamortized Premium
The portion of a bond premium that remains to be amortized over the bond's life.
Acquired Interest
Interest accrued on a bond before its purchase, often paid to the seller by the buyer.
Purchased Accrued Interest (Including and Excluding Interest)
Including Interest: The purchase price includes the interest accrued up to the purchase date.
Excluding Interest: The purchase price does not include accrued interest, which is recorded separately.
Transaction Costs
Costs directly related to acquiring a financial asset, such as broker fees and legal expenses.
Illustration: Adjustment to Effective Interest Rate
Example showing how adjustments are made to reflect transaction costs or other factors affecting the effective interest rate.
Sale of Bonds Prior to Maturity
Selling a bond before its maturity date, which may result in a gain or loss.
Net Disposal Proceeds – The total amount received from selling the bond.
Carrying Amount of the Bonds – The bond’s book value at the time of sale.
Scheduled Interest Payment Dates
The predetermined dates when bond issuers pay interest to bondholders.
Accrued Interest
Interest that has been earned but not yet received by the investor at the time of sale or reporting.
Illustration: Sale of Bonds
Example scenarios demonstrating bond sales under different conditions:
Case 1: Sale on Interest Payment Date – The bond is sold exactly when an interest payment is due.
Case 2: Partial Sale on Interest Payment Date – Only a portion of the bond investment is sold.
Case 3: Sale Between Interest Payment Dates – The bond is sold in between scheduled interest payments.
Purchase Price of Bonds
The total cost of acquiring a bond, including any premium, discount, or accrued interest.
Illustration: Purchase Price of Bonds
Examples showing different bond purchase scenarios:
Case 1: Acquisition on Interest Payment Date – The bond is bought when an interest payment is due.
Case 2: Acquisition Between Interest Payment Dates – The bond is bought between scheduled interest payments.
Serial Bonds
Bonds that mature at different dates instead of a single maturity date.
Illustration: Serial Bonds
Examples of investments in serial bonds, including:
Current & Noncurrent Portions – The classification of serial bond investments in financial statements.
Adjustment to Effective Interest Rate – Calculations for serial bonds using the effective interest method.
Purchase Price of Serial Bonds – The cost of acquiring serial bonds under different conditions.
Zero-Coupon Bonds
Bonds issued at a discount that do not pay periodic interest but are redeemed at face value at maturity.
Illustration: Zero-Coupon Bonds
Examples showing the accounting for zero-coupon bonds, including:
Compounded Interest – Interest that is reinvested instead of paid out periodically.
Lump Sum – A single payment made at maturity.
Adjustment to Effective Interest Rate – How the effective rate is calculated for zero-coupon bonds.
Purchase Price – How zero-coupon bonds are priced at issuance.
Callable Bonds
Bonds that can be repurchased by the issuer before maturity.
Illustration: Callable Bonds
An example of how callable bonds are accounted for and their impact on investors.
Financial Assets Measured at FVOCI (Mandatory)
Financial assets that must be measured at fair value through other comprehensive income under PFRS 9.
Illustration: Financial Assets Measured at FVOCI
Examples of how these financial assets are reported in financial statements.
Subsequent Measurement
The process of updating the carrying value of financial assets after initial recognition.
Puttable Financial Assets / Instruments
Financial instruments that give the holder the right to sell them back to the issuer at a predetermined price.
PFRS 9
The Philippine Financial Reporting Standard governing the classification and measurement of financial instruments.
Extendible Bonds
Bonds that allow investors to extend the maturity date.
Retractable Bonds
Bonds that allow investors to shorten the maturity date and demand early repayment.
Investment in Redeemable Preference Shares
Investments in preferred shares that the issuing company may repurchase.
SPPI (Solely Payments of Principal and Interest)
A criterion under PFRS 9 to determine if a financial asset qualifies for amortized cost or FVOCI measurement.