Chapter 15

CHAPTER 15

INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES

TOPIC OVERVIEW:

This chapter discusses the introduction on financial instruments and its categories, initial recognition, initial measurement, subsequent measurement, and reclassification, derecognition and financial statement presentation for each type of financial instrument.

LEARNING OBJECTIVES:

After studying this chapter, you should be able to:

1. Identify and describe the type of financial instruments.

2. Identify and explain the different classifications of financial assets.

3. Describe the initial recognition, initial measurement, subsequent measurement, reclassification, derecognition and financial statement presentation of financial asset.

4. Differentiate financial asset and investment in equity securities under full PFRS and PFRS for SMEs.

5. Differentiate the accounting for FVTPL, FVTOCI and FAAC.

INVESTMENTS

Investments are assets held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading relationships.

FINANCIAL INSTRUMENT

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

FINANCIAL ASSET

A financial asset is any asset that is:

(a) cash;

(b) an equity instrument of another entity;

(i) to receive cash or another financial asset from another entity; or

(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity;

(d) a contract that will or may be settled in the entity’s own equity instruments and is:

(i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or

(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments.

Examples of Financial Assets

1. Cash and cash equivalents

2. Accounts receivable

3. Allowance for bad debts

4. Notes receivable

5. Interest receivable

6. Prepaid interest (not a valuation account to financial liability)

7. Investment in joint venture

8. Investment in associate

9. Investment in subsidiary

10. Investment in bonds

11. Cash surrender value

12. Sinking fund

Examples of Nonfinancial Assets

1. Merchandise inventories

2. Biological assets

3. Property, plant and equipment (e.g. Building)

4. Accumulated depreciation

5. Intangible assets

6. Prepaid rent

7. Claims for tax refund

8. Deferred tax assets

9. Gold bullion deposited in banks

ILLUSTRATION: Financial Assets

On December 31, data for Petnalu Co. include the following:

1. Investment in bonds - P 340,000

2. Merchandise inventories - 266,000

3. Investment in equity instruments - 250,000

4. Biological assets - 240,000

5. Accounts receivable - 200,000

6. Investment in subsidiary - 150,000

7. Cash and cash equivalents - 140,000