Notes on Financial Accounting and Reporting

By CSJr.

INVESTMENTS
Summary Chart of Investment Types and Their Accounting Treatment

Category Type of Investment Measurement / Treatment

Equity Financial Assets at FVPL Fair value changes and gains/losses recorded in
Investments (Held for Trading) Profit or Loss.

Financial Assets at FVOCI Fair value changes recorded in OCI, not recycled to
(Not for Trading) P/L upon disposal.

Equity method; not FVPL or FVOCI; shows investor’s

Investment in Associate
share of profit/loss.

Investment in Subsidiary
Consolidated in group FS; not a financial asset.
(AFAR)

Investment in Unquoted Measured at FVPL or FVOCI; at cost only if FV is not

Equity Instruments reliably measurable.

Debt Interest in Profit or Loss, principal reduces carrying

At Amortized Cost
Investments amount, no FV changes recorded.

Interest in P/L, FV changes in OCI, recycled to P/L

At FVOCI
on disposal.

All changes, including interest and principal, go to

At FVTPL
Profit or Loss.

Other Land/buildings held to earn rent or appreciate in

Investment Property
Investments value.

Cash Surrender Value of Usually shown as non-current asset, not a financial

Life Insurance asset.

Depends on nature—may be FVPL, FVOCI, or

Investment in Fund (AFAR)
consolidated if it involves control.

Investment in Joint Venture Accounted for using the equity method, similar to
(AFAR) associate.

Note: Reclassification is only allowed for Debt Securities.

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Notes on Financial Accounting and Reporting
By CSJr.

1. EQUITY INVESTMENTS
FINANCIAL ASSETS at FVPL (Held for Trading)
Equity investments that are acquired primarily for short-term profit (e.g., frequent
buying and selling) are classified as Fair Value Through Profit or Loss (FVPL). All
gains and losses are recognized in profit or loss.
FINANCIAL ASSETS at FVOCI (Not held for trading)
If the equity investment is not held for trading, the entity may make an irrevocable
election at initial recognition to classify it as Fair Value Through Other Comprehensive
Income (FVOCI). Gains and losses (based on Fair Value) go to OCI, and are not
recycled to profit or loss, even when sold.
INVESTMENT IN ASSOCIATE
An associate is an entity over which the investor has significant influence (usually
20%–50% ownership). It is accounted for using the equity method, not FVPL or FVOCI.
Common accounting questions:
1. What is the carrying amount of the investment in associate?
2. What is the total amount of income or equity in earnings should be recognized?
3. What amount of gain on remeasurement to equity should be recognized?
4. What is the implied goodwill arising from the acquisition?
5. What is the excess fair value over the acquisition cost?
6. What is the excess of cost over the carrying amount of net assets?

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Notes on Financial Accounting and Reporting
By CSJr.

INVESTMENT IN SUBSIDIARY (AFAR)

A subsidiary is a company controlled by the investor (usually more than 50%
ownership). It is not a financial asset—instead, it is consolidated in the group financial
statements.

1. DEBT INVESTMENT (Bond Investments or Financial Assets at Amortized

Cost)

Initial Measurement:

Bond investments are initially recognized at fair value plus transaction costs directly
attributable to the acquisition. The carrying amount is subsequently amortized over
the life of the bond using the effective interest method.

Subsequent Measurement:

After initial recognition, bond investments are measured based on the company’s
business model and the characteristics of the contractual cash flows, as follows:
 Amortized Cost
Bonds are measured at amortized cost if the company intends to hold them until
maturity and the objective is to collect contractual cash flows only.
Interest Revenue: Recorded in Profit or Loss using the effective interest method.
Principal Repayment: Reduces the carrying amount of the investment.
Fair Value Changes: Not recorded.

 Fair Value Through Other Comprehensive Income (FVOCI)

Bonds are classified under FVOCI if they are held for the purpose of collecting
contractual cash flows and selling the financial asset. These are typically long-term
investments, but the company may sell them before maturity depending on
circumstances.

Interest Revenue: Recorded in Profit or Loss using EIM (same as amortized cost).
Fair Value Changes: Recorded in Other Comprehensive Income (OCI).
Principal Repayment: Reduces the bond's carrying amount.
On Disposal: The cumulative OCI gain/loss is recycled to Profit or Loss.

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Notes on Financial Accounting and Reporting
By CSJr.

 Fair Value Through Profit or Loss (FVTPL)

Bonds are measured at FVTPL if they are held for trading, or if the investment does
not meet the criteria for classification under either amortized cost or FVOCI. In this
case, all changes in fair value are recognized directly in profit or loss. Transaction
costs attributable to the acquisition of bond investments held for trading or at fair
value through profit or loss are expensed immediately.

Interest Revenue: Recorded in Profit or Loss.

Fair Value Changes: Also recorded in Profit or Loss.
Principal Repayment: Treated as part of the fair value change.

Reclassification of Equity Instruments, Debt Instruments and other OCI Items

An entity may reclassify financial assets only when it changes its business model for
managing those assets, such as moving between holding assets to collect
contractual cash flows and holding assets to collect cash flows and sell. This
reclassification is applied prospectively from the first day of the reporting period and
is treated as a change in accounting estimate. Reclassification applies only to debt
investments, as the business model concept is relevant to these assets. Equity
investments cannot be reclassified from OCI to P/L because equity investments (like
company shares) don't give fixed payments like interest or principal, so they don't
follow the business model used for collecting cash flows. Additionally, debt
investments measured at fair value through profit or loss (FVPL) by irrevocable
election are excluded from reclassification since the election is final and cannot be
reversed.
1. Equity Investments
Equity investments at fair value through profit or loss (FVPL),
All changes in fair value are recognized directly in profit or loss. Since they are
already included in net income, there's no need for reclassification. Upon sale, nothing
is transferred from OCI because OCI was never used. Eventually, the gain or loss ends
up in retained earnings when the profit or loss is closed at the end of the period.
Equity investments at fair value through OCI (FVOCI),
Changes in fair value are recorded in OCI, but they are never reclassified to profit or
loss, even upon disposal. Instead, when the investment is sold, the cumulative OCI
balance is directly transferred to retained earnings. So, there is no recycling to profit
or loss — this is a no-recycling OCI item.

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Notes on Financial Accounting and Reporting
By CSJr.

2. Debt Investments
Debt investments at FVPL
Fair value changes are always recorded in profit or loss, just like equity FVPL. There's
no reclassification needed, and upon sale, the gain/loss is already included in net
income and eventually goes to retained earnings.
Debt investments at FVOCI
Fair value changes are recorded in OCI during the holding period, but — unlike equity
FVOCI — they are reclassified to profit or loss upon sale. After being recognized in
profit or loss, they naturally flow into retained earnings when income is closed. This
is an example of OCI that is recycled to P/L. The OCI balance for debt instruments
measured at fair value through OCI (FVOCI) is not directly transferred to retained
earnings. Instead, it is recycled to profit or loss upon sale or derecognition of the
financial asset and remains as an equity component under AOCI account. As a rule,
retained earnings reflect only the net income from the profit or loss section, and not
items from other comprehensive income. Therefore, OCI items remain in a separate
component of equity, typically labeled as Accumulated Other Comprehensive Income
(AOCI), until they are either recycled or directly transferred to retained earnings
depending on their classification
Some OCI items are not recycled through profit or loss but instead remain within
Accumulated Other Comprehensive Income (AOCI) under equity and are transferred
directly to Retained Earnings, typically upon disposal, settlement, or gradually over
time. These items bypass the income statement entirely and include the following:
Revaluation surplus (e.g., from PPE)
Changes are recorded in OCI, and never recycled to profit or loss, even on disposal.
Instead, when the asset is used or sold, the revaluation surplus is transferred directly
to retained earnings, without going through P/L.
Remeasurement of defined benefit pension plans
These actuarial gains or losses are also recorded in OCI and never reclassified to
P/L. Like revaluation surplus, they are eventually transferred directly to retained
earnings.
Changes in fair value of financial liabilities designated at fair value through profit or
loss (due to credit risk)
If the increase or decrease in fair value is due to changes in credit risk, it is recorded
in OCI and not reclassified to profit or loss. It may be transferred directly to retained
earnings upon derecognition of the liability.

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Notes on Financial Accounting and Reporting
By CSJr.

Other OCI items are recyclable, meaning they are temporarily recorded in OCI but
later reclassified (or “recycled”) through the income statement. This ensures that the
income statement reflects the full financial effect of the underlying transaction when
it occurs.
Foreign currency translation adjustments
These arise when consolidating foreign subsidiaries. While the foreign operation
continues, the adjustment is kept in OCI. Upon disposal of the foreign operation, it is
reclassified to profit or loss, and then flows into retained earnings. So this is a
recycled OCI item.
Gains or losses on the effective portion of cash flow hedges
These are first recorded in OCI and later reclassified to profit or loss when the hedged
transaction affects earnings (e.g., when the forecasted purchase or sale actually
occurs). Once in P/L, they eventually flow into retained earnings.

2. Other type of Investments:

 INVESTMENT IN FUNDS (AFAR)

 INVESTMENT IN JOINT VENTURE (AFAR)

 INVESTMENT PROPERTY
Held by an owner or by the lessee under a finance lease to earn rentals or for capital
appreciation. In other words, only Land and building can qualify as investment
property.
Initial Measurement: Purchase Price plus Any directly attributable expenditure.
Subsequent Measurement: (Either of the two)
 Fair Value Model – The change in fair value is recognized in profit or loss. The
price in the principal market (fair value) shall not be adjusted for transaction
cost. Any equipment or furniture that is an integral part of the building is
generally included in the fair value. Also, it excludes prepaid or accrued
operating lease income.
 Cost Model – The investment is carried at cost less any accumulated
deprecation and accumulated impairment loss.

Gain or loss from disposal of investment property is the difference between the net
disposal proceeds and carrying amount of asset.

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Notes on Financial Accounting and Reporting
By CSJr.

An entity and its subsidiaries own the following properties as of December 31, 2024:
Building under construction to Investment property is property held by an owner
be rented out under operating P700,000 ot by the lessee under a finance lease to earn
lease rentals or for capital appreciation.

Vacant building but held to be Investment property is property held by an owner

leased out under operating 300,000 ot by the lessee under a finance lease to earn
lease rentals or for capital appreciation.

Equipment leased out under Only building and land can be classified as
operating lease 200,000 Investment property.

Building occupied by its 200,000 Even if employees are paying rent, the building is
employee paying a market rent still being used to support the company’s own
operations — such as housing employees,
supporting business functions, or serving as office
space. That makes it owner-occupied property.
Land held for undetermined 600,000
use
Factory machine leased out 100,000 Only building and land can be classified as
under operating lease Investment property.
10- story building (first 6 floors 600,000 is part of Investment property because if a
are rented out under operating 1,000,000 building or land could be sold or leased out
lease other floors used as 600,000 separately, an entity shall account the portions
office space) portions of which separately as investment property and owner-
can be rented out occupied property (PPE).
Building leased out under If the services provided are a more significant
operating lease with significant 500,000 component f the arrangement, the property is
ancillary services to its tenant treated as owner-occupied property.
Building that is leased to 300,000 Since investment property means holding real
another entity under a finance estate to earn rental income or for capital
lease appreciation while still owning and controlling the
asset, a finance lease breaks that rule — because
the asset is no longer controlled in the same way.
Land rented out to a subsidiary 400,000 Property leased to an affiliate from the perspective
of the group as a whole for the purpose of
consolidated financial statements, the property is
treated as owner-occupied property.
Land held for sale in the 300,000 A property held for sale in the ordinary course of
ordinary course of business business is included in inventory,
Building rented out to an 400,000 A building rented out to an associate is not treated
associate as owner-occupied in the consolidated financial
statements because, in consolidation, the associate
is considered an external party, not part of the group.
Land held for long term capital 300,000
appreciation
Constructed building to be used 400,000
as office building
Building constructed in behalf 500,000
of another entity
Office building awaiting 100,000 Noncurrent asset held for sale is not an investment
disposal. property.

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Notes on Financial Accounting and Reporting
By CSJr.

What is the total investment property should be reported in the consolidated

statement of financial position the entity and its subsidiary? P 3,300,000
Building under construction to be
rented out under operating lease P700,000

Vacant building but held to be leased

out under operating lease 300,000

Land held for undetermined use 600,000

10- story building (first 6 floors are
rented out under operating lease 600,000
other floors used as office space)
portions of which can be rented out
Land rented out to a subsidiary 400,000 Property leased to an affiliate from the
perspective of the group as a whole for the
purpose of consolidated financial statements,
the property is treated as owner-occupied
property.
Building rented out to an associate 400,000
Land held for long term capital 300,000
appreciation

What is the total investment property that should be reported in the separate
statement of financial position of the entity? P 2,900,000
Building under construction to be
rented out under operating lease P700,000

Vacant building but held to be leased

out under operating lease 300,000

Land held for undetermined use 600,000

10- story building (first 6 floors are
rented out under operating lease 600,000
other floors used as office space)
portions of which can be rented out
Building rented out to an associate 400,000 A building rented out to an associate is not
treated as owner-occupied in the consolidated
financial statements because, in
consolidation, the associate is considered an
external party, not part of the group.
Land held for long term capital 300,000
appreciation

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Notes on Financial Accounting and Reporting
By CSJr.

 CASH SURRENDER VALUE OF LIFE INSURANCE

Cash surrender value is the amount which the insurance from will pay upon the
surrender and cancellation of the life insurance policy. For a CSV to exist, the
following conditions must be met:
1. The policy must be a life insurance policy (not a fire, accident, or other non-
life policy),
2. premiums must have been paid for at least three full years,
3. and the policy must be surrendered at the end of the third year or anytime
afterward.
Although the CSV generally starts accruing legally at the end of the third year, some
insurance companies allow for CSV to be granted as early as the end of the second
year. In accounting, the CSV is classified as a noncurrent investment. Meanwhile, the
loan value refers to the amount the insured can borrow from the insurance company
using the CSV as collateral. This loan is treated as a regular obligation and not
deducted from the CSV.
Why the Initial Cash Surrender Value (CSV) Affects Retained Earnings, but
Subsequent Increases Do Not?

When a company first recognizes a cash surrender value on an existing policy, it often
means the company failed to recognize it in prior years. This makes the initial
recognition a correction of an error or change in accounting estimate related to prior
periods. In its initial recognition at the end of year three, 2/3 (representing prior 2
years of nonrecognition) of the Initial Cash Surrender Value (CSV) is Applied to
Retained Earnings.

Dividends received on a life insurance policy are not recognized as income but are
instead treated as a reduction of life insurance premiums paid. Similarly, any increase
in the cash surrender value (CSV) of the policy is accounted for as a reduction of life
insurance expense, rather than as income. In cases where the policyholder elects to
apply the dividends to increase the CSV, the amount applied is not deducted again
from the insurance expense, since it is already included in the total increase in CSV.
This ensures there is no double-counting of the reduction in expense, and the
accounting remains consistent with the treatment of both dividends and CSV as
offsets to life insurance costs, rather than income items.
The gain on a life insurance settlement is computed as the difference between the
face amount of the policy and the sum of the cash surrender value and any unexpired
portion of the premium from the beginning of the policy up to the date of the insured
person's death.
(See Practical Financial Accounting and Reporting vol. 1, page 540, 541 and 542)

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