CHAPTER 6

Financial Assets

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LEARNING OUTCOME
 To describe the characteristics of financial assets.
 To explain methods to measure financial assets.

 To record financial assets transactions.

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INTRODUCTION ACCOUNTING
STANDARDS
• MFRS 7 Financial Instruments: Disclosures -
contains many of the disclosure requirements of IAS 32
as well as new requirements
• MFRS 9 Financial Instruments – sets out principles
for the financial reporting (recognition and measurement)
of financial assets.
• MFRS 132 Financial Instruments: Presentation –
sets out the definitions of financial assets, liabilities and
equity instruments
• IAS 39/ MFRS 139 MFRS 139 –Financial
Instruments: Recognition and Measurement -
includes procedures for the recognition and measurement
of financial instruments. (Has been replaced by MFRS 9) 3
Financial Assets include:

 Cash

 Contractual right to receive cash from another party - loans and receivables.

 Debt investment -bond

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 Equity investment of another company - ordinary or preference shares.
CLASSIFICATION AND MEASUREMENT
OF FINANCIAL ASSETS
 Paragraph 4 MFRS 9 states that an entity shall classify
financial assets as subsequently measured at amortised
cost (AC), fair value through other comprehensive
income (FVTOCI) or fair value through profit or loss
(FVTPL) on the basis of:
1. the entity’s business model (objective) for managing its
financial assets - whether the objectives are to held
financial assets in order to collect contractual cash flows or
collecting contractual cash flows and selling financial
assets; and
2. the contractual cash flow characteristics of the financial
asset - give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal 5
amount outstanding
CLASSIFICATION AND MEASUREMENT OF
FINANCIAL ASSETS
 Summary of the classification and measurement
of debt and equity investments.

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DEBT INVESTMENTS
 Debt investments are characterized by
contractual payments on specified dates of:
 principal and
 interest on the principal amount outstanding.

 Companies group debt investments into three

categories:
 Held-for-collection
 Held-for-collection and selling
 Trading

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DEBT INVESTMENTS

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AMORTISED COST- EFFECTIVE INTEREST METHOD

Effective interest method

 The effective interest method is a way of allocating interest
expense from a bond evenly and consistently over the life of
the bond.

 When dealing with bonds, there are two different interest

rates to deal with: the stated rate that appears on the bond
and the market rate. The market rate is the rate of interest
that the market is willing to pay for the bond at that time.

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DETERMINING AND RECORDING INITIAL
COST FOR BONDS PURCHASED
 The price of a bond is determined by the interaction
between the bond's stated interest rate and its market rate.
 A bond's price is equal to the sum of the present value of
the principle and the present value of the periodic interest.
 If the stated rate = the market rate, the bond will sell at
par.
 If the stated rate < the market rate, the bond will sell at
a discount.
 If the stated rate > the market rate, the bond will sell at
a premium

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DEBT INVESTMENT—AMORTISED COST
Amortisation of Premiums And Discounts

 Journal entry:
If a premium exists:
Dr Cash/interest receivable XX
Cr Interest revenue XX
Debt investment XX

If a discount exists:
Dr Cash/interest receivable XX
Debt investment in XX
Cr Interest revenue XX

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DEBT INVESTMENT AT AMORTIZED COST
Illustration 1:
Sentosa Bhd purchases RM100,000 of 8 percent
Aman Damai Bhd on 1 January 2016, at a
discount, paying RM92,278. The bonds mature 1
January 2021 and yield 10 percent; interest is
payable each 1 July and 1 January. Sentosa Bhd
records the investment as follows:

1 January 2016
Debt Investments (Amortised cost – AC) RM92,278
Cash RM92,278

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DEBT INVESTMENT AT AMORTIZED COST
8% bonds purchased to yield 10%
Date Cash received Interest revenue Bond discount Carrying amount
amortization of bonds
1/1/16 RM92,278
1/7/16 RM4,000a RM4,614b RM614c RM92,892d
1/1/17 RM4,000 RM4,645 RM645 RM93,537
1/7/17 RM4,000 RM4,677 RM677 RM94,214
1/1/18 RM4,000 RM4,711 RM711 RM94,925
1/7/18 RM4,000 RM4,746 RM746 RM95,671
1/1/19 RM4,000 RM4,783 RM783 RM96,454
1/7/19 RM4,000 RM4,823 RM823 RM97,277
1/1/20 RM4,000 RM4,864 RM864 RM98,141
1/7/20 RM4,000 RM4,907 RM907 RM99,048
1/1/21 RM4,000 RM4,952 RM952 RM100,000
RM40,000 RM47,722 RM7,722

a RM4,000 = RM100,000 x 0.08 x 6/12

b RM4,614 = RM92,278 x 0.1 x 6/12
c RM614 = RM4,614 – RM4,000
d RM92,892 = RM92,278 + RM614

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DEBT INVESTMENT AT AMORTIZED COST

Sentosa Bhd records the receipt of the first semi-

annual interest payment on 1 July 2016, as follows:

1 July 2016
Dr Cash RM4,000
Debt Investment (AC) RM614
Cr Interest Revenue RM4,614

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DEBT INVESTMENT AT AMORTIZED COST
Sentosa Bhd is on a calendar-year basis, it accrues interest
and amortizes the discount at 31 December 2016, as follows:

Interest Receivable 4,000

Debt Investments (AC) 645
Interest Revenue 4,645
DEBT INVESTMENT AT AMORTIZED COST
Reporting of Bond Investment at Amortized Cost

Statement of Profit or Loss and Other Comprehensive Income for

the year ended 31 December 2016 (extract)
Other Income & Expense:
Interest Revenue RM9,259*
**(RM4,614 + RM4,645)

Statement of Financial Position as at 31 December 2016 (extract)

Long-term investments
Debt investment (AC) RM93,537
Current assets
Interest receivable RM4,000
 DEBT INVESTMENT AT AMORTIZED COST

Assume that Sentosa Bhd sells its investment in Aman

Damai Bhd’s bonds on 1 November 2018, at 99.75 plus
accrued interest. Sentosa records this discount
amortization as follows:

Debt Investments (AC) 522

Interest Revenue 522

(783 x 4/6 = 522)

DEBT INVESTMENT AT AMORTIZED COST
Computation of the realized gain on sale
Selling price of bonds (exclusive of accrued interest) RM99,750
Less: Book value of bonds on 1 November 2018:
Amortized cost at 1 July 2018 RM95,671
Add: discount amortized for the period, 1 July 2018
to 1 November 2018 RM522 RM96,193
Gain on sale of bonds RM3,557

Cash (RM99,750 + RM2,667) 102,417

Interest Revenue (4/6 x RM4,000) 2,667
Debt Investments (AC) 96,193
Gain on Sale of Investments 3,557
Debt Investments—Held-for-Collection
and Selling (HFCS)
Debt investments held-for-collection and selling follow
the same accounting entries as debt investments held-
for-collection during the reporting period. That is, they
are recorded at amortized cost.

However, at each reporting date, companies

 Adjust the amortized cost to fair value.

 Any unrealized holding gain or loss is reported as part of other

comprehensive income rather than in the profit and loss
statement.

Thus, this debt investment is designated at fair value

through other comprehensive income (FVTOCI)
Held-for-Collection and Selling (HFCS)
Illustration 2 (Single Security):

Graff plc purchases £100,000, 10 percent, five-year bonds on

January 1, 2019, with interest payable on July 1 and
January 1. The bonds sell for £108,111, which results in a
bond premium of £8,111 and an effective-interest rate of 8
percent. Graff records the purchase of the bonds as follows.
January 1, 2019
Debt Investments (FVTOCI) 108,111
Cash 108,111
Illustration (Single Security): The entry to record interest
revenue on July 1, 2019, is as follows.

Cash 5,000
Debt Investments (FVTOCI) 676
Interest Revenue 4,324
 Held-for-Collection and Selling (HFCS)

Interest
Revenue for
2019 = $8,621

Illustration (Single Security): At December 31, 2019, Graff

makes the following entry to recognize interest revenue.

Interest Receivable 5,000

Debt Investments (FVTOCI) 703
Interest Revenue 4,297
Held-for-Collection and Selling (HFCS)

Illustration (Single Security): To apply the fair value method

to these debt investments, assume that at December 31, 2019
the fair value of the bonds is £105,000. Graff makes the
following entry.
Unrealized Holding Gain or Loss—Equity / Fair Value Reserve 1,732
Fair Value Adjustment 1,732
Held-for-Collection and Selling (HFCS)
Illustration 3 (Portfolio of Securities):

Webb AG has two debt securities classified as held-for-collection

and selling. The following illustration identifies the amortized
cost, fair value, and the amount of the unrealized gain or loss.
 Held-for-Collection and Selling (HFCS)

Prepare the adjusting entry Webb would make on December

31, 2019 to record the loss.

Unrealized Holding Gain or Loss—Equity / Fair Value Reserve 9,537

Fair Value Adjustment 9,537
Held-for-Collection and Selling (HFCS)

Sale of HFCS Securities

If company sells bonds before maturity date:
 It must make entries to remove from the Debt Investments
account the amortized cost of bonds sold.

 Any realized gain or loss on sale is reported in the “Other

income and expense” section of the income statement.
Sale of HFCS Securities
Webb AG sold the Watson bonds (from Illustration 3) on July 1,
2020, for £90,000, at which time it had an amortized cost of
£94,214.

Cash 90,000
Loss on Sale of Investments 4,214
Debt Investments (FVTOCI) 94,214
Sale of HFCS Securities

Webb reports this realized loss in the “Other income and

expense” section of the income statement. Assuming no other
purchases and sales of bonds in 2020, Herringshaw on
December 31, 2020, prepares the information:
 Sale of HFCS Securities

Webb records the following at December 31, 2020.

Fair Value Adjustment 4,537

Unrealized Holding Gain or Loss—Equity / Fair Value Reserve 4,537
Held-for-Collection and Selling (HFCS)

Financial Statement Presentation

Debt Investments—Trading
Companies often hold debt investments with the
intention of selling them in a short period of time.
These debt investments are often referred to as
trading investments.

Companies report trading securities

 at fair value,

 with unrealized holding gains and losses reported

as part of net income.

A holding gain or loss is the net change in the fair

value of a security from one period to another,
exclusive of dividend or interest revenue recognized but
not received.
Debt Investments—Trading
Illustration 4:

Assume that on December 31, 2019, Western Publishing

determined its trading securities portfolio to be as shown. At the
date of acquisition, Western Publishing recorded these trading
securities at cost in the account entitled Debt Investments. This is
the first valuation of this recently purchased portfolio.
 Debt Investments—Trading
At December 31, Western Publishing makes an adjusting entry to
the Fair Value Adjustment account, to record both the increase in
value and the unrealized holding gain.

ILLUSTRATION 17.10

Fair Value Adjustment 3,750

Unrealized Holding Gain or Loss—Income / Fair Value Gain 3,750
Fair Value Option

Companies have the option to report most financial assets

at fair value, with all gains and losses related to changes in
fair value reported in the income statement.
 Applied on an instrument-by-instrument basis.

 Generally available only at the time a company first

purchases the financial asset or incurs a financial
liability.

 Company must measure this instrument at fair value

until the company no longer has ownership.
 Fair Value Option
Illustration 5
Ceria Bhd purchases bonds issued by the Aman Central Bank.
The company plans to hold the debt investment until it
matures in five years. At 31 December 2019, the amortized cost
of this investment is RM100,000; its fair value at 31 December
2019, is RM113,000. If Ceria chooses the fair value option to
account for this investment, it makes the following entry at
December 31, 2019.

Debt Investment (German bonds) 13,000

Unrealized Holding Gain or Loss—Income / Fair Value Gain 13,000
Fair Value Option

In this situation,

 Hardy uses the Debt Investment account to record the

change in fair value at 31 December.

 It does not use the Fair Value Adjustment account.

 The unrealized gain or loss is recorded as part of net

income even though it is managing the investment on a
held-for-collection basis.

 Hardy must continue to use the fair value method to

record this investment until it no longer has ownership
of the security.
EQUITY INVESTMENTS
 Equity investment represents ownership interest, such
as ordinary, preference or other capital asset
 The degree to which one corporation (investor) acquires
an interest in the shares of another corporation
(investee) determines the accounting treatment for the
investment subsequent to acquisition.
 The classification of such investments depends on the
percentage of the investee voting shares that is held by
the investor.
 Cost includes:
 purchase price of the security
 broker’s commissions and fees are recorded as expense.
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Equity Investments
The degree to which one corporation (investor) acquires an
interest in the common stock of another corporation
(investee) generally determines the accounting treatment
for the investment subsequent to acquisition.
Equity Investments
Equity Investments

Holdings of Less Than 20%

Under IFRS, the presumption is that equity investments
are held-for-trading.

General accounting and reporting rule:

 Investments valued at fair value.

 Record unrealized gains and losses in net income.

Thus, this equity investment is designated at fair value through

profit or loss (FVTPL).
Equity Investments

Holdings of Less Than 20%

IFRS allows companies to classify some equity
investments as non-trading.

General accounting and reporting rule:

 Investments valued at fair value.

 Record unrealized gains and losses in other

comprehensive income.

Thus, this equity investment is designated at fair value

through other comprehensive income (FVTOCI).
Equity Investments—Trading (Income)
Illustration 6

November 3, 2019, Republic SA purchased ordinary shares

of three companies, each investment representing less than
a 20 percent interest. These shares are held-for-trading.

Republic records these investments as follows:

Equity
Investments
—Trading

Republic records these investments as follows:

Equity Investments (FVTPL) 718,550
Cash 718,550

On December 6, 2019, Republic receives a cash dividend of

€4,200 on its investment in the ordinary shares of Nestlé.

Cash 4,200
Dividend Revenue 4,200
Equity Investments—Trading (Income)
At December 31, 2019, Republic’s equity investment portfolio
has the carrying value and fair value shown.
 ILLUSTRATION 17.14

On December 31, 2019, Republic prepares an adjusting entry to

record the decrease in fair value and to record the loss as follows.

Unrealized Holding Gain or Loss—Income /Fair Value Loss 35,550

Fair Value Adjustment 35,550
Equity Investments—Trading (Income)

On January 23, 2020, Republic sold all of its Burberry ordinary

shares, receiving €287,220.

Cash 287,220
Equity Investments (FVTPL) 259,700
Gain on Sale of Investments 27,520
Equity Investments—Trading (Income)
In addition, assume that on February 10, 2020, Republic
purchased €255,000 of Continental Trucking ordinary shares
(20,000 shares €12.75 per share), plus brokerage commissions
of €1,850. Republic’s equity investment portfolio as of December
31, 2020.
 Republic records this adjustment on Dec. 31, 2020, as follows.

Fair Value Adjustment 101,650

Unrealized Holding Gain or Loss—Income/ Fair Value Gain 101,650
Equity Investments—Non-Trading (OCI)

The accounting entries to record non-trading equity

investments are the same as for trading equity investments,
except for recording the unrealized holding gain or loss.

Companies report the unrealized holding gain or loss as

other comprehensive income.
Equity Investments—Non-Trading (OCI)
Illustration 7

On December 10, 2019, Republic SA purchased 1,000 ordinary

shares of Hawthorne Company for €20.75 per share (total cost
€20,750). The investment represents less than a 20 percent
interest. Hawthorne is a distributor for Republic products in
certain locales, the laws of which require a minimum level of
share ownership of a company in that region. The investment
in Hawthorne meets this regulatory requirement. Republic
accounts for this investment at fair value.
Equity Investments (FVTOCI) 20,750
Cash 20,750
Equity Investments—Non-Trading (OCI)

On December 27, 2019, Republic receives a cash dividend of

€450 on its investment in the ordinary shares of Hawthorne
Company. It records the cash dividend as follows.

Cash 450
Dividend Revenue 450
 Equity Investments—Non-Trading (OCI)

At December 31, 2019, Republic’s investment in Hawthorne has

the carrying value and fair value shown.

Republic records this adjustment as follows.

Equity Investment (FVTOCI) 3,250

Unrealized Holding Gain or Loss—Equity/ Fair Value Reserve 3,250

The Equity Investment account is used because the non-trading

classification is applied on investment by investment basis,
rather than on a portfolio basis.
Equity Investments—Non-Trading (OCI)
 Equity Investments—Non-Trading (OCI)

On December 20, 2020, Republic sold all of its Hawthorne

Company ordinary shares receiving net proceeds of €22,500.

Entry to adjust the carrying value of the non-trading

investment.

Unrealized Holding Gain or Loss—Equity / Fair Value Reserve 1,500

Equity Investment (FVTOCI) 1,500
Equity Investments—Non-Trading (OCI)

On December 20, 2020, Republic sold all of its Hawthorne

Company ordinary shares receiving net proceeds of €22,500.

Entry to the sale of the investment.

Cash 22,500
Equity Investments (FVTOCI) 22,500
DE-RECOGNITION
MFRS 9 provides that an entity should de-
recognise a financial asset or a portion of a
financial asset when, and only when
 The contractual rights to the cash flows from the
financial asset expires; or
 It transfers the financial assets and the transfer
qualified for de-recognition.

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RECLASSIFICATIONS
 MFRS 9 states that reclassification is permitted
when, and only when, an entity changes its
business model for managing financial assets .
 Reclassification of financial assets should apply
prospectively from the reclassification date.
 The entity shall not restate any previously
recognised gains, losses (including impairment
gains or losses) or interest.

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RECLASSIFICATIONS

 Reclassifications shall be from:

 the amortised cost to the fair value through profit or
loss.
 the amortised cost to the fair value through other
comprehensive income.
 the fair value through profit or loss to the amortised
cost.
 the fair value through profit or loss to the fair value
through other comprehensive income.
 the fair value through other comprehensive income to
the amortised cost.
 the fair value through other comprehensive income to
the fair value through profit or loss.
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DISCLOSURES
 The purpose of disclosures prescribed by MFRS 7 is to
assist users in assessing the risk related to financial
instruments:
 Market risk
 Credit risk
 Liquidity risk

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