CHAPTER 16 INVESTMENT IN DEBT SECURITIES. This chapter dzeuses investment in debt secur, its charatay and classification, i measurement, and reclassification, derecognition and fins presentation. LEARNING OBJECTIVES: ‘After studying this chapter, you should be able to: 1. Identify and describe different types of bonds. 2 Identify the classification of financial assets for debt security 3. Describe the recognition, initial measurement. measurement, relassifcation, derecognition and financial presentation of investment in debt securities, 4. Differentiate finan PERS and PFRS for SMEs. 5._ Differentiate the accounting for FVTPL, FVTOCI and FAAC. &_Calculate the corect amount of investment and its related accounts Me comect amount of investment and its relat esaccounts, DEBT SECURITIES im A debt security pertains to a financial debt instrumer ‘tems, bond is the most common debt securities issued by entities formal unconditional promise, made interest payment ata stated rate until the principal sum is paid. Parties involved include the bond issuer (borrower), bondholder Ginvestor/lender), and underwriter/arranger (one who serves 3% the instruments). leman for a fe from the borrower or gain in re Bond Certificate This is a certificate of j the bondh¢ Proof of ownership over the bonds by the invests 564 i... INVESTMENT IN DEBT SECUR ‘TOPIC OVERVIEW: a Ao recognition, deital measurement yp, bse ra asset and investment in debt securities ung ler ment which can be bog or sold between two parties and has basic terms defined, sve ae amount borrowed, interest rate, and maturity and renewal date. Example of debt securities include government bond, corporate bond, certificates deposit, or preferred stock with mandatory redemption period. Of thee “under seal, to pay @ jbecifed sum of money at a determinable future date and to make perc lebtedness issued by the bond issuer which entiles veh ect Principal and interest payments. This serves 5? Investment in Debt Securities chapter 20= Securities ‘pond indenture song denture (omens ced deed of tas, bod ry ond Irs the unconditional contract ba lation or vract) 1s contract between the be ond anole that species terms ofthe bond. Tema nee SS a bonch® interest rate (coupon, nominal or stated raat) MERE: Dates when the Interest vl be Pld (ly pape ey very sic Provisions regarding security or collateral; and {Other terms and condition of the bond i by parties involved such as financial requirements. quirements of bond indenture cals for da juidation of the bond issuer's assets. an ‘TYPES OF BONDS ~__ TYPE DESCRIPTION SSE With reference to maturity cs ete Bonds which matures ona singe date ‘Term bonds Bonds with a series of maturity dates. With reference to attached security eee | Bonds secured by a mortgage on real properties Bonds secured by stocks and bonds of other corporation. Bonds guaranteed by another party's promise to pay in case the bond issuer falls to make payments Bonds without any security or collateral 3m in the books ofthe bond isuer Bonds in which the names of bondholder are registered in the books ofthe bond issuer bond Bonds in which the holder of the certificate is the acknowledged bondholder. ‘The bond Issuer does not maintain any record to monitor persons who own the bonds. Mortgage bonds Guaranteed bonds Debenture bonds h reference to registra 565 eeeChapter 16 -Investment in Debt Securities Se Callable bonds Junk bonds Zero-interest bonds INVESTMENT IN DEBT SECURITIES Classification Im debe securities are nancial assets and ma bel "assed 1. Financial asset at fair value through profit or loss (evr 2. Financial assetsat amortized cost (FAC) 3 nancial asset at flr value through other comprehen ped PTEMENSIVE zag Measurement fy Prescibed by PRS 9, hancialasets, except for FVTPL, are mex fair value plus transaction costs. Tho fair value ar nana tute determined using the following order of priority 7 1. Quoted pricein an active market 2 Present value ofthe related cash flows (principal and interest using effective interest rate ive interest rate, once he securities shal by Ive mated 25 part of the noncurrent assets unless they are do from the reporting date. THUnClALASSET AT FAIR VALUE THROUGH PROFIT OR LOSS evi Hon of financial assets includes instruments which are a Held for ‘trading; 4 oe a ibly designated at FVTPL; and requirement sett iM debt securities that do not satis © rc Ot measurement at amortized cost and at FVTOCI. 566 NN Peet tor 16 ~Investment in Debt Securities _cpopter 3 tie INITIAL MEASUREMENT - FV TPL 1 MEASU Te riAL categy PL S Taymeasaeg atta A asc i Ee eon eee : Initial Measurement STRATION: Init puanuary 1 2013 Aaora Co. Parhased 7000000 bons a 9 me tre on January 1, 2028 and pes 1p sm nual interest beers ay 202 Comptia one at ag jective ofthe Aurora's business mat aun ar term t fake advantage of Buctutns ig ty C8 nd athe profit taking. Accordingly, the bonds were tee hel SOLUTION: Investment in bonds - FVTPL (P1M x 98%) 980,000, Brokers and commission expense ~ P&L. 50,000 Cash 1,030,000 To record the acquisition SUBSEQUENT MEASUREMENT - FVTPL. Tavestment in bonds as financial asset at far value through profit ‘measured at fair value, with changes in fale value Foss. The formula is as follows: | Fair value (current reporting date) xx Less: Carrying value (fair value previous reporting date) oa Unrealized gains or (loss) - P/L aC Bonds - FVTPL xx sd gain ~ PRL, x Unrealized loss Unrealized loss ~ P&L. x Investment in Bonds - FVTPL. xx ILLUSTRATION: Computation of Unrealized Gain or Loss On January 1, 2021, Bataan Co. purchased bonds at P1,000,000 bonds a 98. The Mature on January 1, 2026 and pay 129% annual intrest January 1, 2022. The objective ofthe Bata's basins models M bonds inthe near term to take advantage of fuctatons in it at fo short-term profit taking Accordingly, the bonds wer csi a held for trading securities. On December 31, 2021, the bon 102, 567Chapter 16 -Investment in Debt Securities red: Compute for theunrelzed gain or oss and LUTION: Less: Carrying value (98 x P7,000,000) Unrealized gatn-P/t. / PPE Neca ty Po, py The Journal entry to record the increase in fair valye i Investment in bonds ~ FVTPL P40,000 Unrealized gain - P&L. Financial Statement Presentation (2021) SFP (Current Asset section) Investmentin bonds - FVTPL. SCI (P&L) Unrealized gain on FVTPL bi 40,00 £10209, 900) Nonamortization of Premium or Discount The premium or discount onthe financial asset at FVTPI, tg Not amor ney I the end of reporting period. Computation of Interest Income mance, emu or discount is not amortized, interest inc Include the nominal or stated interest earned rng the nee The journal entry record the interest and (or) accrual is Cash or Interest receivable XX Interest income x Torecord collection or accrual of interest GLUSTRATION: Computation of Interest Income 9p, anuary 1, 2021, Bulacan Co. purchased bord at 1,000,000 bonds « pete bonds mature on January 1, 2024 an ay 12% annual interes teeing January 1, 2022, The objective of the Bulacan’s s mode Zl such bonds in the near term to take advantage of fluctuations i held an shortterm profit taking. Accordin ra f r gly, the bonds are classi helt for trading securities. On December 31, 2021, the bonds are quoted Required: Prepare journal e collection MY {0 record accrual of interest and its subsesiet 568 pee os terest receivable 021 Pia 32/34/2 nerestimcome(12%xPLooq agg) °° To record accrual ofinterest 120009 022 Cash ossos/2 Interest receivable one To record collection of intrest 129000 pent cOGNITION - FVTPL Et [Realized gain oF losses on dersogaiton of RBC wx cognized fn the loss. The gain o loss is computed as the diference eneeny oe Tying “amount (le, fair value previews measurement date). The formula to compute for the reaiaed pan ers n received x \come of the investment sold x ‘Transaction cost x Net selling price x Less: Carrying value (fait value previous reporting date) Realized gain (or loss) -P/L journal entry below. Ths is also k. is deducted from the the entity sold the investment in between x xx Loss on sale (if any) ~ P&L EVPTI Gain on sale (ifany) - P&L Interest income or receivable (Ifapplicable) To record the sale BSE ILLUSTRATION: Derecognition FVTPL a On January 1, 2021, Nueva Ecija Co. purchased P1,000,000 = ature on January 1, 2024 and pay 12% anual nore begining January 1, 2022. Cor id on eh soe a eee values for short-term ed as held for trading the bonds were clas 569‘On December 31, 2021, the bonds are bonds were sold at 105. 4-16 -Investment in Debt Sec eer way be acqulred thu the olowing iene Se soni Quoted at 192 6, * On Fans "Y6, Psa \ Character 1, Compute for the amount of gain or loss on the Ste of Proceeds Pas] “ene = Peete curse oaea ve Face Amount (FA) | Nominate) 2. Prepare the journal entries. a, : a ln face amour! . a “ PFA Een ‘ata premium EDN The gain onsale ofthe FVTPL is computed as follows Selling price (P1,000,000 x 1.05) ‘at adiscount P1.050,000 ILLUSTRATION: Initial Measurement of anc less: Carrying value ~ December 31, 2024 1020.0 1, 2021, Pampanga Co. purchased P,000,000 bon 020.09 january 1 800 bonds a 98, The Gain on dereco coo a caanare on jaauary A, ag a PAY 12% anmal interest heats z nds ommission paid onthe acquis eae Requirement No.2 — Rao pany 1, 2022, P sustion amounted to PSD.008 ‘The bonds are to be appropriately assed as nancial et eon oe The Journal entry to record the sale on January 6, 202 is Cash P1,050,099 Hs cost a cen eer rmalcaryon Oexcxtin, FINANCIAL ASSET AT AMORTIZED COST (FAAc) Bonds - PAAC 1,030,000 Imvsnent in debt areas class ied ar oa cial asset at amor : co ce Mix 588)» #50000] 1,030,000 1. The business model is to hold the finaner assets In order to clay coe Contractual cash flows on specified date and sRM BONDS, i ; » nal ih fos resol pamens of rade, Eomptatin o urease pe resents (Tom is (SPP) on the principal amount outstanding | acquired on the interest date : i Pverl ‘01 using effective rate x Principal) x Examples of financial asset at amortized cost: err ‘est (PVOA x Principal x Nominal rate) = 1. A bond (term or serial) with stated maturity date with fixed, variaew | Paes carey oa Eerae we mixed interest cash flows poe 2 A bond witha stated maturity date where principal and interes ae io ed to the same currency inflation index oon {Payable annually the face 3 Abond with stated maturity date whit ays a variable market interet Payable Ann eee eee cia rate subject to a cap On January 1, 2021, Tartac Comp: jately classified as financial asset at amount of 2,000,000 to be appropriately Kase a 4 Afull recourse loan secured by collateral amortized cost. The bonds mature on December 31, 2024. The bor jecember 31. Acquired to yield 10%, Interest is payable every December: Requi Compute for the purchase price ofthe bonds i: Computation of Purchase Price (at a Premium), Interest INITIAL MEASUREMENT . FAC Financial asset at amort i "tized cost should initi Including transaction cost, e recognized at fair val sm 570ment in Debt Securities pter 16 -Investt ecurities ca — G99"* x P2M x 1296) 765.004 bo a ‘Add: PV of interest payments is using 10%, Present value of the investm "9 FOF 4 Periods using roy, ‘Present value of 1 for 4 p “Present value of ordinary ILUSTRATION Computation of Purchase Price arg py, is Payable Annually On nur 22021, Zambales Company aeauired 0% g amount af #200000 to be appropriately cassia amortized cos The bonds mature on December 31 sy Thee acetoield 12% Imereti payable every Decent bong Required: ‘Compute for the purchase price of the bonds, "ne me, ry SOLUTION: 6355" x P2M) °1271,090 Ae: PV ofnterest payments (3.0373*xP2M x 1096) 1274 460 Present value of the investment bonds Fist LET 460° ‘Present value of 1 for 4 periods using 12%, “Present value of ordinary annuity for 4 periods using 1295, {LUSTRATION: Computation of Purchase Price, Interest is Payaty Semiannually On January 1, 2021, Cavite Company acquired 12% bonds in the fay semaint of 2,000,000. They mature on December 31,2024 ‘The bonds were acauired te yield 10%, Interest is payable every June 30 sci December Requit Compute for the purchase price of the bonds SOLUTION: Present value of Principal (6768 x P2M) 1,353,600 ‘Add: PV of interest payments (6.4632 xP2Mx5%) 775,584 Present value ofthe investment bonds 2,129,164 the present value factor 6 dunce the interest is payable sem 5% (1004 dicey Petiods (that is 4 years x 2 payments per year) atl 572 a rer 16 Investment in Debt Securties cogpte 1 ae ae “Ferm Bonds: Acquired in Between Interest pates te for the present value oft the bonds) the presen ale ato cston, ae bn yy, on (or deduct premium amore oO con, Ne bonds onthe last interest date (or — ro get the total purchase price, the nominal ould 1 eecipl (POL uungafectn rete = teres digi dha 573Debt Securities L BONDS aa —Investment in Debt Securiti Zomputaton of the Present value of Seriay Bonds at chapter 1621 ee SE SoLuTtor Prindpal Interest Totat sou" anne Years Collection Collection Collection orp tt ~ ie 22,000 EndofYearl XX a XX x vat EndofYear2 XX x YM : { EndofYearn XX x x RR air value Fraction “MOC ichase Price of Serial bonds x vesmentin bonds (FIMx30%) F 980000 ‘Saytoo pp Sia, = aK ive rights (1,000 x P20) 20.000 “apa? _FH7EH00 NN: Computation of Purchase Price ites Oh aral —2ib00,000" [FL00.900- gat. fatagas Company acauied 12% bon, amount of 2,000,000. They mature on December 4 024, The the acquired to yield 10% The bonds mature in 4 equal The bong wal insta Mo ncial P5000 cer Decenter 31. Imeresis payable every Dey reed anor loss de Orcas ane fee Required: Comput forthe purchase price ofthe bonds, fed cost is the amount at which the fnancial asset or Financial SOLUTION: ensured at initial recognition minus principal repayments pcg Total on Cumulative amortization using the effecive interest mothed of Interest Total Pv Present A nce between that initial amount and the maturity amount and, for Principal Collection Collection factor Value financial assets adjusted for any loss allowance. Yer (a) Ho Sat ening ; 7500000 P240,000 740,000 90. 6na74 Interest Collection eee 2 $00,000 160,000 680,000 ares 561952 Inerestrceved s computed by mulpying te eal 3 500.000 120,000 620.000 0.7513 465,806 the nominal rate, The journal entry record the interes 4 500,000 000 560,000 0.6830 __aeaaan acerual is Total present value ofthe serial bonds P2003 97 BONDS WITH WARRANTS When an Tament in bonds is acquired together with warrants the use the relative fair value to allocate the acquisition cost On TRATION: Acquisition of Investment in Bonds with Warrants On January 1, 2021, Rizal Company acquired 10%, 1,000 investment in bonds with warrants at a cost of 1,100,000. The face value per bond 6 1 900. Each bond is accompanied by’ waren tha nina 38¢ 20 shares of common stock, par P50, annually on December 31 nen the bonds are issued, the pre Value per warrant cu without warrants 989 no Required: Prepare jo ‘company sl Bonds FAAC me Jatin / onde FAAC —tntrestincome Increase Increase ecrease Decrease P 575 entry to record the acquisition. 574Chapter 16 -Investment in Debt Securities OE ees Interest Income Interest income is computed by usi an also be computed using the folloy, lowing. Interest received or accrued a a — ‘Add: Discount amortization Deduct: Premium amortization Interest income ILLUSTRATION: Amortization of Term Bonds On January 1, 2021, Quezon Company acquired 1295 amount of 2,000,000 ata cost of P2,126,776, They mar? 2024. The bonds were acquired to yield 109%. Ines December 31. Required: 1) Compute forthe following: 2. Interest income in 2021. b. Carrying amount of investment in bonds, Decemt be & Current portion ofthe bonds, December 31, 992,77 Se 2021. 4. Noncurrent portion of the bonds, December 31, 2021, 2) Prepare all the necessary entries in 2021. SOLUTION: ‘Amortization table: Inerest ——Taterest Prema ra) Date___Collection Income _A ; 1701/2021 erg 12/31/2021 240,000 212,678 27,322 | gpueeee 240.000 2093945 30.055 206839 240000 206,940 33,060 2036 12/31/2024 240,000 203634 9 aot —240000 __203,634 36,339 200000) Notes: —is ¢ 7 {heres collection or received = Nominal rate x face value rate "OMe = Beginning balance of present value x effective ite! Present value 24 year = Attization plus discount v s The difference rouneete Fthe a ‘ortization on December 31, 2024 of P27 is due® 576 ae er 16 —favestment In Debt Secures or 6 —lovestment In Debt Sea nd ofthe year may be computed a eterna weanding/12) = gute: Present value December 44,3600 Bey p240,000] 0 (212677641 es irement No. 1a ReaTest income = P212,678 requirement No. 1b Canvingamounofvestment bons Dcembe33, 2521 =z 454, requirement No. 1¢ Zero the enti amount of 2099/54 is presented as pt of nacre asst since the principal amount i collectible beyond ane yay : juirement No. 14 egret porto othe investment in bonds - eas, Requirement No. 2: Journal entries 1/01/2021 Investments in Bonds - FAC 2,126,776 Cash 212676 12/31/2021 Cash 240,000 Interest income 240,000 To record receipt of interest Interest income 2132 Investments in Bonds - FAAC 27322 To record amortization of premium in ne interes rate x months 192:126776 x (as(t0% x = 92,099,454 ‘rent Asset Section) Investment in Bonds - FAC 2,099,454 SCI (P&L) Interest income P 212678 ILLUSTRATION: Term Bonds with Interpolation Albay Company purchased five-year bond on January 1, 2021 ata cost of ?5,000,000 with annual interest of 5%, which is also the effective rate, Payable on December 31 of each year. Commissions pald to broker 10 Burchase the bond was P110000. At the reporting date of December 31, 2021, interest has been received as expected and the market rate of interest 's now 696. The bonds are to be classified as FAC. ion would be as follows: 110900 e 5,110,000 The journal entry on the date of at January 1, Investments in Bonds - FAC 2021 Cash (5,000,000 + P110,000) 577chapter 16 -Iavestment in Debt Securities subsequent Measurement and Computation of gan through Interpolation Ve I FAAC is required to be subsequently measured at ‘effective interest method. Since the transaction, amortized ‘ cost ace Cos, tof the financial asset, compura”™® inlet i ' Computation celides 8 lation is needed. ones ‘ Since the acqt a premium, the effective “th the original fective rate and nominal rate of $yg° "Mt be ig Using 4% the present valve of 1 f0F§ peviods is o2y9 % vluofan onary anny of for priodsis 445.7 M4 hy Present value of principal (P5,000,000 x.8219) Add: Present value of interest (P250,000 x 4.4518) Total present value (Fair value) The acquisition cost of P5,110,000 is still lower than the sy 75,222,450 using 4% but greater than the present pres value of 59%, This means that the effective rate ust be between 49a iy scenario, the differential between 4% and 5% ca In be analy eta Bercents Presentvae _Gap(P) ig, 1% 75,222,450 — S20 6) } prizaso 1% 2.222.450 Computation using the lower rate as a starting point: K-\nhuowerteece [ap (PVofLR-PVoFx) ereatee [CHR-LR) x Brortac Bvt] ? 5,110,000 5% 5,000,000 Total gap difference ke P11, 496+ [05% -499) x p25 X= 51% emutatonwsingthe higher rate as a stating point xe merely BER PV ol X = S%-165%- 4%), P110,000_ Xo asi 722,450" | 578 eo Investment in Debt Securities eee ree tT el n ietterte —HR-Haate omen ° etn follows: 7 7 interest Interest. Premium = i oi/o1/2021 100 42/31/2022 250,000 229.589 ag 4nq 9090461 42/31/2023 250,000 228.659 ay su 00 12/31/2024 250,000 227.696 22394 Spe 00 12/31/2025 _250,000_226690__-23sta_ Songun should therefore be reported at P5,091 ‘the asset should th P 090,461 on December 31, 2021 using the new effective interest rat. In dition, interest Ieee te £230,461 will be taken to profit or loss for the year. The market merece rate of 6% Is ignored since the asst is measured st amortised eee ‘The journal entry on December 31, 2021 tp record receipt of interest, and premium amortization isas follows: Dec. 31,2021 Cash 250,000 Interest income ~ P&L, P230461, Investment in Bonds - FAAC 19539 ILLUSTRATION: Amortization of Serial Bonds On January 1, 2021, Camarines Norte Company purchased serial bonds with bonds is 12%, Interest and principal are payable annally every December 31. The bonds are to be held with 2 10% effective yield, The bonds mature at annual installment of P1,000,000 every December 21. Required: 1) Compute for the following: investment in bonds, December 31, 2021. the bands, December 31, 2021 ion of the bonds, December 31, 2021. Amortization table: Years Interest Interest Amorir Principal Collection Income zation Collection 01/01/2021 oe 42/31/2021 360.000 _pstazs7__P49,743_P.000,000 379 Present Value‘chapter 16 ~Investment in Debt Securities aaa 740 205282 aapaG sane 270000 Bios ino jotatr saz $000.95 2008 Requirement No. 1 0 terest Income= P310,257, eet 20214 Requirement No. 3 Ria Current portion of the investment in bonds = 1000, PLO34,718 1000s034, Requirement No.4 Honcuret porn ofthe investment in bonds= P1010 9p Requirement No. 5: Journal entries a vest od gain (0 T0ss)=P/L Note st income of the investr J itere ovesime 5g aro rs ea i fo near formulas cull deved tom the Cash (proceeds) sale (if any) ~ P&L x alesse a mortied cost - (if any) ~ P&L come(or receivable (any) (ish ransation cost) lowing journal entry: x RR ILLUSTRATION: Sale of Term Bonds on January 1; 2021, Masbate Company acquired 12% bonds in the fce amount of 2,000,000 ata cost of 2126776 They matureon Doce eg, 2024. The bonds were acquired to veld 10%, Interests payable exes December 31. On December 31, 2022, ater recsving the ntrcat ene ofthe bonds were sold for 1,500,000, Required: Prepare journal entry to recor the sl. SOLUTION Amortization Table: Interest Interest. Premium Present Date Collection Income __Amort.__value 01/01/2021 2,126,776 12/31/2021 240,000 212,678 Pa7,322 2.099.454 12/31/2022 __240,000__ 209,945 30,055 __ 2.069399, 01/01/21 Investments in Bonds - FAAC 3,102,569 Cash : 12/31/21. Cash 360,000 Interest income Investment in Bonds ~ FAAC ay 8 Cash 1,000,000 Investment in Bonds ~ FAAC Lon» Financial Statement Presentation (2021) SEP (Asset) ynvestment in Bonds - FAAC (current) (PIM +#34,718) _p 1034718 Investment in Bonds FAAC (noncurrent) (PIM + P18,107) “FES 7 SCI (P&L) Interest income P 310257 DERECOGNITION - FAAC TENTION FAAC Eee eect ‘The steps in computing the gain or loss on derecognition of FAAC involes the following 1. Compute for the carrying amount of the financial asset at the date a! derecognition, 2 gmpare the carying amount of the financial asset at derecogniion i inst the net consideration received. Recognize the gain or Io (ee lormula sas olows ‘onsideration received Transaction cos t Net selling price a XX 1,500,000 Net selling price 5004 Less: Amortized cost ~ 12/31/2022 (P2,069,399 x ¥4) 1,034,700 Realized gain - P&L, F 465,300 41500,000 1,034,700 465,300 ILLUSTRATION: Derecognition of FAAC Se On January 1, 2021, Catanduanes Company purchased 5-year bonds wit face value of 4,000,000 and stated interest of 10% per year eval semiannually June 30 and December 31. The bonds we ! business model is to 4,324,400 to yield 8%. The objective of Catanduanes' business model is 581| | ! Fr Chapter 16 -Investment in Debt Securities hold the investment w {principal and interest il maturity and to collect th © contra, tual sh on Febriay 28 2023 the bonds were sold st 195, on interest. elie a Ieqart:Conpe orth aM0U Torts ong, ? cop AAC Mery SOLUTION: Interest Premium Income Amor” 12/01/2021 —, 05/30/2021 200,000 P172,976 12/31/2021 200,000 171,895 06/30/2022 200,000 170,71 12/31/2022 200,000 169,602 06/30/2023 200,000 168,386 12/31/2023 200,000 167,121 The carrying amount of the asset at the date of computed as follows; Carrying value - December 31, 2022 Less: Premium amortization (31,614 x 2/6)* Carrying value ~ February 28, 2023 ying ny Anis i the premium amortization from January 1, 2623 to june 3, 2m, Prorated for only 2 months (i.e, January 1 to February 28). : 4,209,644 =10538_ Fi99.106 ‘The loss on sale ofthe investment in bonds is computed as foll Total consideration (P4,000,000 x 1.08) 4,200,000 Less: Accrued interest (P4,000,000 x.10 x 2/12) 66,667 Net selling price 4,133,333 Less: Carrying value - February 28, 2023 4,199,106 Loss on derecognition - P&L, _P 65,773, [h* journal entry on February 28, 2023 would be as follows: 1 Bo record separately the receipt of interest and amortization & 416 ~Investment in Debt Securties n ofthe financial asset, efvestment in Bonds - FAC 4133333, 6573 499,106, ‘vernatively, the compound journal ent fnterest, premium amortization and dey drould be as follows: Hy to record the re cept of recognition of financial aot Gash 41200000 tess onderecogtion Pal va00 Investment in Bonds - Interest income (P168,386 x 2/12) oo rINANGLAL ASSET AT FAIR VALUE THROUGH OTHER coMPREHENSWE (COME (FVTOCT wesiment in debe secures are classed as FYTOCI when both of the "The business model is achleved both by ci the financial assets and 2, The contractual cash flows are solely payments of principal and interest ‘onthe principal amount outstanding ing contractual cash INITIAL MEASUREMENT - FVTOCI +FVTOCI should be initially recognized at far vale including Warsacton cost ILLUSTRATION On January 1. Initial Measurement - FVTOCI unted to P124,400. The objective of che contractual cash flows and sell Required: Prepare journal entry on the acquisition. SOLUTION: Premium up to Feb. 28, 2023, Investment in Bonds - FVTOCI 4,324,400 ae ash Cash ((P4M x 10596) +P124,400) P 66,667 To record the ac Investment in Bonds - FAAC : P 10538 record the acquisition Interest income (P168,386 x 2/12) 5619 SUBSEQUENT MEASUREMENT -FVTOCI__ aT Subseaent to inal recognition, investment Bons cased 2 FOTO {is measured at fair value. However, the amortized c 583 582 a _,, —s iliac itt eae__,.._—- be computed using elective interesy on the fir value and the amortized cogtj"ethod. py n © the cama presented in equity. na sntries to record amortization rest income are act Computation of Unrealized Gain or Loss formula should be used to co The pute unrealized loss in equity: “mraz oy Fair value ~ year end ® less: Amortized cost - year end = Unrealized gain (loss) in equity - cumulative balance ee Less: Unrealized gain (loss) cumulative balance lactyegy Unrealized gain (loss) - OCT ee 22a torecord the unrealized gain or loss ig; in Bonds - FYTOCI x Unrealized gain - OCI a To record increase in fair value of the investment. Unrealized loss - OCI Investment in Bonds - FVTOCI x To record decrease in fair value of the investment, Computation of Interest Income Interest income under FAAC and FVTOCI is co1 follows: Fag [tatrest income = Present vale, beginning othe pov feciverae The journal entry to re amortization of discount of "cord the receipt or accrual of interes premium is as follows: Cash or Interest receivable XX Interest income - P&L To record collection or accrual of interest Investment in Bonds - FVTOC] x Interest income - pa, ~ To record amortization of discount XX Interest income - pa, ‘nvestment in Bonds - FVTOCy m -FVTocI Torecord amortization of premium 584 Pas i |, 16 -Invest ment in Debt Securities RATIO! “Subsequent Measurement of pygqq waar 2021, Suan Company purgeeey bond eda Rp a ed a te oe ner 108 Commision a om TF COnsidering the trang ot ae efective rate ofthe bond on Penlon is computed tote a eter 'f collect the contracts oo Thee and sl fairl ofthe ineestnent the nex yess ote The eo 2023 103 2996? 22 8 2024 101 heres nondcaon tat he nesters edt tered om a oe forthe folk, ured: Compute fo the following ana prepare jour ets he aes chrough 2025: eee SOLUTION: The first step Is to compute forthe initial carrying amount: ion cost (P6,000,000 x 1.05) 6,300,000, cost 179,325 carrying amount P6A79,125 carrying amount, the amortization table is prepared as Interest Interest. Premium Present Collection Income __Amort. 2021 600,000 518.330 81,670 12/31/2022, 600,000 511,796 88,204 12/31/2023 600,000 504740 95,260 12/31/2024 600,000 497,119 102,881 12/31/2025 600,000 __—488,889_——111,111 Next procedure is to compute for the unrealized gain or loss 2s follows: @) (b) (=a-b) Fairvalue Present UG (UL)-_UG(UL)- value Equity —_prioryear 2021 6,600,000 6397455 202,545 2022 490,000 6309,251 470.749 200645 2023 6,180,000 6213992 (33,992) i 585614411 6,000,000 6,060,000 6300000 Not rae = Fae value x fai-value, 2 Prevent vale=based on 2 Gut) eau the came sr ¥ ve(uy oct aspatorthe journal entries: Si0i/5t vestments Bonds FYTOCL Cash 12/31/21 Cash . Interest Income ~ P&L Investment in Bonds - FVTOCI Investments in Bonds - FVTOCI Unrealized gain ~ OCI 12/31/22 Cash Interest income ~ P&L Investment in Bonds - FVTOCI Unrealized gain - OCI Investment in bonds - FVTOCI 12/31/23 Cash Interest income ~ P&L Investment in Bonds - FVTOCI Unrealized loss ~ OCI Investment in Bonds - FVTOCI 12/31/24 Cash Interest income - P&L. Investment in bonds - FVTOCI Unrealized loss - OCI Investment in bonds - VT 12/31/25 cash in bonds - FYTOCI Interest income - P&L, Investment in Bonds - FVTOCI Investments in Bonds - BVTOCI Unrealized gain - Oc] a ses Gian 300,000 * fe the movement of UG (UL) during the g i ure 6479,125 600,000 202,545 600,000 31,796 600,000 204,741 600,000 17,119 600,000 351,111 "Year Py, 647906 31824 ois 200546 517% 8.204 317% 504749 95.28 204741 4gnas 10288 er ausiers ¢ 5: summary carrying UENCE Uareatang Interest Meek SainCloss) —Gayealied Income Value= FV“ guies oe por P510390. P0000 Patras 500. ~eae0; 170766 Gree 2022 6,180,000 33.992) ene 2 =6:180,000" z 204741 Ea —eoeoat. ety Seren ion 5,300,000 300000. ast COGNITION-FVTOCL EAA ga or loss derecogntion of hand am at FVTOC Renae in the profit of loss. However mann recmgously recognized in other comprehensive ine P rege los as proviged under PFRES paghiaee Mellons ensidration received Ceaslntrest income ofthe Investment sol? Transaction cost Less: Carrying amount ~ derecognition date Net realized gains (or loss) -P/L ized cost derecognition date ins (or loss) - P/L. st income of the investment sold is deduct received ifthe entity sold the investment in between ‘The above formula is actually based on the following. Liar entry: Cash Unrealized gain - OCI (ifany) Loss on sale - P&L (if any) Financial asset at FVTOCL Gain on sale - P&L (ifany) Unrealized loss - OI (any Interest income(or receivab BREZe went No.3 vention received chapter 16 ~Investment in Debt Securities ee ized gain or loss previous! 3 by including it in the re, Re ae ier 3,000,000 x 1.02) 7 Conse Tincome oT thetivestmentoc, "8198000 al action cost * LUSTRATION: Derecoa” . yeoman tea on falue of PB600,000 and stated ses an - Oc aan December 31 The bonds wer Aad realized oss — or The objective ; (ese: Creying amount = FY previous 8/5 date aae nga cash lows and “4 vestige loss: P/ Esso The fair value ofthe investment forthe year ended 2021 ang 2999 on ee ao consideration received (P8,000,000. 1.02) The investment was sold for 102 on January 1, 2023 an n cost amounting to P99,000. ion thatthe investments credit rsk increased from ina he Coma 1. Prepare the amortization table 2. Compute for the unrealized gain or loss presented as equity Compute forthe derecognition gain or loss to be presented in P&L, Compute for the amount of reclassification adjustment 5. Prepare the journal entry from January 1, 2021 through january 4,209 art of OCI and SOLUTION: Requirement No. 1 Amortization Table Interest Present Date Collection Income 01/01/2021 ie 12/31/2021 800,000 —_P748,005 51,995 12/31/2022 800,000 743,326 56,674 8,202,503 12/31/2023 800,000 738,225 61,775 8,140,729 12/31/2024 800,000 732,666 67.334 8,073,394 12/31/2025 800,000 726,605 73,395 8,000,000 Requirement No. 2 Computation of unrealized gain or loss as follows: @ @) (c=a-b) fe =e“) Fairvalue Present UG(UL)- _UG(UL)-_UG(UL)- value Equity prioryear_ Ol gaat gszng00 scary “gogog PTF Gage 400.000 8.202503 197497 0.g23—«13667 588 ess: Inter 1g pric ortize sed loss Real 12/31/22 01/0123 income of the investment sold ‘Transaction cost 1d cost ~ derecognition date P/L. Cash t income Investment in bonds - FVTOCL Investment in bonds - FVTOCI Unrealized gain OCI Cash (8,160,000 - 99,000) Unrealized gain - OCI Derecognition loss ~ P&L Investment in bonds - FYTOC! 589 Pe.160.000 copnized in equity. The ized gain recognized in P&L. 831172 agina7 800,000 748,008 51995 60823 60823 800,000 743,326 56,674 136,674 136674 8,061,000 197.497 141,503 8.400000‘Chapter 16 -Investment in Debt Securities ‘Chapter 16 -Investment in Debt Securities LUNREALIZED GAIN ORLOSS ON FVTOC: DEBT vs. EQUrry Note the flowing difrence in accounting for any gay er ty fe accumulated in other comprehengi changes in fa im ive ico 1 FvTOC! (debt) ~ UG (UL) recognized in equity i rece loss. Prot 2 TOC (equity) ~ UG (UL) recognize in equity is transteng to retained earnings. ay, RECLASSIFICATION ‘As discussed in Chapter 15, reclassification is allowed only whom Change in business model and apple only for geht fea Sea action any reclassification shall be treated prospectively fone th reclassification. ate Furthermore, the appropriate recassification date isthe first dq reporting period following the change im business model ir Me an entity classifying financial assets Reclassification from FVTPL to FVTOCL Ian entity reclassifies a financial asset from FVTPL to FVTOCI, the foloving shall be made: ¥ the financial asset continues to be measured at fair value; Ye fairvalu at recsiaton date becomes the new caring any and 7 Y anew efetve interest rate must be determined based onthe ur at reclassification date. The pro-forma entry would be: FVTOCI(fair value reclassification date) FVTPL(carrying value reclassification date) XX x Reclassification from FVTPL to FAAC If an entity reclassifies a financial asset from FVTPL and to FAAC, te following shall be made: ©" the fair value at the reclassification date becomes its new gross carrying amount the difference between the fair value at reclassifc amount is amortized through profit or loss over in date and fac: remaining term o aie fo ing the effective interest method; and Ww terest rate must be d rased on the fair vale ee ee letermined based on ‘The pro-forma entry would be: FAAC (fair value reclassification date) XX PVIPL (carrying value) xx 590 ‘ RATION: Reclassification from FVTpy, reget ry 1, 2020, Pajero Company purchased S.year bonds ou P8000 and ated ies ay MME wh ce value Clecember 31. The bonds were acqurea seg Ba cy cet 3 Wield 10% The 4303 eso | December 31,2070 ee 3, 2020) an A Craon | Amortized Torte vit cost | Fairvalue | “"2*% 4.253589 | P4308 766 pan E J prevailing market rate of Interest applicable tothe bonds at te Wog0 and 2021 are at 9% and 11% respectively. The preva market te 2ofsrerest on January 1, 2022 isalso 119% ssuming thatthe above securities are propery clsited as FYTPLand on CASENO. 1; FVTOCL CASENO.2: FAC ‘The necessary journal entries on December 31,2020 to December 31,2021 are as follows: Investment in Bonds - FVTPL 85503 ec 31, 2020 | Unrealized gain - P&L 85503, Torecord the unrealized gain Fair value, Dec. 31,2020 74388,766 Less: Carrying amount 4303263, Unrealized gain-P/L F85503 cash 480000 Interest income ~ P&L 480,000 Torrecord the receptofimerest. Dec.31, Unrealized loss - P&L 9291018 2021 estment in Bonds FVTPL P291018 To record the unrealized loss Fair value, Dec. 31,2020 4097749 Less: Carrying amount _4308,76_ Unrealized loss - P/L. (291,018) 4800000 Cash 00 Interest income ~ P&L 4904 To record the receipt of interest. CASE NO. 1: From FVTPL to FVTOC! ‘The journal entries in 2022 are as follows: Jan.1, Investment in Bonds FVTOCI 2022 Investment in Bonds ~ FVTPL 591 4,097,749 4,097,749chapter 16 Investment in Debt Securities To record the transfer of financial asset at FTL yp Ic Dec. 31, Cash segs 2022 | __ Interest income ~ P&L ihe receipt of interest. ‘ny 2sa40 sn setemm otarest0" 918 ree p22 sow tat he ural ent for elsiieation ve Nath te esryngpened (ana 12 CASE NO. 2: From FVTPL to FAAC Jan. 1, Investment in Bonds ~ FAAC 202° _Investmentin Bonds ~ FVTPL i To record the transfer of nancial asset at FVTPL, to gq 9748 4,097,749 cost. 'rtizeg Dec. 31, Cash 480,000 2022 | _ Interest income - P&L. To record the receipt of interest. 1609 Interest income ~ P&L 29,248 ment in Bonds ~ FAC Amortization table based on the 11% effective rate on reclassification ae Interest Interest. Premium Present) Date ___Collection _Income Amort. Value 12/31/2021 4,097,749 2/31/2022 480,000 450,752 29,248 4,068,501 2/31/2023 480,000 447,535, 32,465 4,036,036 2/31/2024 480,000___—443,964 36,036 4,000,000 ification from FVTOCI to FVTPL, ae secessifisa financial asset from FVTOCI to FVTPL, the following the phanell asset continues to be measured at fair value lue at the reclassification : oe ication date becomes its new gross carryité tain oF loss previously recognized in ott Fecassipocay nome i reclassified from equity to profit o nss#* ication adjustment (see PAS 1) at the reclassification date 592 perc: ec 16 -Lavestment in Debt Securities crapter CPE epee eerie Stay rae . : sean . recent TONG NAG ten a date; me De eet in oa tg oe mt ater tn prehensive Income is removed rns eal ae ee Shoat va ofthe nancial asset athe let a 7 teal fective ners rte wilieese ee ste adjustment of cumulative gan o los previoualyrecognled in theft value ofthe Financial asset at the reasieation date wl rpg ee Carzying amount ofthe fnancal ase si it had aways been messed a Smortized cost. This adjustment affects OCl but des no aft pot oles and therefore is not a reclassification adjustment. ‘The pro-forma entry would be: FAAC (fair value reclassification date) xx FVTOCI(carrying value reclassification date) x FAAC x Unrealized loss - OCI x Unrealized gain - OCI x FAAC xx al carrying value of the FAAC can be computed using the fllowing Fairvalue~ reclassification date Less: Unrealized gain -OCt Add: Unrealized loss ~OCl ial carrying amount of FAAC = Carrying value had the westment always been measured at amortized cost je bee 593Chapter 16 -Investment in Debt Securities nn Investment in Debt Secu ILLUSTRATION: Reclassification from FVTOCI popter 16 —lnvest Debt Securities ¢ ae On Janary 1, 2020, Fjero CEMPSNY BUTEhased jens jy 228 aesentinBonts-F¥roq {alue of? 000,000 and stated Interest of 129 per seat ayats Mh Interest income - P&L P5401 every December 31. The bonds were acquired to yield 1op0?abl ay See data relate to the bonds: _ Tn To record premium amortisation using 10y origina "S45 ee St December ST-2020 —[ pec oa et jan. 1,2020 | December 31, December 3; n table-based on the 109 or cx cost fair value __cost ™ reclassific Interest Interest Prema — . Pago t —| OSA [ 766 | Fae | My pate__Collction —menett Frey The prevailing market rate of interest applicable to the bony a 4701/2020 2020 and 2021 were at 99 and 11%, respectively. The pres eg 12/31/2020 P480,000 430,376 i alin 480,000 rate of interest on January 1,2022 i also 11%, 1 12/31/2021 ; 425,359 7 : ~~ yja1/2022 480000 ease Assuming thatthe above securesae propery classited as Frog), 12/31/2023 480,000 4133384 January 1, 2022 the bonds are reclassified into: og tefsifanoe —_Songoo hss CASENO. 1: FVTPL. CASENO. 2: FAac 0 ase NO a The necessary journal entries on December 31, 2020 to December 31, 2p ‘The necessary entries in 2022 are as follows: t are as follows: a Jan.4, Investment in Bonds - FVTPL. 4,097,749 Dec. 31, Investment in Bonds - FYTOCI P135,177 5022" Investment in Bonds - FTO Ap97769 2020 Unrealized gain - OCI 13537 To record the transfer ofinancial asset at FYTOCI to FYTPL, To record the unrealized gain Reclassification loss ~ P&L. 101,199 Fair value, Dec. 31, 2020 Unrealized loss - OCI 101.199 Less: Carrying amount amortized cost) penais Gate ‘esa Unrealized gain - OCI 2022 "Interest income (PAM x 1294) 480,000 inh 480,000 To record the receipt of intrest. Interest income- P&L ‘CASE NO. 2: From FVTOCI to FAAG To record the receipt of interest. Jan.1, _ thvestment in Bonds - FAC 4198948 20: realized loss - OCI 101,199 Investment in Bonds - FVTOC 49,674 FL meeeea Fvroc 4097749 Interest income ~ P&L, Pagine To record the tronsfer of financial asset at FVTOCI to FAAC To record the amortization of premium Dec.31, Cash 480,000 Dec.31, Unrealized loss - OCI P 236,376 2022 Interest income ~ P&L. a0. 080 2021 Investment in Bonds - FVTOCI 236,376 To record the receipt of interest. To record the unrealized loss ine racieieacpad 60,205 Fair value, Dec. 31,2020 4,097.8 Investmentin Bonds-FAAC oe Less: Carrying amount (4,388,766 - 54,641) 4334105 To record premium amortization using 10% original effective Decrease i Fi 6,376 Cash feet tr | measurement of the FAAC Is equal to the amortized had the 480,000 investment al asured at amortized cost Interest income - P&L p4g0,000 _ ‘BYestment always been measured at amo oferta Under the sored con measrer aoe he fii t i determined at nal recon, Coenen, wet ey Teclassifies from FAAC to FVTOCI, the recognition 595, To.record the receipt of interest. 594Reclassification from FAAC to FVTPL, A OF the amo ving shal jot measured at fair value at the ren ae So ety a, the fair value at thi the difference betwee assifcay ion da amortized cost ofthe assets recognized in proyiegy yt ag The pro-forma entry would be: FVTPL x Reclassification loss - P&L (if any) x FAAC - Reclassification gain ~ PAL (ifany) 7 Reclassification from FAAC to FVTOCI sssifies a financial asset out of the If an entity aw measurement category and into the thor eam income measurement category, the f shall be made: se the financial assetis measured at fair value at the reclassificg “the difference between the fair value at the recta ton na amortized cost ofthe financial asset is recognized in OCI, kat the orignal effective intrest rate will be used to amortized the nny asset. ‘The pro-forma entry would be: FVTOCI (fair value reclassification date) xx FAAC (carrying value reclassification date) xx Unrealized loss OCI xx F Xx or FvToc! XX Unrealized gain - OCI XX ILLUSTRATION: Reclassification from FAAC iu January 1. 2020, Pajero Company purchased S-year bonds with fit cre pee 00.000 snd stated interes of 1296 per year payable aml lecember 31. The bond — dara po is were acquired to yield 10%. The fol H bonds saaeaeer ecember 31,2020 | | pecenbar si 2a ete [Amortized 5} faitvalue | __cost__| Faltvath | P4.388,766 | P4,198,948 | P4097 596 oo cnapter 16 ~lnvestment in Debt Securities an 2 ston any 202 the bond eg The eva kt ely. ing that the above securiti. assum" 2022 the bonds are Property dassin January 12022 the yor lassie as FAAC and on FvTk ied nto: SASENO.2:FvTOcL ‘he necessary Journal entries on December 31,2020 to December 3, 2001 are as follows: . Dec. 31, NoJournal entry to recognized unreatized pain orloxe 2020 ch Dec. 31, Cas 480,000 2020 | _ Interest income - P&L ‘To record the receipt of interest. Pree Investment in Bonds - FVTOCI 9671 Interest income ~ P&L, ahneesr oe To record the amortization of premium. Dec 31, Cash 480,000 2024 interest income ~ P&L, 480,000 To record the receipt of interest. Investment in Bonds - FVTOCL 954.641 Interest income ~ P&L 954.641 To record the amortization of premium. ible based on the 10% original effective rate on the date of Interest Interest Premium Present Date Collection __Income __Amort._value 01/01/2020 4 303,268 12/31/2020 480,000 430,326 ——PAS,674 4,253,589 12/31/2021 490,000 425359 «54,641 4,198,948 12/31/2022 480,000 419895 60,105 4.138.843 12/31/2023 480,000 413,884 66,116 12/31/2024 480,000 ___407,273__72,727, 4,097,748 101199 948 Bonds ~ FAAC ee ial asset at FVTOCI FA the transfer of financi 597Chapter 16 Investment in Debt Securities “Chapter 16 -Investment in Debt Securities _ Dec. 34, Cash 400,000 2" "Interest income 2022 sa record the receiptof interest 42095 ‘CASE NO. 2: From FAAC to FVTOCI Jan. 1, Investment in Bonds ~ FVTOCI 4.198.948, 202° _Investmentin Bonds ~ FAAC a To record the transfer from FAAC to FVTOCI 198064 -0cl 101,499 Investment in Bonds ~ FVTOCI a r Dee. 31, Cash 480000 9 2022 | _Interestincome Ta record the receipt of interest. 480009 Interest income P&L 60,105 Investment in Bonds ~ FVTOCI a To record amortization using original effective rate 105 Carryingamount at recasication date (4.198.948-101,499) 4.05745 Less: Premium amortization-using original rate ae Carryingamount December 31,2022 x “This i also the carrying amount using 10% using orginal GSE Note thatthe effecive intrest rate andthe measurenns she temas ret adhnted ap 4 roa of tha recauttheaton, ant net interest income of 419,695 (P480,000"- POD 108) when ie Gn the 10% orignal effective rate Amortization table-based on the 10% original effective rate on the date of a i pos 000 6a 4000,000 ation Galn oF Loss vs. Reclassificatio peclassin cry gan or loss is the diferent benalastment pects rou eth wala a ain fancia assets, rized in PBF OC depending ion adjustment 1s the amount of f unrealized aj equity being recyled orto os wi recycled Realized Gain op —— osha MENT (PFRS 9) FAAC, FVTOCI (debt), a lease receivable, a contract asset or a loan Aside from lease receive contract asset, loan commitment and a financial impairment under PFRS9 paragraph: reclassification is et Categories Loved a Interest Interest Premium Present Subjectan’ | upetrments| Cate (es | Date Collection Income _Amort. Value [impairment? | __ Loss reversal) 4 01/01/2020 WA 12/31/2020 480,000 430,326 Ne wa | 12/31/2021 480,000 425,359 No wh N/A 12/31/2022 480,000 419,895 " ” | 12/31/2023 480,000 413,684 |. Pal aI Lazj3ij2024 480,000 407.273 Yes Wk N/A 4 ‘Amortization table using 11%, the prevailing rate at the reclas we PAL PL late is: Date {mterest—Taterest Premium allection Income __Amort. 12/81/2021 . 12/31/2022 480,000 450,752 29,248 12/31/2023 460000 44753532465 4, CEPRr a 599 598 ee ela = { Chapter 16 ~Investment in Debt Securities _ "ECTED CREDIT LOSS (ECL) ee respective risks ofa default occurring as the weights, Sa Credit loss isthe difference between all contractual cash flowy, thay fan entity in accordance withthe contract and all the easy 4 °¢ are Ghat expects to receve, discounted at the original effects, incereg ate Srna efecive inert rte for purchased grag Itmpaired financial oe (Gredit Loss = Cash Short Expected creitoss (ECL) i 2 tmonth ECL ~ recog has not increased signif portion of lifetime ECL Evenson fanlalinsrument that ar posse within hea ster the reporting date ont ime ECL — recognized if the credit risk on that financial insu I recognition. ei the ae ose det eas Sa x Effective Interest Rate ified as eit Credit riskis defined under PERS 7 as the risk that one party toa nang instrument will cause a financial loss for the other party by fallng discharge an obligation Cash shortfalls the difference between contractual cash flow and cash foy that the entity expects to receive. oo (0) peas 16 butuses lifetime ECL as an 16 -Investment in Debt Securities Cee cot ie i) conta Financing component ba >= nent cpaccounting policy choice ‘but uses betine Ee ag a recelvables that result from transa il counting pay HOPE ACH JgRAL APPRO: eral approach is based on thre stages which are intended to. rioration and improvement ef'a trary elect Ent ‘The gem rT ‘al the ere eee instrument. An three-stage’ or ‘three-bucket a . ore ot thee bce gost shonle sr | Mnitial recognition | —Creditrisk ‘ies significantly Increased {performing = 12-month ECL_| Lifetime ECL seeest | Gross carrying | ~ Gross carying fevene | amount(w/oECL) | amount (w/o BCL) | amount Sey ed om! bass Changes in credit risk since initial recogaltion Sagan cae rth imped ta en | ne The ECL model requires two approaches depending on the type of asset or os credit exposure. These are summarized below: Pa Ifetme | ‘Type of asset/exposure ‘Approach | tetnconet trade ec expected | Trade receivables, contract ‘Simplified approach l — ‘credit loss, | assets and lease receivables Fr | Other assets/exposures General approach (ice, ‘three-stage | or ‘three-bucket’ approach SIMPLIFIED APPROACH Under paragraph 5.5.15 of PFRS 9, an entity shall always measure the loss allowance at an amount equal to lifetime ECL for: (@) trade receivables or contract assets that: (do not contain a significant financing component; (i) has a term of one year or less (practical expedient under PFRS 1563); or 600 [Recognize 12-month expected creitoss | fen cat contractual terms of 7 cay Sal ratte eash Flows by considering all conc ent (for example, prepayment 601chapter 16 Investment in Debt Securities contractual terms. ‘Measurement of ECL A ena sal measure ECL of ancl instrunentin aay (an untied an probably weighted amount that ete, evaluating a range of possible outcomes; "ey, (8) the time value of money; and (©) reasonable and. supportable forward-looking Informati available without undue castor afore atthe reporting th evens current conditions and forecasts of future econ coma Undue Cost or Effort “Undue cost or effo deliberately not defined under Pras woul depend onthe enti’ specif circumstances and op Sey Profesional jadgment in assessing the costs and bene wrote of cost or effort is excessive : consideration of how the economic statements could be affected by the availa Approaches in Computing ECL 1. Explci probability of default approach 2 Loss ate approach (including provision matrix) Explicit Probability of Default Approach Under this approach, ECL can be determined using the following formal ECL = Probability of Default x Loss Given Defaule x Exposure at Defau~) “The probability of default (PD) is the default Ifa borrower has 20% PD, "sky compared to a borrower with a 60% PD “Loss given default (LGD) is the fractional loss Where, LGD = 1 - Recovery Rate (RR) > The RR is defined as the pro el cal The RO Proportion of a bad debt that > Itiscalculated as: RR = Val Exposure at Default (EAD). Creditor at the time of default ihood that the debtor wi is considered to be less debtor defs lue of Collateral/Value of the Loan the amount that the borrower owes tothe Loss Rate Approach (Includin, . 18 Provision Matrix) Under th teach, ECL can be determined usin the fa cnet oo oe eee approach te following shouldbenaag, jeal default rates. This can be Wy just started operations it can come such a8 from credit bureaus, « Statistics prepared by the BSP (ifany) nd gu serward-tooking information. The i sen For includes creitinformation pertaningtoe abe based on economic changes such ot Caw laws, effect of COVID-19 and thers, foup of inane assets ee ety using romans can be grouped depending on what factors afc ma Pateivables. A good example of provision tion set ure developments This, sion, new competitors x atrin, assets tthe repayment matric aging ofreceiva jrment Gain (Le. reversal) and Loss Impscordance with paragraph 5.5.8 of PERS 9, an entity shall recognize in oft oF loss, a6 an impairment gain ot loss, the ammun of fee Feversal) thats required to adjust the ss alowance ttre ‘The amount of the gain or loss is computed as follows: ying a0 ia tess PV of ash flows discounted. at the finan nal ecognton % Impairment Impairment Loss: FVTOCI vs FAC ‘The journal entries to record impairment loss of FVTOCI and FAC is as follows: FVTOCI FAAC Impairment ioss-P&L XX Impairmentloss-P&L XX ance in OCI XX Loss allowance in SFP we Financial Statement Presentation ; For FS presentation purposes, the followi a Statement of Financial Postion: | oan ing amount PV= Gross carrying amount XX. PV = Gross carrying seP Less; Loss allowance in ‘Amortized cost or Net carrying amount 603