FINANCIAL

ASSETS AT
AMORTIZED
COST
Introduction
Financial assets at amortized cost refer to
assets that are initially recognized at cost
and subsequently measured at amortized
cost using the effective interest method,
less any impairment. This accounting
method is typically applied to debt
instruments such as loans, bonds, and
notes receivable that meet certain criteria.

financial assets at amortized cost are like loans or

bonds on a company's books that are regularly
adjusted to account for their real value and any
possible losses.
 What is
BOND?
• Is a contract of debt whereby one party called the
issuer borrows fund from another party called
investor.
• Is a debt security as the bondholder is a creditor
and the issuer is a debtor.
• An investor acquires a bond either as a temporary
or permanent investment and derives regular
income in the form of interest.
ü Bond Indenture - is the contractual agreement
between the issuer and investor.
• Bond is issued in small denomination of P100,
P1,000 or P10,000 to enable investors to purchase
the bond issue. Example: P50, 000 bond issue may
be issued in denomination of P1000. Thus, there
shall P50,000 bonds with face of P1,000 each.
ü Interest payment date – annually but usually
paid semiannually or every six months
Classification of
Bond Investments
a. Financial asset held for trading

b. Financial asset at amortized cost

c. Financial asset at fair value other

comprehensive income

d. Financial asset at fair value profit or

loss by irrevocable designation or by
fair value option
 Initial and
Subsequent
Measurement
• Bond investments are recognized initially at fair
value plus transaction cost that are directly
attributable to the acquisition cost.
• However, transaction cost attributable to the
acquisition of bond investments held for trading or at
fair value through profit and loss are called expensed
immediately.
• Bond investments are measured and accounted for as
any of the following:
a. At fair value through profit or loss
b. At amortized cost
c. At fair value through other comprehensive income
Acquisition of Bond
Investments
• Acquired on:
o Interest date – purchase price is
initially recognized at acquisition cost.
o Between interest date – purchase
price includes the accrued interest.
o Date of acquisition – accrued interest
is charged either to accrued interest
receivable or interest income.

Reminder:
o When accrued interest receivable is
debited upon receipt of the semiannual
interest, the interest receivable is closed
and inte re st income is cre d ite d for the
excess.
o When interest income is debited, the
receipt of the first semiannual interest is
credited entirely to interest income.
Investment in
Bonds at
Amortized Cost
• PFRS 9, paragraph 4.1.2 – financial asset shall
be measured at amortized cost if both of the
f o l l o w i ng c o nd i t i o ns a r e me t : a . T he b u s i n e s s
model is to hold the financial asset in order to
collect contractual cash flows on specific dates.
b. The contractual cash flows are solely
payments of principal and interest on the
principal amount outstanding.

Amortized Cost – the initial recognition amount

of the investment minus repayments, plus
amortization of discounts, minus amortization
of premium, and minus reduction of
impairment or uncollectibility.

N o nc ur r e nt I nv e st me nt s – a b o n d i n v e s t m e n t
where bonds are acquired and classified as
financial asset at amortized cost.
 Amortization of
Premium Discount
• investment in bonds shall be measured at amortized cost.
• any premium or discount on the acquisition of long-term
investment in bonds shall be amortized.
• bond premium or discount is amortized over the remaining life of
the bonds from the date of acquisition to the date of maturity.
 Amortization
• done through the interest
income account
• may be made on interest
dates or at the end of the
reporting period
• m or e c onv e nie nt to r e c o r d a t
the end of the reporting period
 Bond Premium and
Bond Discount
• Either of these bonds is the difference between the
acquisition cost and the face amount of the bonds
• Not accounted for separately but included in the
carrying amount of the investment
o Bond Premium – is the difference if the acquisition
cost is more than the face amount of the bonds
o Bond Discount – is the difference if the acquisition cost
is less than the face amount of the bonds.
Philosophy on
Amortization
• Amortizati on of b ond p r em i u m or d i sc ou nt c an b r i ng
the carrying amount of the investment to face amount on
the date of maturity.

• When the bonds are redeemed on the date of maturity,

the entry wi l l si m p l y b e a d eb i t t o c ash and a c r ed i t t o
investment in bonds of the face amount.

• Bondholder is a creditor and will collect on the date of

maturity an amount equal only to the face amount of the
bonds no more and no less.

• Bond premium is a loss on the part of the bondholder as

the bondholder paid more than what can be collected on
the date of maturity. Such loss is not recognized outright
but allocated over the life of the bonds to be offset
against the interest income to be derived from the bond
investment.

• On the other hand, bond discount is a gain on the part

of the bondholder because the bondholder paid less than
what can be collected on the date of maturity. Such gain
is not recognized outright but allocated over the life of
the bonds to be added to the interest income derived
from the bond investment. Such process of allocating the
bond premium as deduction from the interest income
and the bond discount as addition to interest income is
what is traditionally called amortization.
Acquisition
between interest
dates
• Note that when bo n ds ar e acqu i r e d
between interest dates, it is more
convenient to compute monthly
amortization rather than an annual
amortization.
Sale of bonds
prior to
maturity
• When investment in bonds is sold prior to the date of
maturity, it is necessary to determine the carrying
amount of the bond investment to be used as basis in
computing gain or loss on the sale. In such a case,
amortization of the premium or discount should be
recognized up to the date of sale. If the sale is between
interest dates, the sale price normally includes the
accrued interest.

• Accordingly, that portion of the sale price pertaining

to the accrued interest should be credited to interest
income. The difference between the sale price, after
deducting the accrued interest, and the carrying
amount of the bond investment represents the gain or
loss on the sale of the investment.
Convertible
bonds
• Convertible bonds are those which give the
bondholders the right to exchange their bonds for
share capital of the issuing entity at any time prior to
maturity. • The existence of the conversion feature
generally precludes classification of the convertible
bonds as financial asset at amortized cost because that
would be inconsistent with paying the conversion
feature.

• Investment in convertible bonds can be classified as financial

asset measured at fair value.
 Callable bonds
• Callable bonds are those which may be called in or
redeemed by the issuing entity prior to their date of
maturity. Usually, the call price or redemption price is at
a premium or more than the face amount of the bonds.
• The difference between the redemption price and the
carrying amount of the bond investment on the date of
redemption is recognized as gain or loss.
 Serial bonds
• Serial bonds are those which have a
series of maturity dates or those bonds
which are payable in installments.

Term bonds
Term bonds are those bonds that
mature on a single date. Callable and
convertible bonds can be classified as
term bonds despite their special
features.
 Methods of
amortization
A. Straight line method provides for an equal amount of
premium or discount amortization each accounting period.
-The annual amortization of discount and premium is simply
computed by dividing the amount of discount and premium
by the life of the bonds.

B. Bond outstanding method is applicable to serial bonds and

provides for a decreasing amount of amortization.

C. Bond outstanding method is applicable to serial bonds and

provides for a decreasing amount of amortization.
-Under IFRS, bond investments shall be classified as financial
assets measured at amortized cost using the effective interest
method.
-Any discount or premium must be amortized using the
effective interest method
THEORIES!
 QUESTION 1
If the investment is measured at amortized cost,
the transaction costs are?

A. amortized to profit or loss using C. recognized in equity when the asset

the effective interest method is derecognized or becomes impaired

B. recognized in profit or loss when

the asset is derecognized or becomes
D. expensed immediately on acquisition
impaired
date
 QUESTION 1 ANSWER
If the investment is measured at amortized cost,
the transaction costs are?

A. amortized to profit or loss using C. recognized in equity when the asset

the effective interest method is derecognized or becomes impaired

B. recognized in profit or loss when

the asset is derecognized or becomes
D. expensed immediately on acquisition
impaired
date
 QUESTION 2
Zoom Corporation purchased bonds at a discount in the open market as
an investment. Assume that Zoom elects the fair value option. Zoom
should account for these bonds at

A. Cost. C.Amortized cost

B.Fair value. D. Lower of cost or market.

 QUESTION 2 ANSWER
Zoom Corporation purchased bonds at a discount in the open market as
an investment. Assume that Zoom elects the fair value option. Zoom
should account for these bonds at

A. Cost. C.Amortized cost

B.Fair value. D. Lower of cost or market.

 QUESTION 3
Subsequent to initial recognition, debt instruments acquired to be held
up to their maturity are measured at

A. acquisition cost C.acquisition cost plus

amortization of a discount.

B. acquisition cost plus

D. fair value
amortization of a
premium.
 QUESTION 3 ANSWER
Subsequent to initial recognition, debt instruments acquired to be held
up to their maturity are measured at

A. acquisition cost C. acquisition cost plus

amortization of a discount.

B. acquisition cost plus

D. fair value
amortization of a
premium.
 QUESTION 4
Solo Co. purchased ₱300,000 of bonds for ₱315,000. If Solo intends to hold
the securities to maturity, the entry to record the investment includes

A. a debit to Held-to-Maturity C.a credit to Premium on

Securities at ₱300,000. Investments of ₱15,000.

B. a debit to Investment
D. none of these.
in bonds at amortized
cost of ₱315,000.
 QUESTION 4 ANSWER
Solo Co. purchased ₱300,000 of bonds for ₱315,000. If Solo intends to hold
the securities to maturity, the entry to record the investment includes

A. a debit to Held-to-Maturity C.a credit to Premium on

Securities at ₱300,000. Investments of ₱15,000.

B. a debit to Investment
D. none of these.
in bonds at amortized
cost of ₱315,000.
 QUESTION 5
Subsequent changes in fair value of financial assets measured at
amortized cost are

A. recognized in profit or loss C. recognized in other

comprehensive income

B. recognized in equity
D. not recognized
 QUESTION 5 ANSWER
Subsequent changes in fair value of financial assets measured at
amortized cost are

A. recognized in profit or loss C. recognized in other

comprehensive income

B. recognized in equity
D. not recognized
PROBLEM QUESTIONS
 PROBLEM 1

FINANCIAL ASSET AT AMORTIZED COST PROBLEM 1 (AICPA Adpated) On

October 1, 2011, Yost Company purchased 4,000 of the P 1,000 face
value, 10% bonds of Pell Company for P 4,400,000 which includes
accrued interest of P 100,000. The bonds, which mature on January 1,
2018, pay interest semiannually on January 1 and July 1. Yost uses the
straight line method of amortization and appropriately recorded
the bonds as held to maturity. What is the carrying amount of the
bonds in the December 31, 2011 statement of financial position?

a. 4,284,000 b. 4.288,000 c. 4,300,000 d. 4,400,000

Solution (PROBLEM 1)

answer b

October 1, 2011 to January 1, 2018________________________75 MONTHS

Cost (4,400,000-100,000)_________________________________4,300,000
Face Value____________________________________________ 4,000,000
Premium_______________________________________________ 300,000
Monthly__amortization (300,000/75)
_______________________________4,000

Cost_________________________________________________4,300,000
Amortization of premium for October 1 to December 31, 2011
(4,000 x_______________________________________________
3) (12,000)
Carrying amount- December 31, 2011________________________4,288,000
Under PFRS 9, the term "held to maturity" is now eliminated.
The equivalent term is "financial asset at amortized cost"
 PROBLEM 2

Jent Company purchased bonds at a discount of P

100,000. Subsequently, Jent sold these bonds at a
premium of P 140,000. During the period that Jent held
this long-term investment, amortization of the
discount amounted to P 20,000. What amount should
Jent report as gain on the sale of bonds?

a. 120,000 b. 220,000 c. 240,000 d 260,000

Solution (PROBLEM 2)

answer b
_________________________140,000
Premium on sale of bonds
______________
Unamortized discount ( 100,000 - 20,000) 80,000
_______________________________
Gain on sale of bonds 220,000
End of discussion