CFAS PAS 32 Financial Instruments and PFRS 9 Measurement of F Asset Topic 5

e.
Security deposits and other returnable deposits

PAS 32 - Financial Instruments
Not Financial Liabilities
Financial Instruments - Any contract that gives rise to a a. Deferred/unearned revenue and warranty obligations that are
financial asset of one entity and a financial liability or equity to be settled by future delivery of goods and provisions of
instrument of one entity. services. (Reason: The outflow of economic benefits is the
delivery of goofs and services rather than a contractual
Characteristics of a Financial Instrument obligation to pay cash)
⚫ There must be a contract b. Taxes, SSS, Philhealth, Pag-Ibig Payables (Reason: Imposed
⚫ There must be at least two parties to the contract by law)
⚫ The contact shall give rise to a financial asset of one party c. Constructive obligations
and financial liability or equity instrument of another party.
Equity Instrument
Financial Asset Any contract that evidences a residual interest in the asset of an
- Any asset that is: entity after deduction of all its liabilities
a. Cash Includes;
b. An equity instrument of another entity. a. Ordinary Share Capital
c. A contractual right to receive cash or another financial asset b. Preference Share Capital
from another entity; c. Share options or share warrants
d. A contractual right to exchange financial instruments with
another entity under conditions that are potentially favorable. What is a Compound Instrument?
Examples: - A financial instrument that from the issuer’s perspective
a. Cash and cash equivalents (e.g. cash on hand, in bank, contains both a liability and an equity component. These
short-term money placements and cash finds) components are classified and accounted for separately.
b. Receivables such as accounts, notes, and loans ⚫ One component meets the definition of financial asset and
c. Investment in equity or debt instruments of other entities another component financial liability.
such as held for trading securities, investment in subsidiaries, Example:
associates, joint ventures, investment in bonds and derivative - Bonds payable issued with share warrants
assets. - Convertible bonds payable - bonds that can be converted into
d. Sinking fund and other long term funds composed of cash shares of stocks of the issuer
and other financial asset. > Two Instruments
1. Debt instruments for the bonds payable
Not Financial Assets 2. Equity instruments for the equity conversion feature
a. Physical assets such as inventories, biological assets, PPE
and investment property Accounting for Compound Financial Instrument
b. Intangible assets (Reason: Control of such physical and - If the financial instrument contains both a liability and an equity
intangible assets create an opportunity to generate an inflow component, components shall be accounted separately.
of cash or another financial asset but it does not give rise to - Consideration received from the issuance of the compound
present right to receive cash or another financial asset) financial instrument shall be allocated between the liability and
c. Prepaid expenses and advances to suppliers (Reason: The equity components.
future economic benefit is the receipt of goods or services
rather than the right to receive cash or another financial asset) STEPS:
d. An entity’s own equity instrument (e.g. treasury shares) 1. Determine the fair value of the whole instrument
e. Current and deferred tax assets (Not contractual) 2. Deduct from the FV of the whole instrument the fair value of
the debt component without the equity feature
Financial Liability 3. Remaining amount represents the equity component
Any liability that is a contractual obligation:
a. To deliver cash or other financial asset to another entity; and
b. To exchange financial instruments with another entity under
conditions that are potentially unfavorable;
Examples:
a. Payables such as accounts, notes, loans, and bonds
b. Lease liabilities
c. Held for trading liabilities and derivative liabilities
d. Redeemable preference issued
PFRS 9 - Measurement of Financial Asset Fair Value through Profit or Loss
Initial Recognition
- Financial assets and financial liabilities are recognized only
when the entity becomes a party to the contractual provisions of
the instruments.
- Always measured at FAIR VALUE
Exceptions:
Transaction Cost (Incremental Cost) - Brokerage fees and
commissions, levies by regulatory agencies (SEC free on
transaction value and PSE), transfer taxes and duties.
Summary
Financial Asset at FV through OCI - Capitalized as cost of
financial asset
Financial Liability at FV through OCI - FV minus Transaction
Cost
Financial Asset/Liability at FV through P/L held for trading -
Expensed outright NOTES:
➢ Only debt instruments can be classified under amortized
Subsequent Measurement cost or FVOCU measurement categories
After initial recognition, an entity shall measure a financial asset ➢ Equity instruments are measures at FVPL unless the entity
at; makes an irrevocable election on initial recognition to
1. FV through P/L (e.g. Investment on Equity / Debt Securities- measure them at FVOCI (election)
Trading FVPL) ➢ Debt instruments that are not measured at amortized cost
2. FV through OCI (e.g. Investment in Equity / Debt Instruments or at FVOCI are measured at FVPL
@FVTOCI) ➢ Business model and SPPI tests are relevant only to debt
instruments
Basis of Classification ➢ Equity instruments do not have contractual cash flows that
PFRS 9 requires an entity to classify financial asset on the basis are solely payments of principal and interest
of both: ➢ Equity instruments are classified as FVPL unless they are
1. The entity’s model for managing the financial asset; and irrevocably elected to be classified as FVOCI
2. The contractual cash flow characteristics of the financial asset Gains and Losses
Business Model - Refers to how an entity manages its financial

asset in order to generate cash flow
⚫ To hold instrument to realize fair value changes
⚫ To hold instrument to collect contractual cash flows
⚫ To hold instrument to collect contractual cash flows and sell
the instrument
Contractual Cash Flows - solely payments of principal and Financial Instruments Summary
interest (SPPI) consistent with basic lending arrangement
Derecognition - Classification
Financial assets are derecognized when;
1. The contractual rights to the cash flows from the financial
asset expire
- Collected, canceled, or when they become uncollectible
because of loss events
2. The financial asset are transferred and the transfer qualities
for derecognition.
- Transfer of substantially all the risks and rewards of ownership
of the financial asset, entity derecognize
- Retains substantially all the risks and rewards - financial asset
- Neither retains or transfers (partial transfer and partial
retention)- determine whether there is control.
No control - derecognize
Retained control - financial asset
Subsequent Measurement of Liabilities
Amortized cost is the amount or which the financial asset or

financial liability is measured at initial recognition minus principal
prepayments, plus or minus the cumulative amortization using
the effective interest method of any difference between the initial
amount and the maturity amount, and for financial asset adjusted
for any lost allowances.

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e.

Security deposits and other returnable deposits

Business Model - Refers to how an entity manages its financial

Subsequent Measurement of Liabilities

Amortized cost is the amount or which the financial asset or

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