Financial Instrument – Presentation PAS 32

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.

The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial
liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the
definitions of a financial liability, a financial asset and an equity instrument. The issuer of a non-derivative financial instrument
shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity
component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments.
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.

A financial asset is any asset that is:

. (a) cash; 

. (b) an equity instrument of another entity; 

. (c) a contractual right: 
 (i) to receive cash or another financial asset from another entity;or
 (ii) to exchange
financial assets or financial liabilities with another entity under 
 conditions that are potentially favourable to the
entity; or 

. (d) a contract that will or may be settled in the entity’s own equity instruments and is:
. (i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own
equity instruments; or 

. (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own
equity instruments do not include instruments that are themselves contracts for the future receipt or
delivery of the entity’s own equity instruments. 


A financial liability is any liability that is: (a) a contractual obligation:

(i) to deliver cash or another financial asset to another entity;or

(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to
the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments and is:
. (i) a non-derivative for which the entity is or may be obliged to deliver a variable 
 number of the entity’s own equity
instruments; or 

. (ii) a derivative that will or may be settled other than by the exchange of a fixed 
 amount of cash or another
financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity
instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s
own equity instruments. 


A financial instrument may require the entity to deliver cash or another financial asset, or otherwise to settle it in such a way
that it would be a financial liability, in the event of the occurrence or non-occurrence of uncertain future events that are
beyond the control of both the issuer and the holder of the instrument
SUCH AS :
change in a stock market index
consumer price index
interest rate or taxation requirements
or the issuer’s future revenues
net income or debt-to-equity ratio

Investment in Debt Instruments

Under PAS 39

1. Investment in debt instruments are financial assets because they are

a. Cash Equivalents
b. Equity instruments of another entity
c. Contractual rights to receive cash or another financial asset from another entity
d. Contractual rights to exchange financial asset or financial liabilities with another entity under conditions that are
potentially favorable to the entity

2. Investment in debt instruments can be classified as:

I. Financial assets at fair value through profit or loss
II. Available for sale
III. Held to maturity
IV. Loans and receivables
a. I,II, III and IV c. I, III, and IV only
b. I,II, and III only D. II,III and IV only

Lecture Notes:

Financial Assets Classification Summary (PAS 39)

Category Derivative? Type of Quoted

Instrument

FA@FVTPL Yes or No Debt or equity Yes or No

AFS No Debt or equity Yes or No

HTM No Debt Yes

L&R No Debt No

3. Which of the following may be classified as held-to-maturity investment?

a. An investment in an unquoted debt instrument
b. An investment in a quoted equity instrument
c. A quoted derivative financial asset
d. An investment in a quoted debt instrument

4. Under PAS 39, which securities are purchased with the intent of selling them in the near future?
a. Trading securities
b. Available-for-sale securities
c. Held-to-maturity securities
d. Loans and receivables

5. At initial recognition, an entity shall measure which of the following financial assets at their fair value plus transaction costs
that are directly attributable to the acquisition of the financial assets?
a. Those that the entity intends to sell immediately or in the near term
b. Those that the entity upon initial recognition designates as at fair value through profit or loss
c. Those that the entity upon initial recognition designates as available for sale.
d. None of the above

Financial asset Measurement Summary (PAS 39)

Category Initial measurement Subsequent Changes in Fair Value

FA @ FVTPL FV FV Profit or loss

AFS FV + TC FV OCI (Equity)

HTM FV + TC AC IGNORE

L and R FV + TC AC IGNORE

On January 1, 2017 Alaska Corp. purchased P1,000,000 10% bonds for P1,051,510 (including broker’s commission of
P20,000). Interest is payable annually every December 31. The bonds mature on December 31, 2019. The prevailing market
rate for the bonds is 9% at December 31,2017.

 If the bonds are classified as held for trading, the amount to be recognize as fair value adjustment loss in its 2017
profit or loss is?
P 13,900

Current fair value vs. Previous Fair Value

 If the bonds are classified as held to maturity(HTM) the amount to be reported on the entity’s December 31, 2017
statement of financial position is?
P 1, 035,631

 Which statement is correct if the bonds are classified as available for sale?
o The amount to be recognized in 2017 profit or loss is P100,000 (84,120)
 o The amount to be recognize in 2017 other comprehensive income is P33,900 ( 18,021)
o The amount to be reported on the entity’s December 31,2017 statement of financial position is P1,035,630
(fv -1,017,610)
o None of the above

6. Under PAS 39, transfers between categories

a. Result in companies omitting recognition ofnfair value in the year of the transfer
b. Are considered unrealized and unrecognized
if transferred out of held-to-maturity into
trading
c. Will always result in an impact on net income
d. Are accounted for a at Fair Value for all transfers

Lecture Notes:

Transfer Permitted? FV-CA

Into and out of Generally n/a

FA @ FV TPL NO

Into and out L&R Generally n/a

NO

HTM to AFS YES, sometimes OCI

Required (accumulated in equity)

7. Which of the following does PAS 39 allow?

a. Reclassify a derivative financial instrument into or out of the FVTPL category while it is held or issued
b. Reclassify a financial instrument out of the FVTPL category if upon initial recognition it was designated by the
entity as at FVTPL
c. Reclassify a financial instrument into the FVTPL category after initial recognition
d. Reclassify a financial asset out of the FVTPL category in rare circumstances (arising from a single event that is
unusual and highly unlikely to recur in the near term) if that financial asset is no longer held for the purpose of
selling in the near term

8. If the entity concluded that an investment originally classified as available for sale would now more appropriately be
classified as held to maturity, the entity would:
a. Not reclassify the investment, as original classifications are irrevocable
b. Need to restate earnings, as the original classification was in error
c. Reclassify the investment as held to maturity and immediately recognize in net income any unrealized gain or
loss on the reclassification date.
d. Reclassify the investment as held to maturity and treat the fair value as of the date of reclassification as the
investment’s amortized cost basis for future amortization.

PFRS 9

9. Which of the following is not a phase in the IASB’s project to replace IAS 39?
a. Classification and measurement
b. Impairment methodology
c. Hedge accounting
d. Recognition and derecognition

10. PFRS 9 requires companies to measure their financial assets based on

a. The contractual cash flow characteristics of the financial asset
b. The company’s business model for managing its financial assets (AND FAIR VALUE OPTION)
c. Both a and b
d. Neither a nor b
11. Under PFRS 9, which of the following debt investments most likely will be measured at amortized cost?
a. Held for trading
b. Designated at fair value through profit or loss
c. Held for collection only
d. Held for collection and for sale
(Financial Assets Classification Flowchart (2014 PFRS 9)

Financial Assets Classification Summary (2014 PFRS 9)

Category SPPI Business Model Type of Instrument

AC (HTM/LR) yes Held for collection Debt

FVTOCI (AFS) yes Held for collection Debt or equity

and for sale

FVTPL (TRADING yes or Other than held for Debt or equity

No collection and held
for collection and
for sale

12. Under what circumstances under PFRS 9 can an entity classify financial asset that meet the amortized cost criteria as at
FVTPL?
a. Where the instrument is held to maturity
b. Where the business model approach is adopted
c. Where the financial asset passes the contractual cash flow characteristics test
d. If doing so eliminates or reduces an accounting mismatch (hedge acctg topic)

13. Which of the following is correct regarding the classification the classification of investment in debt instrument as financial
asset at fair value through OCI?
a. This classification is not allowed for investment in debt instruments
b. This classification is the same as “available-for-sale”
c. This classification is generally an unrestricted option
d. In order to be classified at fair value through OCI, a debt instrument needs to both have simple principal and
interest cash flows and be held in a business model in which both holding and selling financial assets are integral
to meeting management’s objectives.

14. Under PFRS9, when can the classification of an instrument, which has been determined on initial recognition, be changed?
a. Reclassification are not permitted
b. Reclassifications are only permitted where a category becomes tainted
c. Reclassifications are only permitted on the change of the contractual cash flows
d. Reclassifications are only permitted on the change of an entity’s business model and are expected to occur only
infrequently.

(transition pas 39-pfrs 9 change of standard)

15. Which statement is incorrect regarding transition to PFRS 9
a. An entity shall apply PFRS9 retrospectively, except as specified in the standard
b. Depending on the entity’s chosen approach to applying PFRS9, the transition can involve one or more than one
date of initial application for different requirements
 c. The date on initial application is the date when an entity first applies PFRS9
d. PFRS9 shall be applied even to items that have already been derecognized at the date if initial application

16. At the date of initial recognition, an entity shall classify financial assets on the basis of the facts and circumstances that
exist at the date. The resulting classification shall be applied
a. Retrospectively irrespective of the entity’s business model in prior reporting periods
b. Retrospectively depending on the entity’s business model in prior reporting periods
c. Prospectively irrespective of the entity’s business model in prior reporting periods
d. Prospectively depending on the entity’s business model in prior reporting periods

17. Where prior periods are not restated, any difference between the previous reporting carrying amounts and the new
carrying amounts of financial assets at the beginning of the annual reporting period should be recognized in
a. The opening retained earnings (or other component of equity, as appropriate) of the annual reporting period
when PFRS 9 is first applied
b. Profit or loss of the annual reporting period when PFRS 9 is first applied
c. Other comprehensive income of the annual reporting period when PFRS 9
d. Either b or c

Investment in Equity Securities

FINANCIAL ASSET AT FAIR VALUE

18. investment in equity instrument can be classified as :

I. Financial assets at fair value through profit or loss
II. Available for sale
III. Held-to-maturity
IV. Loans and receivable

18. Investment in equity instruments are financial assets because they are
a. Cash equivalents
b. Equity instrument of another entity
c. Contractual rights to receive cash or another financial asset from another entity
d. Contractual rights to exchange financial assets or financial liabilities with another entity under conditions that
are potentially favorable to the entity

Lecture Notes:

Financial Assets Classification Summary (PAS 39)

Category Derivative? Type of Quoted

Instrument

FA@FVTPL Yes or No Debt or equity Yes or No

AFS No Debt or equity Yes or No

HTM No Debt Yes

L&R No Debt No

On Apri 1,2017, Joanna Co. purchased 25,000 ordinary shares of Shiela Co. at P180 per share which reflected book value as of
that date. At the time of the purchase, Shiela had 100,000 ordinary shares outstanding. The shares are intended as long as a
long term investment. The first quarter statement ending March 31,2017 of Shiela recorded profit of P480,000. For the year
ended December 31,2017, Shiela reported profit of P2,400,000. Shiela paid Joanna dividends of P60,000 on June 1,2017 and
again P60,000 on December 31, 2017. The shares of Shiela are selling at P190 per share on December 31, 2017.

Joanna is entitled to appoint two directors to the board, which consists of eight members. The remaining of the voting right
are held by two other companies, each of which is entitled to appoint three directors . The board makes decisions on the basis
of simple majority. Because board meetings are often held at very short notice, Joanna does not always have representation
on the board. Often the suggestions of the representative of Joanna are ignored, and the decision of the board seem to take
little notice of any representations made by the director from Joanna Corp.
19. Significant Influence is
a. The power to participate in the financial and operating policy decisions of the investee but is not control or
joint control over those policies
b. Deemed to exist when the investor is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee
c. The contractually agreed sharing of control of an arrangement, which exists only when decisions about the
relevant activities require the unanimous consent of the parties sharing control
d. The power to govern the financial and operating policies of entity so as to obtain benefits from its activities

20. The investment of Joanna Co. in Shiela should be classified as

a. Financial asset at fair value
b. Investment in associate
c. Investment in subsidiary
d. Investment in Joint venture

How much is the carrying amount of the investment in Shiela Co. as of December 31,2017?

ACCOUNTING FOR INVESTMENTS IN ORDINARY SHARES

Level of Influence Method Investment Standard

Little or no influence Fair Value Financial Asset PAS 39

(less than 20%) PAS 32
PFRS 7
PFRS 9

Significant Equity Investment in Associate PAS 28

(20% or more)
Control Consolidation Investment in Subsidiary PFRS 10

Joint Control Equity Investment in Joint PAS 28

Venture

Financial Asset Measurement

Category Initial Subsequent Changes in FV

FA @ FVTPL FV FV P/L
AFS FV + TC FV OCI (EQUITY)
HTM FV + TC AC ignore
L&R FV + TC AC ignore

21. The Coffee Co. acquired an AFS financial instrument for P800,000 on March 31,2017. The direct acquisition costs incurred
were P140,000

On December 2017 the fair value of the instrument was P1,100,000 and the transaction costs that would be incurred on sale
were estimated at P120,000

What gain would be recognize in the financial statements for the year ended December 31,2017?
Increased by P160,000 (1,100,000- 940,000)

22. On June 1, 2017, KayaPa Corp. purchased 10,000 of DINA’s 50,000 outstanding shares at a price of P6.00 per share. Dina
had earnings of P3,000 per month during 2017 and paid dividends of P10,000 on March 1,2017 and P12,500 on December 1,
2017. The fair value of Dina’s shares was P6.50 per share on December 31,2017

which statement is correct?

a. Assuming that the investment is held for trading, the total effect on KayaPa’s profit or loss for the year ended
December 31,2017 is P2,500. (7,500)
b. Assuming that the investment is AFS the total effect on KayaP’s profit or loss for the year ended December 31,
2017 is P7,500 (2,500)
c. Assuming that the investment is an associate, the total effect on KayaPa’s profit or loss for the year ended
December 31,2017 is P3,600 (4,200)
d. After all closing entries for 2017 are completed, the affect of the increase in fair value on total shareholder’s
equity would be the same amount under the AFS and trading securities approaches.
Summary of Recognition and Derecognition in a regular way purchase and sale of financial assets:

Trade Date Settlement Date

Recognize Commitment date Delivery date

Derecognize Commitment date Delivery date

Change in FV from
Trade date to settlement
Date (for FA measured at FV) :
Purchase Recognize recognize
Sale Ignore Ignore

Trade Date Settlement Date

Recognize Commitment date (CD) Delivery date (DD)]

Changes in FV from trade to settlement date :

FA @FV Recognize Recognize

FA not @FV Ignore Ignore

Initial Measurement
FA @FV FV at CD FV at DD

FA not @ FV FV at CD FV at CD

23. When an entity uses settlement date accounting for an asset that is subsequently measured at amortized cost, the asset is
recognized initially
a. At its fair value on the trade date
b. At its fair value on the settlement date
c. At the higher of a and b
d. At the lower of a and b

24. Gain or loss on derecognition of a financial asset shall be recognized in

a. Profit or loss from continuing operations
b. Profit or loss from discontinued operations
c. Profit or loss from continuing operations, except for available for sale financial assets
d. Other Comprehensive income

On December 28,2017(trade date ), Francis Corp enters into a contract to sell an equity security classified as AFS for its current
fair value of P303,000. The asset was acquired a year ago and its cost was P300,000. On December 31,2017( financial year end
) the fair value of the asset is P303,600. On January 5,2018 (settlement date), the asset’s fair value is P303,900

25. If Francis uses the trade date method to account for regular way sales of its securities, the net amount to be recognized in
2017 comprehensive income is
a. P3,900 c. P3,000
b. P3,600 d. P 0
26. If Francis uses the settlement date method to account for regular way sales of its securities, the net amount to be
recognized in 2018 comprehensive income is
a. P3,900 c. P3,000
b. P 3,600 d. P 0

27. If an available for sale investment is sold for which there are unrealized losses in accumulated other comprehensive
income , the total effect on total comprehensive income is
a. An increase
b. A decrease
c. No effect
d. Can’t determine given this information
28. Entities being able to increase or decrease net income by choosing to sell particular investments with net unrealized gains
or unrealized losses is a weakness of
a. the available for sale approach
b. The trading securities approach
c. Both the AFS and trading securities approaches
 d. Neither the AFS and trading securities approaches
29. Gains trading or cherry picking involves
a. Moving investments whose value has decreased since acquisition from non-trading to held for collection in
order to avoid reporting losses.
b. Reporting investments at fair value but liabilities at amortized cost
c. Selling investments whose value has increased since acquisition while holding those whose value has decreased
since acquisition
d. All of the above are considered methods of “gains trading” or “cherry picking”

AFS VS. FVTOCI

AFS – EQUITY (PAS 39) FVTOCI – EQUITY (PFRS 9 )
By designation or “No choice” By designation only

OCI : Change in FV OCI : Other income/ expenses

P/L : Other income / expenses P/L : Dividend income onlyy
With reclassification adjustment on derecognition and No reclassification adjustment
impairment
Subject to impairment Not subject to impairment

Reclassification: allowed Reclassification: Not allowed

Investment in Associate

30. PAS 28 defines an “associate” as

a. An entity over which the investor has significant influence
b. An entity that controls one or more entities
c. An entity that is controlled by another entity
d. A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the arrangement

31. Which statement is incorrect regarding identification of associates?

a. A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant
influence unless it can be clearly demonstrated otherwise
b. If the holding is less than 20%, the investor will be presumed not to have significant influence unless such
influence can be clearly demonstrated
c. Potential voting rights are a factor to be considered in deciding whether significant influence exists
d. A substantial or majority ownership by another investor precludes an investor from having significant influence

32. The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
I. Representation on the board of directors or equivalent governing body of the investee
II. Participation in the policy-making process
III. Material transactions between the investor and the investee
IV Interchange of managerial personnel
V . Provision of essential technical information

a. I, II, III, IV and V b. I , II, III and IV c. I, II and IV d. I and II

33. Which statement is incorrect regarding the equity method of accounting for investment in associate?
a. The investment is essentially recorded at cost
b. the investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other
comprehensive income includes its share of the investee’s profit or loss and the investor’s other comprehensive
income.
c. Distributions received from the investee reduce the carrying amount of the investment
d. Change in fair value of the investment is recognize in OCI

Equity method carrying amount computation

Cost Pxxx
Share of Profit of Assoc xxx
Share of Loss on Assoc (xxx)
Share of OCI- income xx
Share of OCI- Expense (xx)
Distributions (dividends) (xx)
Additional Investment xxx
Disposal of investment (xx)
Impairment (xx)
Carrying Amount Pxx