AC3202 Financial Reporting
Financial Assets:
Recognition and Measurement
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3. Recognition & Measurement
Debt investment
3.3 Subsequent measurement
3.4 Changes in fair value
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Debt Investments
Debt investments are characterized by contractual payments on
specified dates of
● principal
● interest on the principal amount outstanding.
Companies measure debt investments at
● Amortized cost or
● FVTPL
● FVTOCI
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Bonds Measured at Amortized Cost
● Two types of future payments from bonds:
● Payment of a fixed sum (face value, maturity value or principal) at maturity
date; and
Periodic payment of interest over the life of the bonds;
Interest = face value * stated int. rate
Int. Int. Int. Int. Int. + face value
Yr1 Yr2 Yr3 Yr4 Yr5
Investors pay purchase price of bond
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Bonds Measured at Amortized Cost
●FV of the bonds=PV(principal & interest payments)
discounted by the effective interest rate on the purchase date
● Effective interest rate: “prevailing market rate” determined by current
market conditions on the date of the purchase.
● Effective interest rate is the “true” / de facto benefits investors can receive
from lending money to the borrowing company.
● The stated interest rate is NOT the de facto benefits from lending. It simply
determines the periodic cash payment from the borrower to the investor.
● The borrower may or may not set the stated interest rate to be the same as the
effective interest rate.
● If the two differ, actual market price of the bond will be different from its face
value.
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Bonds Measured at Amortized Cost
FV of the bonds=PV(principal & interest payments)
discounted by the effective interest rate on the purchase date
Bonds issued/bought Stated rate vs. Effective rate Purchase price vs. Face value
At par stated = effective purchase price = face value
At premium stated > effective purchase price > face value
At discount stated < effective purchase price < face value
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Bonds Measured at Amortized Cost
Terminologies:
Face value: The amount that will be paid on a bond at the
1.
maturity date.
2.Bond premium: The difference between the face value and the
sales price when bonds are sold above their face value.
3.Bond discount: The difference between the face value and the
sales price when bonds are sold below their face value.
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Example 2(a)
Company A purchases a debt instrument: (at discount)
Date of the transaction: 1-1-2018
Term: 5-year term
Fair value: $1,000
Principal amount: $1,250
Fixed interest rate (stated interest): 4.7% annually on 31 Dec
Effective interest rate: 10%
(i)Prepare a table to set out the cash flows and interest income and amortized
cost for each period from 2018 to 2022.
(ii)Prepare all relevant journal entries from 2018-2022 assuming this debt
investment is classified as financial assets at amortized costs.
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Example 2(a)
Company A purchases a debt instrument: (at discount)
Date of the transaction: 1-1-2018
Term: 5-year term
Fair value: $1,000
Principal amount: $1,250
Fixed interest rate (stated interest): 4.7% annually on 31 Dec
Effective interest rate: 10%
* Periodic int. pmt: $1,250*4.7% = 59 (after rounding)
$59 +
$59 $59 $59 $59 $1,250 face value
2018 2019 2020 2011 2022
PV = $59*PVIFA(10%,5) + $1,250*PVIF(10%,5)
= 59*3.79079 + 1,250*0.62092 = $1,000 (after rounding)
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Example 2(a) – Suggested Answers
Amortized cost
Actual cash Effective interest Discount (carrying
Date inflow# income @10% amortized amount)
(a) (b) (c) (d)
1.1.2018 1,000
31.12.2018 59 100 41 1,041
Cash interest Effective interest The $41 increase in carrying The carrying amt. of
receipt income is the amt. of bond (from $1,000 to bond investment
investor’s true $1,041) is called “amortized increased with the
benefits from discount”. passage of time, since
lending. effective rate > stated
rate.
• The process of adding a portion of total discount to the carrying amt. of bond is called “discount amortization”.
• At the end of the amortization process (i.e., bond maturity date), the carrying amt. of the bond should be equal to its
face value. So when borrower repays principal, no gain/loss should be recognized.
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Example 2(a) – Suggested Answers
Schedule of Interest Revenue and Bond Discount Amortization
Actual cash Effective interest Discount Amortized cost
Date
inflow# income @10% amortized (carrying amount)
(a) (b) = beg. bal of (c) = (b)-(a) (d)
(d)*10%
1.1.2018 1,000
31.12.2018 59 100 41 1,041
31.12.2019 59 104 45 1,086
31.12.2020 59 109 50 1,136
31.12.2021 59 113 54 1,190
31.12.2022 59 119 60 1,250
31.12.2022 1,250* --- --- ---
# Actual cash inflow = gross interest income = Face value x stated rate
= $1,250 x 4.7% = $59
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*cash inflow from the redemption of the debt investment (not interest income)
Example 2(a) – Suggested Answers
Initial recognition
1.1.2018
Dr. Debt investment 1,000 Initial
Cr. Cash 1,000 recognition
Subsequent measurement
31.12.2018
Dr. Debt investment (amortized discount) 41
Dr. Cash (stated int. pmt.) 59
Cr. Interest income (effective int. income) 100
Recognition
31.12.2019 of interest
Dr. Debt investment 45 income &
Dr. Cash 59 amortization
Cr. Interest income 104 of discount
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Example 2(a) – Suggested Answers
Subsequent measurement
31.12.2020
Dr. Debt investment 50
Dr. Cash 59
Cr. Interest income 109
31.12.2021
Dr. Debt investment 54 Recognition
Dr. Cash 59 of interest
Cr. Interest income 113 income &
amortization
31.12.2022 of discount
Dr. Debt investment 60
Dr. Cash 59
Cr. Interest income 119
Dr. Cash 1,250 Redemption
Cr. Debt investment 1,250 of investment
(carrying amt. of bond after discount is fully amortized = face value, so 0
no gain/loss should be recognized when principal is repaid)
Bonds Measured at Amortized Cost
●Amortized cost is the bond’s carrying amount as of a certain date.
● The carrying amount of the bond as of t = PV(face value + stated interest
payments to be received), discounted by effective rate (@ purchase date).
● Algebraically, the carrying amount is also equal to purchase price + (-) the
cumulative discount (premium) amortization.
● Carrying amt. of bond on a certain date may NOT be the same as its fair market
price on that date.
● FV of bond on day t = PV(face value + stated int. pmt. to be received),
discounted at prevailing market interest rate @ day t.
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Debt Investment – Amortized Cost
If bond is issued at a premium (purchase price > face value):
Carrying amt. of the bond (i.e., PV of future principal and interest pmt.) decreases
with passage of time, as effective interest rate < stated rate.
The decrease in carrying amt. is called “amortized premium”, and it reduces the
investor’s “true” benefit from lending.
Effective interest income is also equal to effective int. rate * carrying amt. of bond (beg. bal.)
Amortized premium = stated interest – effective interest income End. Bal. of carrying amt.
of bond = Beg. Bal. of carrying amt. – amortized premium.
At the end of the amortization process (i.e., bond maturity date), carrying amt. of bond
should be equal to its face value.
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Debt investment – Amortized Cost
Question 2 - Assignments
On 1 January 2017, XYZ Ltd. acquires bonds carrying a stated interest rate of 13%
that will be held to maturity with the face value of $200,000 for $204,917.42. The
interest of bonds are payable semiannually on June 30 and December 31. The
effective interest rate is 12%. The maturity date of the bonds is 31 December 2019.
a. Work on the amortization schedule of the bond investment.
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Debt Investment – Amortized Cost
(1) Purchase price of bond =
Question 2 - Assignments $13,000*PVIFA(6, 12%*1/2) +
$200,000*PVIF(6, 12%*1/2)
Date Payment received Effective interest income Premium amortized Amortized
(Beg. Amortized cost * Cost
12%*1/2)
1.1.17 204,917.42
30.6.17 13000 12,295.05 704.95 204,212.47
“True”/effective int. income = Decrease in bond
Carrying amt. of bond
Beg. Bond carrying value * eff. carrying value =
Int. rate (204,917.42*6%) 204,917.42 –
204,212.47 =
“premium amortized”
31.12.17 13000 12252.75 747.25 203465.22
30.6.18 13000 12207.92 792.08 202673.14
31.12.18 13000 12160.39 839.61 201833.53
30.6.19 13000 12110.01 889.99 200943.54
31.12.19 13000 12056.46 943.54 200000.00
31.12.19 200000.00 - - -
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Debt Investment – Amortized Cost
Question 2 - Assignments
Date Payment received Effective interest income Premium Amortized
(Beg. of amortized cost * eff. amortized Cost
Int. rate 6%) (Stated Int. (Beg. Bal. –
received – Eff. amortized premium)
Int. income)
1.1.17 204,917.42
30.6.17 13,000 12,295.05 704.95 204,212.47
31.12.17 13,000 12,252.75 747.25 203,465.22
30.6.18 13,000 12,207.92 792.08 202,673.14
31.12.18 13,000 12,160.39 839.61 201,833.53
30.6.19 13,000 12,110.01 889.99 200,943.54
31.12.19 13,000 12,056.46 943.54 200,000.00
31.12.19 200,000.00 - - -
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Debt Investment – Amortized Cost
● No gain or loss recognized for fair value changes over the
life of the debt investment measured at amortised cost.
● As the investor intends to hold the bond.
● But the entity is required to recognise a gain or loss in the
income statement (P/L) on a financial asset that is measured at
amortised cost when the asset is derecognized or impaired.
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Debt Investment-FVTPL
Debt investments at fair value through profit or loss follow the
same accounting entries as debt investments held-for-collection to
record interest income during the reporting period.
●In addition, at each reporting date, companies
● Adjust the carrying amount of the investment to fair value.
● Any unrealized holding gain or loss reported as part of profit or
loss (fair value method).
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Example 2(b)
Company A purchases a debt instrument: (at discount)
Date of the transaction: 1-1-2018
Term: 5-year term
Fair value: $1,000
Principal amount (face value): $1,250
Fixed interest rate (stated interest): 4.7% annually on 31 Dec
Effective interest rate: 10%
Assume that the debt investment is classified as financial assets at FVTPL and
due to interest rate changes, the fair values of the debt investment at the end
of 2018 and 2019 are as $1200 and $1100 respectively. The debt investment
was sold for $1300 on 30 June, 2020. Make journal entries in 2018, 2019 and
2020.
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Schedule of Interest Revenue and Bond Discount Amortization
Amortized cost
Actual cash Effective interest Discount (carrying
Date inflow# income @10% amortized amount)
(a) (b) = beg. bal of (c) = (b)-(a) (d)
(d)*10%
1.1.2018 1,000
31.12.2018 59 100 41 1,041
31.12.2019 59 104 45 1,086
31.12.2020 59 109 50 1,136
31.12.2021 59 113 54 1,190
31.12.2022 59 119 60 1,250
31.12.2022 1,250* --- --- ---
FV of the bond at year-end is irrelevant to the calculation of effective interest income.
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Example 2(b) – Suggested Answers
Initial Recognition
1.1.2018
Dr. Debt Investment - FVTPL 1,000 Initial
Cr. Cash 1,000 recognition
Subsequent Measurement Recognition
31.12.2018 of interest
Dr. Debt Investment - FVTPL 41 income &
Dr. Cash 59 amortization
Cr. Interest income 100 of discount
Dr. Debt Investment - FVTPL 159 Recognition
(FV $1,200-carrying amt. after discount amortization $1,041) of fair value
Cr. Unrealized gain (recognized in the IS) 159 increase in
P/L
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Example 2(b) – Suggested Answers
31.12.2019 Recognition
Dr. Debt Investment - FVTPL 45
of interest
Dr. Cash 59
income &
Cr. Interest income 104
($1,041 carrying amt. assuming bond is measured at amortized cost * 10% amortization
effective interest rate) of discount
Dr. Unrealized loss (recognized in the IS) 145
Recognition
($1200 carrying amt. @ 1/1/2019 + $45 amort. disc. - $1100 FV @ 12/31/2019) of fair value
Cr. Debt Investment - FVTPL 145 decrease in
P/L
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Example 2(b) – Suggested Answers
Disposal of the debt investment
30.06.2020 Accrue
Dr. Debt Investment - FVTPL 54 interest
Cr. Interest income (1,086*10%*6/12) 54 income
($1,086 is the carrying amt. of the bond @ 12/31/2019 assuming the
bond is measured at amortized cost.)
• This JE is to record the appreciation in the value of Debt Investment due to passage of time (6
months).
• This increase in value is equal to Beg. Bal. of carrying amt. of bond (assuming measured at
amortized cost) * effective int. rate * time lapsed (6/12 year)
• No need to record an “interest receivable” from the stated cash interest payment.
• Because the company is no longer entitled to the cash interest pmt. on 12/31/20 once it sells
the bond on 6/30/20.
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Example 2(b) – Suggested Answers
Disposal of the debt investment
30.06.2020
Dr. Debt investment – FVTPL (1,300 – 1,154) 146 Update bond
($1,100 carrying amt. @ 1/1/2020+$54 amort. disc.) value to FV
Cr. Unrealized gain 146
Dr. Cash 1,300 Record cash
Cr. Debt investment – FVTPL 1,300 receipt
Transfer
Dr. Unrealized gain 146 unrealized gain
Cr. Gain on sale of debt investment 146 to realized gain
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Debt Investment-FVTOCI
Debt investments at fair value through other comprehensive income follow
the same accounting entries as debt investments held-for-collection to record
interest income during the reporting period.
●In addition, at each reporting date, companies
● Adjust the carrying amount of the investment to fair value.
● Any unrealized holding gain or loss reported as part of other
comprehensive income.
●When derecognized, unrealized gains and losses previously recognized in OCI
will be reclassified to profit or loss.
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Example 2(c)
Company A purchases a debt instrument: (at discount)
Date of the transaction: 1-1-2018
Term: 5-year term
Fair value: $1,000
Principal amount (face value): $1,250
Fixed interest rate (stated interest): 4.7% annually on 31 Dec
Effective interest rate: 10%
Assume that the debt investment is classified as financial assets at FVTOCI and
due to interest rate changes, the fair values of the debt investment at the end o
2018 and 2019 are as $1200 and $1100 respectively. The debt investment was
sold for $1300 in 30 June, 2020. Make journal entries in 2018, 2019 and 2020.
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Schedule of Interest Revenue and Bond Discount Amortization
Amortized cost
Actual cash Effective interest Discount (carrying
Date inflow# income @10% amortized amount)
(a) (b) = beg. bal of (c) = (b)-(a) (d)
(d)*10%
1.1.2018 1,000
31.12.2018 59 100 41 1,041
31.12.2019 59 104 45 1,086
31.12.2020 59 109 50 1,136
31.12.2021 59 113 54 1,190
31.12.2022 59 119 60 1,250
31.12.2022 1,250* --- --- ---
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Example 2(c) – Suggested Answers
Initial recognition
1.1.2018
Dr. Debt Investment - FVTOCI 1,000 Initial
Cr. Cash 1,000 recognition
Subsequent measurement Recognition
31.12.2018 of interest
Dr. Debt Investment - FVTOCI 41 income &
Dr. Cash 59 amortization
Cr. Interest income 100 of discount
Dr. Debt Investment - FVTOCI 159 Recognition
(FV $1,200-carrying amt. after discount amortization $1,041) of gain of fair
Cr. Other comprehensive income 159 value increase
in OCI
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Example 2(c) – Suggested Answers
31.12.2019 Recognition
Dr. Debt Investment - FVTOCI 45
of interest
Dr. Cash 59
income &
Cr. Interest income 104
($1,041 carrying amt. assuming bond is measured at amortized cost * 10% amortization
effective interest rate) of discount
Recognition
Dr. Other comprehensive income 145
of loss of
Cr. Debt Investment - FVTOCI 145
fair value
($1200 carrying amt. @ 1/1/2019 + $45 amort. disc. - $1100 FV @ 12/31/2019) decrease in
P/L
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Example 2(c) – suggested answers
Disposal of the debt investment
30.06.2020 Accrue
Dr. Debt Investment - FVTOCI 54 interest
Cr. Interest income (1,086*10%*6/12) 54 income
($1,086 is the carrying amt. of the bond @ 12/31/2019 assuming the
bond is measured at amortized cost.)
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Example 2(c) – Suggested Answers
Disposal of the debt investment
30.06.2020
Dr. Debt investment – FVTOCI (1,300 – 1,154) 146 Update bond
($1,100 carrying amt. @ 1/1/2020+$54 amort. disc.) value to FV
Cr. Other Comprehensive Income 146
Dr. Cash 1,300 Record cash
Cr. Debt investment – FVTOCI 1,300 receipt
Transfer
Dr. Other Comprehensive Income 160 previously
($159-$145+$146) recognized OCI
Cr. Gain on sale of debt investment 160 to realized gain
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3. Recognition & Measurement
Equity investment
3.5 Subsequent measurement
3.6 Changes in fair value
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Equity Investment - FVTPL
Holdings of Less Than 20%
General accounting and reporting rule:
● Investments valued at fair value.
● Record unrealized or realized gains and losses in profit or loss.
● Any dividend receipt from the equity investment will be
recognized as dividend income in Income Statement (P/L)
● At derecognition, record realized gain/loss from selling equity
investment.
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Example 3(a)
● On 1 January 2015, firm A invests $1000 in the shares of firm B, a
listed company, and accounts for the investment as a financial asset on
its books. The details of the investment are as follows:
Year-end Fair value change over the year
31.3.2015 $200
31.3.2016 ($300)
31.3.2017 ($400)
31.3.2018 $700
● On 5 May 2018, firm A sells the investment for $1,350.
Required: Prepare all journal entries for the above transactions assuming
that the equity investment is classified as FVTPL.
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Example 3(a)– Suggested Solutions
$ $
1.1.2015 Dr. Equity investment - FVTPL 1,000
Cr. Cash 1,000
Initial recognition of FVTPL investment.
31.3.2015 Dr. Equity investment - FVTPL 200
Cr. Unrealized gain (recognized in the IS) 200
Change in fair value for 2015.
31.3.2016 Dr. Unrealized loss (recognized in the IS) 300
Cr. Equity investment – FVTPL 300
Change in fair value for 2015/16.
31.3.2017 Dr. Unrealized loss (recognized in the IS) 400
Cr. Equity investment – FVTPL 400
Change in fair value for 2016/17.
31.3.2018 Dr. Equity investment – FVTPL 700
Cr. Unrealized gain (recognized in the IS) 700
Change in fair value for 2017/18.
5.5.2018 Dr. Cash 1,350
Cr. Equity investment – FVTPL 1,200
(1,000+200-300-400+700)
Cr. Gain on disposal of equity investment 150
Gain on sales of investment. 0
Equity Investment - FVTOCI
Holdings of Less Than 20%
IFRS allows companies to designate some equity investments as fair value
through other comprehensive income under the following two conditions.
1. The equity investment is not held for trading
2. Make an irrevocable election at initial recognition.
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Equity Investment - FVTOCI
Holdings of Less Than 20%
General accounting and reporting rule: .
● Investments valued at fair value.
● The gains and losses from the investment, except for dividends, are
recognised in other comprehensive income and accumulated in
equity.
● At derecognition:
● No gain/loss recognized, as selling price of equity investment = FV @ date
of sale.
● Transfer previously recognized OCI to Retained Profit.
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Example 3(b)
On 1 January 2015, firm A invests $1,000 in the shares of firm B Ltd,
a listed company, and accounts for the investment as a financial asset on
its books. The details of the investment are as follows:
Year-end Fair value change over the
period
31.3.2015 $200
31.3.2016 ($300)
31.3.2017 ($400)
31.3.2018 $700
On 5 May 2018, firm A sells the investment for $1,350.
Required:
Prepare all journal entries for the above transactions assuming that the
equity investment is classified as FVTOCI.
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Example 3(a)– Suggested Solutions
$ $
1.1.2015 Dr. Equity investment - FVTOCI 1,000
Cr. Cash 1,000
Initial recognition of FVTOCI investment.
31.3.2015 Dr. Equity investment - FVTOCI 200
Cr. Other comprehensive income 200
Change in fair value for 2015.
31.3.2016 Dr. Other comprehensive income 300
Cr. Equity investment – FVTOCI 300
Change in fair value for 2015/16.
31.3.2017 Dr. Other comprehensive income 400
Cr. Equity investment – FVTOCI 400
Change in fair value for 2016/17.
31.3.2018 Dr. Equity investment – FVTOCI 700
Cr. Other comprehensive income 700
Change in fair value for 2017/18.
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Example 3(a)– Suggested solutions
$ $
5.5.2018 Dr. Equity investment – FVTOCI 150
(1,350-Bal. of Equity investment @ 3/31/2018
$1,200)
Cr. Other comprehensive income 150
Update fair value to sales price
5.5.2018 Dr. Cash 1,350
Cr. Equity investment - FVTOCI No gain/loss 1,350
Derecognized equity investment on sale recognized
from sale of
5.5 2018 Dr. Other comprehensive income equity inv., as
350
(200-300-400+700+150) sales proceeds
Cr. Retained profit = FV @ date of 350
Company may transfer OCI to R/P on sale.
derecognition of Equity investment
Previous unrealized gain/loss
from changes in FV ($350 OCI)
is now realized ($1,350 cash
proceeds - $1,000 original cost) -
> so transferred to R/P.
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Thanks!
