INVESTMENT IN DEBT SECURITIES

Objective
Establish principles for the financial reporting of financial assets that will present relevant and
useful information to users of financial statements for their assessment of the amounts,
timing and uncertainty of an entity’s future cash flows.

Scope
PFRS 9 shall be applied by all entities to all types of financial instruments except:
➢ Interests in subsidiaries, associates and joint ventures
➢ Rights and obligations under leases
➢ Employers’ rights and obligations under employee benefit plans
➢ Financial instruments issued by the entity that meet the definition of an equity instrument
in PAS 32
➢ Insurance contract
➢ Forward contract under business combinations
➢ Loan commitments
➢ Financial instruments, contracts and obligations under share-based payment
➢ Reimbursements classified as provisions
➢ Rights and obligations rising from revenue from contracts with customers

Definition of Terms

The portion of lifetime expected credit losses that represent the expected
12-month expected
credit losses that result from default events on financial instruments that
credit losses are possible within the 12 months after the reporting date.
The amount at which the financial asset is measured at initial recognition
minus the principal repayments, plus or minus the cumulative
Amortized cost of a amortization using the effective interest method of any difference
financial asset between that initial amount and the maturity amount and, for financial
assets, adjusted for any loss allowance.

The removal of a previously recognized financial asset or financial liability

Derecognition
from an entity’s statement of financial position.
The method that is used in the calculation of the amortized cost of a
Effective interest
financial asset and in the allocation and recognition of the interest
method revenue or interest expense in profit or loss over the relevant period.
The rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial asset or financial
Effective interest rate
liability to the gross carrying amount of a financial asset or to the
amortized cost of a financial liability.
The price that would be received to sell an asset or paid to transfer a
Fair Value liability in an orderly transaction between market participants at the
measurement date.
 The first day of the first reporting period following the change in business
Reclassification date
model that results in an entity reclassifying financial assets.
Returns consistent with a basic lending arrangement, interest may
Solely payments of
include return not only for the time value of money and credit risk but also
principal and interest
for other components such as a return for liquidity risk, amounts to cover
(SPPI) expenses and a profit margin.
Incremental costs that is directly attributable to the acquisition, issue or
disposal of a financial asset or financial liability. An incremental cost is
Transaction costs
one that would not have been incurred if the entity had not acquired,
issued or disposed of the financial instrument.

INITIAL RECOGNITION OF FINANCIAL ASSETS

➢ When the entity becomes party to the contractual provisions of the instrument.

INITIAL MEASUREMENT OF FINANCIAL ASSETS

FVPL - Fair Value
AC & FVOCI – Fair Value + directly attributable transaction costs.

SUBSEQUENT CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS

➢ Debt instruments shall be classified either at Amortized Cost (AC), Fair Value
through Other Comprehensive Income (FVOCI) or Fair Value through Profit or Loss
(FVPL).

DEBT INSTRUMENTS

Financial Assets at Amortized Cost

Requisites for ➢ The asset is held to collect its contractual cash flows and
Classification ➢ The asset’s contractual cash flows represent ‘solely payments of
principal and interest’

Profit or Loss ➢ Effective interest income

Items ➢ Impairment losses and reversal gains
➢ Gain or loss on derecognition

Statement of ➢ Measured at amortized cost

Financial ➢ Classified as a non-current asset unless maturity is within 12
Position months after the end of the reporting period.
 Financial Assets at Fair Value through Other Comprehensive Income

Requisites for ➢ The objective of the business model is achieved both by

Classification collecting contractual cash flows and selling financial assets;
and
➢ The asset’s contractual cash flows represent SPPI.

Profit or Loss ➢ Effective interest (income)

Items ➢ Impairments losses and reversal gains
➢ Gain or loss on derecognition including reclassification
adjustments (PAS 1) OCI
➢ Changes in fair value due to subsequent measurement

Statement of ➢ Measured at fair value after amortization for the effective

Financial interest
Position ➢ Cumulative gain or loss on fair value in Equity
➢ Since PFRS 5 excludes the scope for financial assets, FVOCI
are non-current asset unless maturity is within 12 months after
the end of the reporting period

Note that both amortization is applied under the effective interest method before
applying the FV measurement requirement for the FVOCI classification.

Financial Assets at Fair Value through Profit Or Loss

Requisites for ➢ This is a “residual category” if none of the two previously mentioned
Classification (AC and FVOCI) business models apply or if any of the two business
model apply but the contractual cash flows are NOT SPPI for example
if interest will include a profit participation.
➢ If the two requisites for the AC and FVOCI category are met
but the entity elects to measure debt instruments at FVPL to
eliminate an “accounting mismatch” because financial
liabilities are measured at FVPL.

Profit or Loss ➢ Nominal interest (income)

Items ➢ Direct transaction cost incurred on acquisition
➢ Gain or loss on changes in fair value on subsequent
measurement
➢ Gain or loss on derecognition
Statement of Position
Financial ➢ Measured at fair value
➢ Under the assumption the Financial asset is held for trading, FVPL shall be classified
as a current asset (PAS 1)

RECLASSIFICATIONS OF DEBT INSTRUMENTS

Original category New category Accounting impact
 Fair value is measured at reclassification date.
 Difference from carrying amount should be
recognized in profit or loss.
Entry:
Amortized cost FVPL
1. FVTPL
Reclassification Loss – P/L (if any)
FAAC
Reclassification Gain – P/L (if any)
 Fair value is measured at reclassification date.
 Difference from amortized cost should be
recognized in OCI.
 Effective interest rate is not adjusted as a result
of the reclassification.
Amortized cost FVOCI
Entry:
1. FVTOCI (FV Reclassification date)
Reclassification Loss – OCI (if any)
FAAC
Reclassification Gain – OCI (if any)
FVOCI FVPL  Fair value at reclassification date becomes
carrying amount.
 Cumulative gain or loss previously recognized
in OCI is reclassified to profit or loss at
reclassification date.
Entry:
1. FVPL (FV Reclassification Date)
FVOCI (CV Reclassification date)
2. Unrealized Gain – OCI
Reclassification Gain – P/L
3. Reclassification Loss – P/L
Unrealized Loss - OCI
  Fair value at the reclassification date becomes
its new amortized cost carrying amount.
 Cumulative gain or loss in OCI is adjusted
against the fair value of the financial asset at
reclassification date.
 The original effective interest rate will be used
to amortized the financial asset
FVOCI Amortized cost
Entry:
1. FAAC (FV Reclassification Date)
FVTOCI (CV Reclassification Date)
2. FAAC
Unrealized Loss - OCI
3. Unrealized Gain – OCI
FAAC
FVPL Amortized Cost  Fair value at then reclassification date
becomes its new gross carrying amount.
 The difference between the FV at
reclassification date and face amount is
amortized through P/L over the remaining term
of the FA using the effective interest method
 A NEW effective rate must be determined
based on the FV at reclassification date.
FAAC (FV Reclassification date)
FVPL (carrying value)
 Fair value at reclassification date becomes its
new carrying amount.
 A NEW effective rate must be determined
based on the FV at reclassification date.
FVPL FVOCI
Entry:
FVOCI (FV reclassification date)
FVPL (carrying value at reclassification
date)
 IMPAIRMENT OF FINANCIAL ASSETS
Scope
A single set of an impairment model will be applied to:
a. Financial assets measured at amortized cost including trade receivables
b. Financial assets measured at fair value through OCI
c. Loan commitments and financial guarantees contracts where losses are currently
accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets
d. Lease receivables

The impairment model follows a three-stage approach based on changes in

expected credit losses of a financial instrument that determine:
a. The recognition of impairment, and
b. The recognition of interest revenue

THREE STAGE APPROACH TO IMPAIRMENT

Stage 1 – Applied at initial recognition and subsequent measurement when there is
no significant increase in credit risk
a. As soon as a financial instrument is originated or purchased, 12-month expected
credit losses are recognized in profit or loss and a loss allowance is established.
b. Entities continue to recognize 12 month expected losses that are updated at each
reporting date
c. Effective interest is based on the gross carrying amount rather than the carrying
amount net of allowance for impairment.

Stage 2 – Applied at subsequent measurement when there is a significant increase in

credit risk.
a. If the credit risk increases significantly and the resulting credit quality is not
considered to be low credit risk, full lifetime expected credit losses are recognized.
b. Lifetime expected credit losses are only recognized if the credit risk increases
significantly from when the entity originates or purchases the financial instrument.
c. Effective interest is based on the gross carrying amount rather than the carrying
amount net of allowance for impairment.

Stage 3 – Applied at subsequent measurement when there is credit impairment

a. If the credit risk of a financial asset increases to the point that it is considered
credit-impaired, interest revenue is calculated based on the net amortized cost
b. Financial assets in this stage will generally be individually assessed.
c. Lifetime expected credit losses are still recognized on the financial assets.
 MEASUREMENT OF CREDIT LOSSES
Credit losses are the present value of all cash shortfalls. Expected credit losses are an
estimate of credit losses over the life of the financial instrument.
Factors in measuring credit losses:
a. The probability-weighted outcome: expected credit losses should represent
neither a best or worst-case scenario. Rather, the estimate should reflect the
possibility that a credit loss occurs and the possibility that no credit loss occurs.
b. The time value of money: expected credit losses should be discounted to the
reporting date.
c. Reasonable and supportable information that is available without undue cost or
effort.