Illustration 1

On 28 September 20x1, ABC Ltd commits to purchase 1,000,000 shares for S$2,000,000
(including transaction costs). On 2 October 20x1 (settlement date), the fair value of the shares is
S$2,100,000. ABC Ltd has 31 December accounting year-ends.

Under “trade date accounting”

28 September 20x1

Dr Investment in shares 2,000,000

Cr Account payable 2,000,000

2 October 20x1

Dr Account payable 2,000,000

Cr Cash 2,000,000

Dr Investment in shares 100,000

Cr Fair value gain (P/L) 100,000

Under “settlement date accounting”

28 September 20x1

No entry

2 October 20x1

Dr Investment in shares 2,100,000

Cr Cash 2,000,000
Cr Fair value gain (P/L) 100,000
Illustration 2

On 30 December 20x1, ABC Ltd (with 31 December accounting year-ends) “sells” its investments
in shares to XYZ Ltd for S$10,000,000 with the concurrent condition that ABC Ltd has the
obligation to repurchase the investments at S$11,000,000 on or before 30 December 20x2.

In this case, since the ABC Ltd retains substantially all the risks and reward of ownership of the
shares, it should not derecognise its investment account.

The transaction should be recorded, not as a sales transaction, but as a financing transaction.

The journal entries will be as follows (assuming ABC Ltd repurchases the investments on 30
December 20x2):

30 December 20x1
Dr Cash 10,000,000
Cr Loan payable 10,000,000

30 December 20x2
Dr Interest expense 1,000,000
Cr Cash 1,000,000

Dr Loan payable 10,000,000

Cr Cash 10,000,000

Illustration 3

On 30 December 20x1, DEF Ltd (with 31 December accounting year-ends) sells its investments
in shares to STU Ltd for S$10,000,000. DEF has a call option to repurchase the investments at
their fair value on or before 30 December 20x2.

In this case, since DEF Ltd has transferred substantially all the risks and reward of ownership of
the shares to STU Ltd, it (DEF Ltd) should derecognise its investment account.
Illustration 4

ABC Ltd borrows from a bank in 20x1. In January 20x2, ABC Ltd pays a fee to XYZ Ltd to assume
the loan liability even though ABC Ltd continues to make interest and principal payments on behalf
of XYZ Ltd. The bank has agreed to accept XYZ Ltd as the new primary obligor.

In this case, ABC Ltd should derecognise the loan liability, because it has extinguished its liability
to the bank since the bank has released it from its primary responsibility for the loan liability.

While ABC Ltd derecognises its loan liability to the bank, it should, at the same time, recognise
its new liability to XYZ Ltd.

As for XYZ Ltd, it should recognise both a receivable from ABC Ltd and a liability to the bank.
XYZ Ltd is not permitted to offset its liability to the bank against its receivable from ABC Ltd unless
a binding legal agreement among the three entities gives XYZ Ltd the currently available right to
offset and XYZ Ltd has the intention to settle on a net basis, as provided under FRS 32*.

* FRS 32 Para 42:

A financial asset and a financial liability shall be offset and the net amount presented in the
statement of financial position when, and only when, an entity:

(a) currently has a legally enforceable right to set off the recognised amounts; and

(b) intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
Illustration 5: A biz model whose objective is to hold assets in order to collect contractual cash
flows

Facts:
An entity holds investment to collect their contractual cash flows. The funding needs of the entity
are predictable and the maturity of its financial assets is matched to the entity’s estimated funding
needs.

The entity performs credit risk management activities with the objective of minimising credit
losses. In the past, sales have typically occurred when the financial assets’ credit risk has
increased such that the assets no longer meet the credit criteria specified in the entity’s
documented investment policy. In addition, infrequent sales have occurred as a result of
unanticipated funding needs.

Reports to key management personnel focus on the credit quality of the financial assets and the
contractual return. The entity also monitors fair values of the financial assets, among other
information.

Analysis:
Although the entity considers, among other information, the financial assets’ fair values from a
liquidity perspective (ie the cash amount that would be realised if the entity needs to sell assets),
the entity objective is to hold the financial assets in order to collect the contractual cash flows.

Sales would not contradict that objective if they were in response to an increase in the assets’
credit risk, for example, if the assets no longer meet the credit criteria specified in the entity’s
documented investment policy.

Infrequent sales resulting from unanticipated funding needs (eg in a stress case scenario) also
would not contradict that objective, even if such sales are significant in value.
Illustration 6: A biz model whose objective is achieved by both collecting contractual cash flows
and selling financial assets

Facts:
An entity anticipates capital expenditure in a few years. The entity invests its excess cash in short
and long-term financial assets so that it can fund the expenditure when the need arises. Many of
the financial assets have contractual lives that exceed the entity’s anticipated investment period.

The entity will hold financial assets to collect the contractual cash flows and, when an opportunity
arises, it will sell financial assets to re-invest the cash in financial assets with a higher return.

The managers responsible for the portfolio are remunerated based on the overall return generated
by the portfolio.

Analysis:
The objective of the business model is achieved by both collecting contractual cash flows and
selling financial asset. The entity will make decisions on an ongoing basis about whether
collecting contractual cash flows or selling financial assets will maximise the return on the portfolio
until the need arises for the invested cash.

In contrast, consider an entity that anticipates a cash outflow in five years to fund capital
expenditure and invests excess cash in short-term financial assets. When the investment mature,
the entity reinvests the cash in new short-term financial assets. The entity maintains this strategy
until the funds are needed, at which time the entity uses the proceeds from the maturing financial
assets to fund the capital expenditure. Only sales that are insignificant in value occur before
maturity (unless there is an increase in credit risk). The objective of this contrasting business
model is to hold financial assets to collect contractual cash flows.
Illustration 7

On 1 January 20x1, ABC Ltd pays S$104,330 to acquire a bond which has a nominal value of
S$100,000, a coupon rate of 6% interest payable on 31 December each year and matures on 31
December 20x5.

ABC Ltd’s business model is to hold the bond to collect contractual cash flows. The investment in
bond is therefore classified as “amortised cost”.

(It may be determined from financial calculator that the effective interest rate in this case is 5%).

In this case, the carrying amount of the investment and the interest income for each relevant
period will be determined, using the effective interest rate method, as follow:

Year ending (1) (2) (3) (4)

Interest income Interest received Decrease in Carrying amount
(5% x beginning (6% x nominal carrying amount (beginning
balance of value of (or premium balance – (3))
carrying amount S$100,000) amortisation
which is (2)-(1))
S$104,330
31/12/x1 S$5,216 S$6,000 S$784 S$103,546
31/12/x2 S$5,177 S$6,000 S$823 S$102,723
31/12/x3 S$5,136 S$6,000 S$864 S$101,859
31/12/x4 S$5,093 S$6,000 S$907 S$100,952
31/12/x5 S$5,048 S$6,000 S$952 S$100,000

The relevant journal entries are as below:

1/1/x1
Dr Investment in bond 104,330
Cr Cash 104,330

31/12/x1
Dr Cash 6,000
Cr Investment in bond 784
Cr Interest income 5,216

31/12/x2
Dr Cash 6,000
Cr Investment in bond 823
Cr Interest income 5,177

31/12/x3
Dr Cash 6,000
Cr Investment in bond 864
Cr Interest income 5,136
31/12/x4
Dr Cash 6,000
Cr Investment in bond 907
Cr Interest income 5,093

31/12/x5
Dr Cash 6,000
Cr Investment in bond 952
Cr Interest income 5,048

Dr Cash 100,000
Cr Investment in bond 100,000

In its 20x1 financial statements:

o Investment in bonds will be presented as its amortised cost of S$103,546 in the balance
sheet.
o Interest income of S$5,216 will be presented as “profit or loss” in Statement of profit and
loss and other comprehensive income.
Illustration 8

Refer to Illustration 7 above, except in this illustration, assume ABC Ltd’s business model is to
“collect cash and sell”, and the investment in bond is therefore classified as FVOCI.

Assume further that the fair value of the bonds is S$103,000 as at 31 December 20x1.

In this case, the relevant journal entries for 20x1 are as below:

1/1/x1
Dr Investment in bond S$104,330
Cr Cash S$104,330
(to record cost of investment)

31/12/x1
Dr Cash S$6,000
Cr Investment in bond S$784
Cr Interest income S$5,216
(to recognise interest income)

31/12/x1
Dr Fair value loss (OCI) S$546
Dr Investment in bond S$546
(to record bridging loss (103,546 - 103,000)

In its 20x1 financial statements:

o Investment in bonds will be presented as its fair value of S$103,000 in the balance sheet.
o Interest income of S$5,216 will be presented as “profit or loss” in Statement of profit and
loss and other comprehensive income.
o Fair value loss of S$546 presented as “other comprehensive income” in the Statement of
profit and loss and other comprehensive income, and the Fair value reserve of S$546 will
be presented as part of shareholder’s equity in the balance sheet.

In subsequent years, there are two ways to compute the yearly interest income. One way is to
compute the yearly interest income as shown in the table in Illustration 7 above. The other way is
to compute the yearly interest income based on the fair value at the beginning each year. The
interest income for 20x2 may be recorded as follows:

31/12/x2
Dr Cash S$6,000
Cr Investment in bond S$823
Cr Interest income S$5,177
(interest income computed as per table in Illustration 7)

31/12/x2
Dr Cash S$6,000
Cr Investment in bond S$850
Cr Interest income (5% x 103,000) S$5,150
(interest income computed based on the fair value)
Illustration 9

Refer to Illustration 7 and 8 above, except in this illustration, assume ABC Ltd acquires the bond
on 11 November 20x1, and its business model is “held for trading””, and the investment in bond
is therefore classified as FVPL.

In this case, the relevant journal entries for 20x1 are as below:

11/11/x1
Dr Investment in bond S$104,330
Cr Cash S$104,330
(to record cost of investment)

31/12/x1
Dr Cash S$6,000
Cr Investment in bond S$1,330
Cr Gain on bond investment S$4,670
(to recognise loss interest income (S$104,330 – S$103,000))