Investment in Debt Securities

• A debt security pertains to a financial debt instrument that can be bought or sold between two parties and has basic terms defined.
• Debt securities include government bond, corporate bond, certificate deposit, or preferred stock with mandatory redemption.
• A bond is a formal conditional promise, made under seal, to pay a specified sum of money at a determinable future date and to make periodic interest payments at a stated rate until the principal sum is paid.
• Bond certificate is a certificate issued by the bond issuer which entitles the bondholder to receive principal and interest payments.
• Bond indenture is the unconditional contract between the bond issuer and the bondholder that specifies terms of the bond.
• Term bond is a type of bond which matures on a single date
• Serial bonds is a type of bond with series of maturity dates
• Debenture bonds is a bond without any security or collateral
• Investment in debt securities are financial assets and may be classified as follows:

  1. FA at FV through profit or loss
  2. FA at amortized cost
  3. FA at FV through other comprehensive income
• Measurement of FVTPL as per PFRS 9:

  1. Quoted price in active market
  2. PV of related cash flows (principal and interest) using an EIR
• FAAC & FVTOCI are initially measured at fv + transaction costs
• Financial assets at fvtpl are presented as part of the current assets.
• FA @ FVTPL includes those that are:

  1. Held for trading
  2. Irrevocably designated at FVTPL
  3. All other investment in debt securities that do not satisfy the requirements for measurement at AC and at FVTOCI
• Investment in debt securities classified as FVTPL is initially measured at fv. Transaction cost is expensed outright.
• Subsequent measurement - FVTPL:

  FV (current reporting date) xx

  Less: CV (FV previous reporting date) (xx)

  Unrealized gains or loss - P/L xx
• Unrealized gain:

  Investment in Bonds - FVTPL xx

  Unrealized gain - P&L xx
• The premium or discount on the financial asset at FVTPL is not amortized at the end of the reporting period. The journal entry for the interest and (or) accrual is:

  Cash or interest receivable xx

  Interest income xx
• Derecognition - FVTPL:

  Consideration received xx

  Less: Interest income of investment sold* (xx)

  Transaction cost (xx)

  Net selling price xx

  Less: CV (fv previous reporting date) (xx)

  Realized gain (or loss) - P/l xx

  
  

  *Int inc is deducted if the investment is sold in between interest dates
• JE for Derecognition:

  Cash (net of tc) xx

  Loss on sale xx

  FVTPL xx

  Gain on sale xx

  Interest income or receivable xx
• Investments in debt securities are classified as FA @ AC when both of the following conditions are met:

  1. The business model is to hold the financial assets in order to collect contractual cash flows on a specified date
  2. The contractual cash flows are SPPI on the principal amount outstanding
• A bond with stated maturity date with fixed, variable or mixed interest cash flows is an example of FA @ AC
• Bonds acquired at a premium: Proceeds > FA; E<N
• Bonds acquired at a discount: Proceeds < FA; E>N
• On April 1, 2021, Laguna Company acquired 12% bonds with a face amount of 2,000,000. The bonds are dated January 1, 2021, and will mature on December 31, 2024. The bonds were acquired to yield 10%. Interest is payable on December 31. Compute the purchase price of the bonds.

  2,179,945

  Refer to P573 for the solution
• Reclassification date, as to financial assets refers to the first day of the next reporting period following the change in business model.