[ACYFAR1] Investments

• 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:

  1. Cash
  2. An equity instrument of another entity
  3. A contractual right to exchange financial instruments with another entity under conditions that are favorable
  4. A contract that will or may be settled in the entity's own equity instruments and is not classified as the entity's own equity instruments
• A financial liability includes:

  1. A contractual obligation to deliver cash or another financial asset to another entity
  2. A contractual obligation to exchange financial instruments with another entity under conditions that are potentially unfavorable
  3. A contract that will or may be settled in the entity's own equity instruments and is not classified as the entity's own equity instrument
• An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
• Examples of financial assets are:

  1. Cash and Cash equivalents
  2. Receivables
  3. Investments in equity or debt instruments
  4. Sinking fund or other long term funds
• Only equity instruments of other entities can qualify as financial assets.
• Equity securities are equity instruments that are classifiable as investments.
• The following are not financial assets:

  1. Physical Assets
  2. Advances to Suppliers
  3. Prepaid Assets
  4. Prepaid Interest
  5. Own equity intruments
• Examples of financial liabilities:

  1. Payables
  2. Lease Liabilities
  3. Held for trading liabilities and derivative liabilities
  4. Redeemable preference shares issued
  5. Security deposits and other returnable deposits
• Items arising from statutory requirements (i.r., required by the government) are not financial instruments because these do not arise from contracts.
• Classification of financial assets:

  1. Amortized Cost
  2. Fair Value through comprehensive income
  3. Fair value through profit or loss
• A financial asset is measured at amortized cost if:

  1. Business Model: Hold to collect
  2. Cash Flow: SPPI
• A financial asset is measured at FVOCI if:

  1. Business Model: Hold to Collect and Sell
  2. Cash Flow: SPPI
• A financial asset is measured at FVPL if:

  1. Business Model: Not defined
  2. Cash Flow: Not defined
• An entity can make an irrevocable election to classify investment in equity instruments as FVOCI even if it would otherwise be measured at FVPL.
• An entity may irrevocably designate a financial asset as FVPL if doing so eliminates or reduces accounting mismatch.
• A business model refers to how an entity manages its financial assets in order to generate cash flows.
• Hold to collect: A business model wherein financial assets are managed to realize cash flows by collecting payments over the life of the instrument.
• Hold to collect and sell: A business model wherein both collecting cash flows and selling financial assets are integral to achieving the entity's objective of holding financial assets.
• A held for trading security is a financial asset that is acquired for the purpose of selling it in the near term or short term profit-taking.
• Only financial assets whose contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding can be classified as amortized cost or FVOCI.
• Financial assets are generally measured at fair value plus transaction costs, except FVPL.
• Transaction costs include:

  1. Fees and commissions paid to agents, advisers, brokers, and dealers
  2. Levies by regulatory agencies and securities exchanges
  3. Transfer taxes and duties
• Investment in equity securities is under the IFRS 9: Financial Instruments
• In investments in equity securities, investment income equals dividends.
• The order of priority in identifying cost of security in non-cash assets are:

  1. Fair Value of the Asset Assigned
  2. Fair Value of the Asset Given Up
  3. Book Value of the Asset Given Up
• The initial measurement for FA-FVPL is cost.
• The subsequent measurement for FA-FVPL is fair value.
• Any changes in fair value under FA-FVPL is an unrealized gain/loss recognized in the statement of profit or loss.
• Any sale under FA-FVPL is a realized gain/loss recognized in the statement of profit or loss.
• The initial measurement for FA-FVOCI is cost plus direct costs.
• The subsequent measurement for FA-FVOCI is fair value.
• Any changes in fair value under FA-FVOCI is an unrealized gain/loss recognized in other comprehensive income.
• Any sale under FA-FVOCI is a realized gain/loss in retained earnings.
• Equity securities include the following:

  1. Ordinary Shares
  2. Preference Shares
  3. Rights and options to acquire shares
• Transaction costs incurred on the sale of equity securities at FVPL are netted against resulting gain or loss on sale.
• Transaction costs incurred on the sale of equity securities at FVOCI are reported in profit or loss as loss on sale.
• Share dividends are also called bonus issues.
• Share dividends are generally not considered investment income.
• Dividends shall be recognized as income on the date of declaration.