Part-2-Chapter-1 Auditing and Assurance .pptx

Auditing and Assurance:
Concepts and Application Part 2
Audit of Investments

Introduction
Investing activities pertain to activities relating to ownership of
securities issued by other entities. The types of instruments
included are certificates of deposit, equity securities (ordinary and
preferred shares), and securities (bonds). The investing cycle
interfaces with cash receipts and disbursement transactions.
Investment is an asset held by the entity for purposes of
accretion of wealth through distributions of dividends, interest, and
rentals or for capital appreciation or other benefits to be obtained.

Introduction
In particular, investments in equity and debt instruments include the
following reasons for making such an investment:
Investment Purpose
1. Investment in equity instrument To earn from changes in fair value and/or dividends
- Financial asset at fair value
2. Investment in equity instrument To benefit from exercising significant influence over
- Associate another entity
3. Investment in debt instruments To earn from changes in fair value and interest

Classification of Investment
Equity instruments that are held for trading are required to
be classified at FVPL. For all other equities, management can
make an irrevocable election on initial recognition, on an
instrument-by-instrument basis, to present changes in fair value
in other comprehensive income (OCI) rather than profit or loss.

Equity investments within the scope of PFRS 9 (IFRS 9):
1. Equity investments at fair value through profit or loss (EI@FVTPL) – a financial instrument that is
held primarily for the purpose of being traded, it is measured initially at fair value and
subsequently measured and reported in the financial position at fair value. Any changes in the fair
value of this instrument are accounted for in P/L in the period where the changes happened.
2. Equity investments at fair value through other comprehensive income (EI@FVTOCI) – financial
assets included within the FVTOCI category are initially recognized and subsequently measured at
fair value. Movements in the fair value should be recorded through OCI.
Summary of classification and changes in fair value for equity investment at fair value.
Category Type of instrument Reclassification
EI at FVTPL Equity NO
EI at FVTOCI Equity NO

Changes in fair value are recognized are follows:
1. In profit or loss if the equity instrument is held for trading, designated or the
entity did not elect to present changes in fair value in OCI; and
2. In other comprehensive income (OCI) if the equity instrument is not held for
trading and the entity is irrevocably elected to present them in OCI.
Measurement summary for equity investments at fair value:
Category Initial End of reporting period Changes in fair value
EI at FVTPL Fair Value Fair Value Profit or Loss
EI at FVTOCI Fair Value plus transaction cost Fair Value Other Comprehensive Income

Equity investments not within the scope of PFRS 9 (IFRS 9):
Investment in Associate
An associate is an entity over which the investor has significant influence.
Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control of those policies. If an entity
holds directly or indirectly (e.g. through subsidiaries), 20% or more of the voting
power of the investee, it is presumed that the entity has significant influence, unless it
can be clearly demonstrated that this is not the case.
Under the equity method, on initial recognition of the investment in associate
is recognized at cost, and the carrying amount is increased or decreased to recognize
the investor’s share of the profit or loss of the investee after the date of acquisition.

Summary of influence and classification:
Level of Influence % of ownership Method Classification Applicable PFRS (IFRS)
Little or none < 20% Fair Value Financial Asset at fair value PFRS 9
Significant 20% - 50% Equity Investment in Associate PAS 28
Control > 50% Consolidation Investment in Subsidiary PFRS 10
Joint Control No quantitative presumption Equity Investment in Joint Venture PAS 28

Debt (Bond) investments within the scope of PFRS 9 (IFRS 9) are:
1. Debt instrument at fair value through profit or loss (DI@FVTPL) – financial assets included
within the FVTPL category should be measured at fair value with all changes recorded through
profit or loss. Under the new model, FVTPL is a residual category. Financial assets should be
classified as FVTPL if they do not meet the criteria of FVTOCI or amortized cost. Changes in the
fair value of the asset are recognized in profit or loss. Interest income is recognized in profit or
loss based on nominal interest.
2. Debt instrument at fair value through other comprehensive income (DI@FVTOCI) – financial
asset is measured at fair value through other comprehensive income (FVTOCI) if both of the
following criteria are met:
• The objective of the business model is achieved both by collecting contractual cash flows and
selling financial assets; and
• The asset’s contractual cash flows represent solely for payment of principal and interest (SPPI).

Financial assets included within the FVTOCI category are
initially recognized at fair value plus any transaction costs and
subsequently measured at fair value. Movements in the carrying
amount should be recorded through OCI, except for the
recognition of impairment gains or losses, and interest revenue
which are recognized in profit and loss.
Where the financial asset is derecognized, the cumulative
gain or loss previously recognized in OCI is reclassified from
equity to profit or loss (recycling). Interest income is recognized
based on effective interest using the effective interest method.

3. Debt investment at amortized cost
A financial asset is measured at amortized cost if both of the following
criteria are met:
• The asset is held to collect its contractual cash flows; and
• The asset’s contractual cash flows represent solely for payment of principal
and interest (SPPI).
Financial assets included within this category are initially recognized at
fair value plus any transaction costs and subsequently measured at amortized
cost. Interest income is recognized based on effective interest using the
effective interest method.

Inherent Risk of Investments
The inherent risk of investment is the risk that investments contain material
misstatements before considering internal control.
Example of inherent risk:
1. Improper valuation of investments due to their complexity (especially when
dealing with derivative instruments, e.g. FA@FVTPL)
2. Incorrect value of investments (e.g., due to changes in market value has not been
recorded).
3. Impairment of investments is not properly measured and recorded.
4. Investment transactions are recorded in the wrong accounting period.
5. Incorrect method of accounting used in investments.

Inherent Risk of Investments
Example of inherent risk:
6. Losses from investments may be hidden or delayed reporting (e.g., with the
improper method of valuation).
7. Wrong classification of investments (e.g., due to the staff’s lack of
knowledge)
8. Revenues from investments are overstated
9. Fictitious investments are recorded
10. Investments are stolen
11. Investments are intentionally overstated to cover fraud.

Control Risk of Investments
The control risk of investments is the risk that investment accounts contain material
misstatements, but the related control procedures cannot prevent or detect such misstatements.
Examples of internal control procedures that can reduce the risk of material misstatement for
investments:
1. Proper authorization controls (e.g., all purchases and sales of investments need to be
approved by the board of directors).
2. Proper segregation of duties (e.g., the persons, who have the right to make investments and
persons who are responsible for the custody of investments, are different persons)
3. Monthly reconciliation of investments schedule to the general ledger.
4. Adequate policies on valuation and classification of investments.
5. Periodic performance review of investments.

Audit Assertions for Investments
Existence Investments reported on the financial statements
really exists at the reporting date.
Completeness All investments that should have been recorded
have actually been recorded.
Valuation Investments balances truly reflect their actual
economic value as at reporting date.
Rights and Obligations The client has ownership rights for all investments
as of the reporting date.
Presentation and disclosure Investments have been properly classified and
appropriately disclosed (e.g. any restrictions) in
the notes to financial statements.

Substantive Procedures for Investments
Existence
1. Perform direct confirmation with the brokerage (for investments held by the broker).
Verify the existence and ownership of recorded investments, including those in
affiliates, by confirming or examining evidence of ownership.
2. Review minutes (shareholders, board, executive committee, etc.), agreements, and
confirmation reply for evidence of existence, liens, pledges, or other security interests
in investments; and of commitments to acquire or dispose of investments.
3. Vouch for new acquisitions and disposals of investments to supporting documents,
(e.g. broker’s advice).
4. Inspect securities on hand and trace to lists.
5. Investigate unusual items by means of analytical procedures.

Completeness
1. Request the schedule of all investments from the client (if the client doesn’t have the schedule, request them to
prepare one).
2. Verify the arithmetic accuracy of the schedule by footing and cross-footing.
3. Reconcile the beginning balance in the schedule to the previous year’s audited balance.
4. Examine the transactions around year-end to ensure all investments have been recorded in the correct accounting
period.
5. Perform analytical procedures
6. Verify interest and dividend income, and equity in earnings (losses) of investees or affiliates, by calculating interest
earned or by referring to published records of dividends paid or to the financial statements of investees or affiliates.
7. Inspect the broker’s advice and other support to verify that additions and disposals have been recorded properly.
8. Review the investments, including investments in affiliates and related accounts (e.g., interest and dividend income)
in the general ledger for unusual items.

Valuation
1. Vouch the investment balances to the actual market value at year-end.
2. Use information obtained during the audit to determine whether management has identified
appropriate indicators of impairment and determines that the valuation adjustments are
appropriate.
3. Determine whether gains or losses, as a result of changes in market value, have been properly
recorded.
4. Recalculate interest income or dividend income from investments
5. Reconcile the investment list to the subsidiary ledger and general ledger account.
6. Re-calculate interest income and verify dividend income by reference to published reports of
dividend.

Measurement Principles for Equity Securities
Amount to be reported in profit or loss due to changes in fair value
Entry:
Category FV (at initial) Transaction Costs Changes in FV
EI at FVTPL Capitalized Expense Profit or Loss
EI at FVTOCI Capitalized Capitalized Other comprehensive income
Fair Value to date P xxx,xxx
Less: Previous Fair Value (xxx,xxx)
Unrealized gain/ (loss) - P/L P xxx,xxx
when the value increase: when the value decrease:
EI at FVTPL xxx,xxx Unrealized gain/(loss) - P/L xxx,xxx
Unrealized gain/(loss) - P/L xxx,xxx EI at FVTPL xxx,xxx

Measurement Principles for Equity Securities
Amount to be reported in other comprehensive income due to changes in fair value
Entry:
Note: if first-time remeasurement to fair value, the amount deducted is the previous fair value
plus transaction cost.
Fair Value to date P xxx,xxx
Less: Previous Fair Value (xxx,xxx)
Unrealized gain/ (loss) - OCI P xxx,xxx
when the value increase: when the value decrease:
EI at FVTOCI xxx,xxx Unrealized gain/(loss) - OCI xxx,xxx
Unrealized gain/(loss) - OCI xxx,xxx EI at FVTOCI xxx,xxx

Dividends
Dividends are a distribution of profits to holders of equity investments in proportion to their
holdings of a particular class of capital. It represents the investor’s share of an investee’s profit.
Dividends may be distributed in different forms such as cash dividends, share dividends, and property
dividends. Dividends are recognized as income in profit or loss as an investment income for cash and
property dividends, and no income is recognized for share dividends.
Dividend Type Treatment Amount
Cash dividend Dividend income in profit or loss Received or receivable
Cash
Dividend income
Property Dividend Dividend income in profit or loss Fair value of property
Property (asset) Received or receivable
Dividend income
Share Dividend Not recognized as income: None
Recorded by memo entry only

Illustrative Case – Equity Investments
On January 01, 2023, Nivea Company acquired 15,000 shares of Dove Incorporated for P10
per share. The investment represents 5% of the outstanding shares of Dove Incorporated.
Transaction costs incurred were P15,000 (P1 per share). On October 01, 2023, Dove declared
a total of P250,000 cash dividends distributed on December 01, 2023. The shares were selling
at P12 per share on December 31, 2023.
Your task as an auditor is to determine:
1. The amount reported in the statement of financial position as equity investments at fair
value as of December 31, 2023.
2. Total amount reported in ‘Comprehensive Income” for the period ending December 31,
2023, related to equity investments at fair value.
3. Assuming no entries were made to reflect the transactions after initial recognition, the
proposed adjusting journal entries for the audit period ending December 31, 2023.

IllustrativeCase – EquityInvestments
Audit Case Analysis – Assuming the investment is classified as EI at FVTPL:
Note: The equity security was classified as EI at fair value since the ownership represents 5% of the
outstanding shares. The amount of dividend received is reported as dividend income in the profit or loss
(P250,000 declared dividend x 5%)
On acquisition date:
EI at FVTPL 150,000.00
Cash 150,000.00
Various Expenses 15,000.00
Cash 15,000.00
Upon receipt of cash dividend:
Cash 12,500.00
Dividend Income 12,500.00

The equity security is reported is reported in the statement of financial position
as of December 31, 2023 at fair value (P180,000).
Adjustment as of year-end:
Unrealized gain/(loss) - P/L 30,000.00
Fair Value on 12/31/2023 (15,000 sh at P12) P 180,000.00
Less: Fair Value on 01/01/2023 (15,000 sh at P10) 150,000.00
Unrealized gain/ (loss) - P/L P 30,000.00

The amount to be reported in comprehensive income is P27,500 since the
amount in comprehensive income is those amounts reported in profit or
loss and other comprehensive income. No amount is reported in other
comprehensive income.
Unrealized gain/ (loss) - P/L P 30,000.00
Transaction cost - 15,000.00
Net amount in P/L P 27,500.00

Audit Case Analysis – Assuming the investment is classified as EI at FVTOCI:
Note: The equity security was classified as EI at fair value since the ownership represents 5% of the
outstanding shares. The amount of dividend received is reported as dividend income in the profit or loss
(P250,000 declared dividend x 5%)
On acquisition date:
EI at FVTOCI 165,000.00
Cash 165,000.00
Upon receipt of cash dividend:
Cash 12,500.00

The equity security is reported is reported in the statement of financial
position as of December 31, 2023 at fair value (P180,000).
Adjustment as of year-end:
Unrealized gain/(loss) - OCI 15,000.00
Fair Value as of 12/31/2023 (15,000 sh at P12) P 180,000.00
Less: Fair Value as of 01/01/2023 165,000.00
Unrealized gain/ (loss) - OCI P 15,000.00

The total amount reported in comprehensive income is the net amount
reported in profit or loss (P12,500 dividend income) and the amount
recognized in other comprehensive income (P15,000). Therefore, the total
amount in comprehensive income is P27,500.
Unrealized gain/ (loss) - OCI P 15,000.00
Total amount in comprehensive income P 27,500.00

IllustrativeCase – Disposal of EquityInvestments at
Fair Value
Audit Case Analysis – Sale of investment classified as EI at FVTPL:
On January 01, 2023, Nivea Company acquired 15,000 ordinary shares of
Dove Incorporated for P10/sh. The investment represents 5% of the
outstanding shares of Dove Incorporated. Transaction costs incurred were
P15,000 (P1/sh). On October 01, 2023, Dove declared a total of P250,000
cash dividends distributed on December 01, 2023. The shares were selling
at P12 per share on December 31, 2023. On July 01, 2024, all of the
15,000 shares were sold at P15/sh.

IllustrativeCase – Disposalof EquityInvestmentsat Fair
Value
Audit Case Analysis – Sale of investment classified as EI at FVTPL:
When an equity investment at fair value through profit or loss is sold, the difference
between the selling price and the previous fair value before the sale is recognized as
gain/loss on sale in profit or loss.
Selling Price (15,000 sh at P15) P 225,000.00
Less: Fair Value as of 12/31/2023 (15,000 sh at P12) 180,000.00
Gain on sale - P/L P 45,000.00
Sale of investment:
Cash 225,000.00
Gain on sale 45,000.00

Value
Audit Case Analysis – Sale of investment classified as EI at FVTOCI:
On January 01, 2023, Nivea Company acquired 15,000 ordinary shares of
Dove Incorporated for P10/sh. The investment represents 5% of the
outstanding shares of Dove Incorporated. Transaction costs incurred were
P15,000 (P1/sh). On October 01, 2023, Dove declared a total of P250,000
cash dividends distributed on December 01, 2023. The shares were selling
at P12 per share on December 31, 2023. On July 01, 2024, all of the
10,000 shares were sold at P15/sh.

IllustrativeCase – Disposal of EquityInvestments at
Fair Value
Note: even if only 10,000 sh were sold, the entire 15,000 sh were updated to its presumed fair value on the date of sale. No gain or
loss on sale is recognized when an equity security at FVTOCI is sold. PFRS 9 does not allow the recycling of amounts in OCI to profit
or loss. However, the entity has the option to transfer the amount in OCI to retained earnings proportionately to the percentage of
investment sold.
Total Selling Price (15,000 sh at P15) P 225,000.00
Less: Fair Value as of 12/31/2023 (15,000 sh at P12) 180,000.00
Unrealized gain on sale - OCI P 45,000.00
Update of investment to its FV:
Actual sale of 10,000 sh:
Cash (10,000 sh at P15) 150,000.00

Value
Assuming the company elects to transfer the portion in OCI for the 10,000 sh sold to retained earnings:
After the transfer, the cumulative balance in OCI is P20,000 pertaining to the 5,000 sh remaining as of
July 01, 2024. Subsequently, only 5,000 sh will be updated to its new fair value as of December 31,
2024, and reported in the statement of financial position.
Retained earnings 40,000.00
Total FV at the date of sale P 225,000.00
Initial FV plus TC (15,000 sh at P11) 165,000.00
Cumulative in OCI P 60,000.00
% of investment sold 10/15
Amount of transfer P 40,000.00

Value
Detailed Entries:
January 01, 2023 - Acquisition 15,000 shares
EI at FVTOCI P 165,000.00
Cash P 165,000.00
December 31, 2023 - Subsequent measurement
Unrealized gain - OCI P 15,000.00
July 01, 2024 - Sale of 10,000 shares
Cash P 150,000.00
Retained Earnings 30,000.00
to close the related unrealized gain of sold portion
subsequent measurement of remaining 5,000 shares
Unrealized gain - OCI 15,000.00

Investment Associate
The existence of significant influence by the investor shall be accounted for
using the equity method for investment in ordinary shares reported as an
associate. The significant influence is usually evidenced in one or more of the
following ways:
1. Representation on the board of directors or the equivalent governing body of
the investee;
2. Participation in the policy-making process;
3. Material transactions between the investor and investee;
4. Interchange of managerial personnel; or
5. Provision of essential technical information.

The computation for the carrying amount of investment using the equity method is:
Cost, beginning P xxx,xxx
Share of Profit in Associate (SOPA) xxx,xxx
Share of Loss in Associate (SOLA) (xxx,xxx)
Share in OCI - Gain (SOCI-gain) xxx,xxx
Share in OCI - Loss (SOCI-loss) (xxx,xxx)
Distribution (Dividends) (xxx,xxx)
Additional Investment (Acquisition) xxx,xxx
Disposal of Investment (CV) (xxx,xxx)
Impairment Loss, if any (xxx,xxx)
Carrying Value P xxx,xxx

Under the equity method, the investment in an association is:
 Initially recognized at cost
 Increased or decreased to recognize the investor’s share of the profit or loss of the investee
after the date of acquisition
 Decreased in distributions received (e.g., cash or property dividends)
 Increased or decreased to recognize the investor’s share for changes in the investor’s
proportionate interest in the investee arising from changes in the investee’s equity that have not
been recognized in the investee’s profit or loss (i.e., other comprehensive income)
 Increased or decreased for the amortization of the effect of intercompany transactions
 Increased for gain on acquisition of associate
 Decreased for impairment loss

Audit CaseAnalysis – Investmentin Associate
On January 01, 2022, Nivea Company acquired 15,000 ordinary shares of Dove
Incorporated for P10/sh. The investment represents 5% of the outstanding shares (a
total of 300,000 outstanding shares – 15,000 shares divided by 5%) of Dove
Incorporated. Transaction costs incurred were P15,000 (P1/sh). The shares were
designated at fair value through OCI. On December 31, 2022, the shares were selling
at P12 per share.
On July 01, 2023, Nivea Company purchased an additional 45,000 ordinary shares of
Dive Incorporated at P14/sh. On this date, Nivea gained significant influence on the
financial reporting of Dove Incorporated, that is 20% (a total of 60,000 shares divided
by 300,000 shares). On September 2023, Dove declared and paid a total of P500,000
cash dividends. Net income reported during the period is P3,200,000 which is evenly
earned during the period. Dove reported a revaluation surplus of P500,000 during the
six-month period ending December 31, 2023.

Reclassification from EI at FVTOCI to Investment in Associate:
60,000 shares x P14 = P840,000 (07.01.2023)
15,000 shares x P12 = P180,000 (12.31.2022)
45,000 shares x P14 = P630,000 ( 07.01.2023)
Investment in Associate 840,000.00
Cash 630,000.00
Gain in reclassification 30,000.00

Reclassification from EI at FVTOCI to Investment in Associate:
Detailed Entries:
January 01, 2022 - Acquisition 15,000 shares
Cash P 165,000.00
December 31, 2022 - Subsequent measurement
July 01, 2023 - Acquisition of additional 45,000 shares
Investment in Associate P 630,000.00
Cash P 630,000.00
to close the unrealized gain to retained earnings
Retained Earnings P 15,000.00
reclassification of 15,000 shares to Inv. In Associate
Investment in Associate P 210,000.00
Gain on remeasurement 30,000.00
to close the gain on remeasurement to retained earnings
Gain on remeasurement P 30,000.00

Transactions affecting the carrying value of associate:
1. Dove declared and paid dividends on September 01, 2023, where the
entire 60,000 shares held as an associate were outstanding.
Therefore, the total amount received of P100,000 as dividends
(500,000 x 20%) is deducted from the carrying value of the associate.
Cash 100,000.00

2. The associate will be increased by the amount of share of profit of
associate (SOPA) during the period where the associate had the
significant influence. Since the significant influence happened on July 01,
2023, the SOPA shall be from July 01 to December 31. The 3,200,000 net
income reported during the period was for the entire year, the net
income was evenly earned during the period, hence, the share of profit
of the associate is P320,000 (P3,200,000 x 6/12 x 20%).
Share in profit of associate 320,000.00

3. A revaluation surplus of P500,000 was reported during the six-month
period ending December 31, 2023. The revaluation surplus is reported in
OCI where the associate has a share. Therefore, the share of associate in
OCI – gain will increase the carrying value by P100,000 (P500,000 x 20%).
OCI-gain 100,000.00

The carrying value of the Investment in Associate as of December 31, 2023:
Initial Cost P 840,000.00
Share of Profit in Associate (SOPA) 320,000.00
Share in OCI - Gain (SOCI-gain) 100,000.00
Distribution (Dividends) - 100,000.00
Carrying Value P 1,160,000.00

DebtInstruments
Valuation
An investment in debt securities shall be initially measured at fair value when
classified as debt investments at fair value through profit or loss; at fair value plus transaction
costs when classified as debt investments at fair value through other comprehensive income;
and at fair value plus transaction cost when classified as debt investments at amortized costs.
Fair Value at initial recognition
When an asset is acquired in an exchange transaction, the transaction price is the
price paid to acquire the asset (an entry price). Since debt investments are measured at fair
value, in case the transaction price differs from the fair value, the entity shall recognize the
resulting gain or loss on initial recognition in profit or loss. The fair value of debt investment at
the acquisition date is the quoted price in the market or in the absence of the quoted price,
the present value of future cash flows discounted at a market rate of interest when the bonds
were purchased.

DebtInstruments
Transaction Costs
These are incremental costs that are directly attributable to the acquisition,
issue, or disposal of financial assets. Transaction costs include fees and commissions
paid to agents, levies by regulatory agencies and securities exchanges, advisers,
brokers and dealers, and transfer taxes and duties.
Transaction costs do not include financing costs, internal administrative or
holding costs, and debt premiums or discounts.
Transaction costs of debt investment at fair value through other
comprehensive income and amortized costs are added to arrive at the initial carrying
value of the investment.

Business Model andInvestment Classification
The classification of debt securities depends on the business model adopted by the company to account
the investments:
1. For trading (to sell) or cash flows are not representing SPPI – Debt Investments at fair value
through profit or loss.
2. To collect contractual cash flows and to sell – Debt Investments at fair value through other
comprehensive income
3. To collect contractual cash flows – Debt Investment at amortized cost
Interest Income:
1. Debt Investments at fair value through profit or loss – Nominal interest
2. Debt Investments at fair value through other comprehensive income – Effective interest
3. Debt Investment at amortized cost – Effective interest

IllustrativeCaseAnalysis – DebtInvestments
On January 01, 2023, Nivea Company purchased P1,000,000, 10% bonds issued by Dove
Incorporated. The bonds were purchased to yield 12%. Interest is payable annually every
December 31. The bonds mature on December 31, 2027. On December 31, 2023, the bonds
were selling at 101. On December 31, 2024, there is no available quoted price for the bonds
while interest effective on this date is 11%.
Your task as an auditor is to determine the following:
1. The amount reported in the statement of financial position as debt investment as of
December 31, 2023 and 2024.
2. The amount recognized in the statement of comprehensive income due to changes in fair
value for the period ending December 31, 2023 and 2024.
3. The amount recognized in the statement of comprehensive income as interest income
(investment income) for the period ending December 31, 2023 and 2024.

Audit Case Analysis - Assuming the investment is classified as DI at FVTPL:
1. When an investment is classified as debt investment at FVTPL, the initial value of
the investment is fair value. Since the bond has no quoted price at the acquisition
date, the fair value is computed based on discounted cash flows.
Present Value of Principal (1M x 1.12^-5) P 567,427.00
Present Value of Interest (1M x 10% x 3.604776) 360,478.00
Fair Value as of 01/01/2023 927,905.00
Entry on acquisition date:
DI at FVTPL 927,905.00
Cash 927,905.00

2. At each year-end, entries shall be made to recognize interest income and the
changes in fair value. The amount of interest income is based on nominal interest,
while the changes in fair value is reported in profit or loss as unrealized gain/ (loss)
– PL.
Entry to recognize interest income on December 31, 2023:
Cash 100,000.00
Interest Income 100,000.00

3. While the change in fair value is the difference in fair value as of December 31,
2023, and fair value on January 01, 2023. Since the bonds were quoted at 101 on
December 31, the quoted price is used to compute the fair value.
Fair Value as of 12/31/2023 (1M x 1.01) P 1,010,000.00
Fair Value as of 01/01/2023 927,905.00
Increase in fair value P 82,095.00
Entry to recognize changes in fair value in P/L in 2023:
Unrealized gain/ (loss) - PL 82,095.00

4. Since there is no quoted price on December 31, 2024, the discounted cash flows
using the effective interest on December 31, 2024 in 3 period is the fair value of
the investment. The computation of the fair value is:
Fair Value as of 12/31/2024 P 975,562.00
Fair Value as of 12/31/2024 P 975,562.00
Fair Value as of 12/31/2023 1,010,000.00
Decrease in fair value P - 34,438.00

Entry to recognize interest income on December 31, 2024:
Cash 100,000.00
Unrealized gain/ (loss) - PL 34,438.00

Audit Case Analysis - Assuming the investment is classified as DI at FVTOCI:
On January 01, 2023, Nivea Company purchased P1,000,000, 10% bonds issued by Dove Incorporated. The bonds
were purchased to yield 12%. Interest is payable annually every December 31. The bonds mature on December 31,
2027. On December 31, 2023, the bonds were selling at 101. On December 31, 2024, there is no quoted price for
the bonds while interest effective on this date is 11%.
(Assuming the transaction cost of P35,136 was paid and the new effective interest is 11% after transaction cost)
1. The amount reported in the statement of financial position as debt investment as of December 31, 2023 and
2024.
2. The amount recognized in the statement of comprehensive income due to changes in fair value for the period
ending December 31, 2023 and 2024.
3. The amount recognized in the statement of comprehensive income as interest income (investment income)
for the period ending December 31, 2023 and 2024.

1. When an investment is classified as debt investment at FVTOCI, the initial value of
the investment is fair value plus transaction cost. Since the bond has no quoted
price at the acquisition date, the fair value is computed based on discounted cash
flows. Present Value of Principal (1M x 1.12^-5) P 567,427.00
Fair Value as of 01/01/2023 P 927,905.00
Transaction cost 35,136.00
Total FV plus TC P 963,041.00
DI at FVTOCI 963,041.00
Cash 963,041.00

2. At each year-end, entries shall be made to recognize interest income and the changes in fair value.
The amount of interest income is based on effective interest (in this case, interest is adjusted by
transaction costs), while changes in fair value are reported as a component of equity through other
comprehensive income as unrealized gain/ (loss) – OCI.
Amortization table using the effective interest method:
Date NI (10%) EI (11%) Amortization Carrying Value
01/01/2023 - - - 963,041.00
12/31/2023 100,000.00 105,934.51 5,934.51 968,975.51
12/31/2024 100,000.00 106,587.31 6,587.31 975,562.82
12/31/2025 100,000.00 107,311.91 7,311.91 982,874.73
12/31/2026 100,000.00 108,116.22 8,116.22 990,990.95
12/31/2027 100,000.00 109,009.00 9,009.00 1,000,000.00

2. At each year-end, entries shall be made to recognize interest income and the
changes in fair value. The amount of interest income is based on effective interest
(in this case, interest is adjusted by transaction costs), while changes in fair value
are reported as a component of equity through other comprehensive income as
unrealized gain/ (loss) – OCI.
Entry to recognize interest income on December 31, 2023
and amortization of debt investment:
Cash 100,000.00

3. Since this is the first time to remeasure the debt investment to fair value, the
cumulative balance in OCI is also the current amount in OCI in 2023. To record the
changes in fair value on December 31, 2023.
Fair Value as of 12/31/2023 (1M x 1.01) P 1,010,000.00
Carrying Value as of 12/31/2023 968,976.00
Cumulative balance in OCI as of 12/31/2023 P 41,024.00
Unrealized gain/ (loss) - OCI 41,024.00

4. The amount to be recognized in OCI in 2024 is computed as follows:
Fair Value as of 12/31/2024 P 975,562.00
Carrying Value as of 12/31/2024 975,563.00
Cumulative balance in OCI as of 12/31/2024 P -
Less: Cumulative balance in OCI as of 12/31/2023 41,024.00
Unrealized Loss in OCI in 2024 P - 41,024.00

4. The amount to be recognized in OCI in 2024 is computed as follows:
Cash 100,000.00
Unrealized gain/ (loss) - OCI 41,024.00

Audit Case Analysis - Assuming the investment is classified as DI at Amortized Cost:
On January 01, 2023, Nivea Company purchased P1,000,000, 10% bonds issued by Dove Incorporated. The bonds
were purchased to yield 12%. Interest is payable annually every December 31. The bonds mature on December 31,
2027. On December 31, 2023, the bonds were selling at 101. On December 31, 2024, there is no quoted price for
the bonds while interest effective on this date is 11%.
(Assuming the transaction cost of P35,136 was paid and the new effective interest is 11% after transaction cost)
1. The amount reported in the statement of financial position as debt investment as of December 31, 2023 and
2024.
2. The amount recognized in the statement of comprehensive income due to changes in fair value for the period
ending December 31, 2023 and 2024.
3. The amount recognized in the statement of comprehensive income as interest income (investment income)
for the period ending December 31, 2023 and 2024.

1. When an investment is classified as debt investment at amortized cost, the initial
value of the investment is fair value plus transaction cost. Since the bond has no
quoted price at the acquisition date, the fair value is computed based on
discounted cash flows.
Fair Value as of 01/01/2023 P 927,905.00
Cash 963,041.00

2. At each year-end, entries shall be made to recognize interest income. The amount of
interest income is based on effective interest (in this case, interest is adjusted by
transaction costs).
01/01/2023 - - - 963,041.00
12/31/2023 100,000.00 105,934.51 5,934.51 968,975.51
12/31/2024 100,000.00 106,587.31 6,587.31 975,562.82
12/31/2025 100,000.00 107,311.91 7,311.91 982,874.73
12/31/2026 100,000.00 108,116.22 8,116.22 990,990.95
12/31/2027 100,000.00 109,009.00 9,009.00 1,000,000.00

2. At each year-end, entries shall be made to recognize interest income. The amount
of interest income is based on effective interest (in this case, interest is adjusted
by transaction costs).
Cash 100,000.00
DI at amortized cost 5,935.00
Cash 100,000.00
DI at amortized cost 6,587.00

Disposal of Debt Investments
When debt investments are sold, a gain or loss is recognized and reported in
profit or loss as gain or loss on sale.
For investment classified at FVTPL:
Net Selling Price P xxx,xxx
Less: Previous FV of investment sold (xxx,xxx)
Gain/ (Loss) on sale P xxx,xxx
For investment classified at FVTOCI:
Less: AC of investment sold as of the date of sale (xxx,xxx)
For investment classified at AC:
Less: AC of investment sold as of the date of sale (xxx,xxx)

Audit CaseAnalysis – Disposal of DebtInvestment
Audit Case Analysis – Disposal of debt investment at FVTPL:
On January 01, 2023, Nivea Company purchased P1,000,000, 10% bonds
issued by Dove Incorporated. The bonds were purchased to yield 12%
interest and is payable annually every December 31. The bonds mature on
December 31, 2027. On December 31, 2023, the bonds were selling at
101. At December 31, 2024, there is no available quoted price for the
bonds while interest effective on this date is 12%. The bonds were sold on
January 01, 2025 at 97.

Audit Case Analysis – Disposal of debt investment at FVTPL:
* - The gain on sale is reported in profit or loss.
Fair Value as of 12/31/2024 P 951,963.00
Net Selling Price (1M x .97) P 970,000.00
Less: Fair Value as of 12/31/2024 951,963.00
Gain/ (Loss) on sale P 18,037.00
Entry to record the sale of investment on January 01, 2025:
Cash 970,000.00
DI at FVTL 951,963.00
Gain on sale* 18,037.00

Audit Case Analysis – Disposal of debt investment at FVTOCI:
On January 01, 2023, Nivea Company purchased P1,000,000, 10% bonds
issued by Dove Incorporated. The bonds were purchased to yield 12%
interest and are payable annually every December 31. The bonds mature
on December 31, 2027. The bonds were selling at 101. On December 31,
2024, there is no available quoted price for the bonds while interest
effective on this date is 12%. The bonds were sold on January 01, 2025, at
97.
(Assuming that transaction costs of P35,136 were paid and the new
effective interest is 11% after transaction costs)

Fair Value as of 01/01/2023 P 927,905.00
01/01/2023 - - - 963,041.00
12/31/2023 100,000.00 105,934.51 5,934.51 968,975.51
12/31/2024 100,000.00 106,587.31 6,587.31 975,562.82
12/31/2025 100,000.00 107,311.91 7,311.91 982,874.73
12/31/2026 100,000.00 108,116.22 8,116.22 990,990.95
12/31/2027 100,000.00 109,009.00 9,009.00 1,000,000.00

Less: AC as of 01/01/2025, see amortization table 975,562.00
Gain/ (Loss) on sale P - 5,562.00
Cash 970,000.00
Loss on sale 5,562.00
Unrealized loss - OCI 23,599.00

Composition of loss on sale:
Diff. between Selling Price and previous FV P 18,037.00
(970,000 - 951,963)
Diff. between previous FV and AC on the date of sale - 23,599.00
(951,963 - 975,562)
Loss on sale P - 5,562.00

Audit Case Analysis – Disposal of debt investment at amortized cost:
(Assuming that transaction costs of P35,136 were paid and the new effective interest is
11% after transaction costs)
Less: AC as of 01/01/2025, see amortization table 975,562.00
Gain/ (Loss) on sale P - 5,562.00
Cash 970,000.00
Loss on sale 5,562.00
DI at AC 975,562.00

Reclassification of Debt Investments
Reclassification is allowed as long as there is a change in the business model. The change in the
classification of debt investment shall be effected at the beginning of the following period.
From To Requirement
Amortized Cost FVTPL Measure FV at reclassification date and recognize difference between
FV and amortized cost in P/L.
FVTPL Amortized Cost FV at the reclassification date becomes the new gross carrying amount.
Amortized Cost FVTOCI Measure FV at reclassification date and recognize any difference in OCI.
FVTOCI Amortized Cost Cumulative gain/(loss) previously recognized in OCI is removed from equity and
applied against the fair value of the financial asset at the reclassification date.
FVTPL FVTOCI Asset continues to be measured at FV but subsequent gains/(losses) are
recognized in OCI rather than in profit or loss.
FVTOCI FVTPL Asset continues to be recognized at FV and the cumulative gain/(loss)
previously recognized in OCI is reclassified from equity to profit or loss.

AuditCaseAnalysis - Reclassificationof DebtInvestments
On January 02, 2023, Santos Company invested in a 4-year, 10% bond with a
face value of P6,000,000, in which interest is to be paid every December 31.
The bond has an effective interest rate of 9% and was acquired for P6,194,383.
On December 31, 2023, the bond had a fair value of P6,229,862, which was
based on a prevailing rate of interest of 8.5%.
1. Assume that the debt investment was classified initially as an investment at
FVTPL, assume further that during the year 2023, there was a change in
business model and cash flow characteristics to investment at FVTOCI and
decided to effect on January 01, 2024. On December 31, 2024, the debt
investment has a fair value of P6,213,992 which is based on the prevailing
rate of 8%. Provide the entry for reclassification.

2. Assume that the debt investment was classified initially as an
investment at FVTPL, assume further that during the year 2023, there
was a change in business model and cash flow characteristics to
investment at amortized cost and decided to effect on January 01,
2024. On December 31, 2024, the debt investment has a fair value of
P6,213,992 which is based on the prevailing rate of 8%. Provide the
entry for reclassification.
3. Assume that on the date of acquisition the debt investment was
designated as investment at amortized cost but reclassified on January
01, 2024 due to changes in business model as investment at FVTPL.
Provide the entry for reclassification.

1. Entry to record the reclassification January 01, 2024
DI at FVTOCI 6,229,862.00
DI at FVTPL 6,229,862.00
DI at amortized cost 6,229,862.00
DI at FVTPL 6,229,862.00

DI at FVTPL 6,229,862.00
DI at amortized cost 6,151,877.00
Gain on reclassification 77,985.00
01/01/2023 - - - 6,194,383.00
12/31/2023 600,000.00 557,494.47 - 42,505.53 6,151,877.47
12/31/2024 600,000.00 553,668.97 - 46,331.03 6,105,546.44

4. Assume that on the date of acquisition, the debt investment was
designated as an investment at amortized cost but reclassified on
January 01, 2024 due to changes in the business model as an investment
in FVTOCI.
designated as an investment at FVTOCI but reclassified on January 01,
2024 due to changes in the business model as an investment at
amortized cost.
designated as an investment at FVTOCI but reclassified on January 01,
2024 due to changes in the business model as an investment at FVTPL.

DI at FVTOCI P 6,229,862.00
DI at amortized cost P 6,151,877.00
Unrealized gain (loss) - OCI 77,985.00
DI at amortized cost P 6,151,877.00
Unrealized gain (loss) - OCI 77,985.00 P

DI at FVTPL P 6,229,862.00
Unrealized gain (loss) - OCI 77,895.00 P
Gain on reclassification 77,895.00

Presentation and Disclosure
The objective of the auditor is to determine that investment and
related income accounts are presented and disclosed in
accordance with the standards. The auditor shall:
1. Review financial statements; and
2. Perform analytical procedures to whether accounts are
classified and disclosed in the financial statements in
accordance with practicable standards.

The IASB amends IAS 1, Presentation of Financial Statements, to require the presentation
of the following amounts as separate line items in the statement of profit and loss for the
period:
1. Revenue calculated using the effective interest method
2. Gains and losses arising from de-recognition of financial assets measured at
Amortized cost
3. Impairment losses (including reversals)
4. If an asset is reclassified from the Amortized Cost category to FVTPL, any gain or loss
arising therefrom
5. If an asset is reclassified from FVTOCI to FVTPL, any cumulative gain or loss previously
recognized in OCI is transferred to profit or loss.

The changes range from updating of cross-references and making
consequential changes to existing requirements, to significant new
requirements. Major changes include those relating to:
1. Disclosing carrying values under the new measurement classifications
2. Investments in equity instruments designated as FVTOCI
3. Liabilities designated at FVTPL
4. Reclassifications
5. Gains and losses relating to derecognized assets measured at Amortized
Cost

EXERCISES!!!
Audit of Investments

ProblemNo. 1
The following are data on Investment in MES (@FVOCI) for the auditor’s
scrutiny:
• January 01, 20X7 – purchased marketable equity securities for
P2,000,000 with transaction costs of P200,000. The company made an
irrevocable election to present unrealized gain or loss in other
comprehensive income.
• December 31, 20X7 – Market value of the securities, P2,600,000
• December 31, 20X8 – Market value of the securities, P3,200,000
• July 01, 20X9 – Securities are sold for P4,000,000

ProblemNo. 1
1. What entries relative to the Investment in MES (@FVOCI) should have been made by the company?
a. On January 01, 20X7?
b. On December 31, 20X7?
c. On December 31, 20X8?
d. On July 01, 20X9?
2. At what balance should the following accounts be shown on the Statement of Financial Position
Accounts Balance as of
Investment in MES (@FVOCI) 12.31.20X7?
12.31.20X8?
07.31.20X9?
Unrealized gain - OCI 12.31.20X7?
12.31.20X8?
07.31.20X9?

ProblemNo. 1 - Solution
1. Journal Entries
January 01, 20X7
Investment in MES @ FVOCI 2,200,000.00
Cash 2,200,000.00
December 31, 20X7
Investment in MES @ FVOCI 400,000.00
(2,600,000 - 2,200,000)
December 31, 20X8
Investment in MES @ FVOCI 600,000.00
(3,200,000 - 2,600,000)

1. Journal Entries
July 19, 20X9
Cash 4,000,000.00
Investment in MES @ FVOCI 3,200,000.00
Unrealized gain - OCI 1,000,000.00
Retained Earnings 1,000,000.00

2. Account Balances
Accounts Balance as of
Investment in MES (@FVOCI) 12.31.20X7: 2,600,000.00
12.31.20X8: 3,200,000.00
12.31.20X9: 0
Unrealized gain - OCI 12.31.20X7: 400,000.00
12.31.20X8: 1,000,000.00
12.31.20X: 0

ProblemNo. 2
On January 01, 2023, Balibago Corporation purchased P1,000,000 10% bonds for
P1,051,510 (including broker’s commission of P20,000). Interest is payable annually
every December 31. The bonds mature on December 31, 2025. The effective interest
rate is 8% considering the broker’s commission. On December 31, 2023, the fair value
of the bond is P1,017, 610.
Questions:
1. If the bonds are classified as financial assets at fair value through profit or loss (FA
at FVTPL), the amount to be recognized as fair value adjustment loss in the entity’s
2023 profit or loss is?
2. If the bonds are classified as financial assets at amortized cost (FA at AC), the
amount to be reported on the entity’s December 31, 2023 statement of financial
position is?

ProblemNo. 2
On January 01, 2023, Balibago Corporation purchased P1,000,000 10% bonds for
P1,051,510 (including broker’s commission of P20,000). Interest is payable annually
every December 31. The bonds mature on December 31, 2025. The effective interest
rate is 8% considering the broker’s commission. On December 31, 2023, the fair value
of the bond is P1,017, 610.
Questions:
3. If the bonds are classified as financial assets at fair value through other
comprehensive income (FA at FVTOCI), the amount to be recognized as fair value
adjustment loss in the entity’s 2023 other comprehensive income is?
4. If the entity sold the investment in December 31, 2023 at fair value and bonds are
classified as FA at FVTOCI, the entity will report a “reclassification adjustment” of?

1. P(13,900)
2. P1,035,631
Fair Value, 12/31/23 P 1,017,610.00
Less: Carrying amount before FV adjustment
(1,051,510 - 20,000) 1,031,510.00
Fair Value adjustment gain/(loss) - PL P - 13,900.00
01/01/2023 - - - 1,051,510.00
12/31/2023 100,000.00 84,120.80 - 15,879.20 1,035,630.80
12/31/2024 100,000.00 82,850.46 - 17,149.54 1,018,481.26
12/31/2025 100,000.00 81,478.50 - 18,521.50 1,000,000.00

2. Alternative Computation
3. P(18,021)
Fair Value as of 12/31/2023 P 1,035,630.00
Fair Value, 12/31/23 P 1,017,610.00
Less: Carrying amount before FV adjustment
(1,051,510 - 15,879) 1,035,631.00
Fair Value adjustment gain/(loss) - OCI P - 18,021.00

4. P18,021
When the debt investment classified as FA at FVTOCI is derecognized, the cumulative
gain/(loss) previously recognized in OCI (P18,021)is reclassified from equity to P/L as a
reclassification adjustment.
Statement of Profit and Loss and other OCI
Profit or Loss:
Loss on sale of debt investment P -18,021.00
Other Comprehensive Income:
Remeasurement loss -18,021.00
Reclassification adjustment 18,021.00
Total Comprehensive Income P -18,021.00

Journal Entries:
Acquisition:
Debt Investment - FVTOCI 1,051,510.00
Cash 1,051,510.00
Receipt of Interest:
Cash 100,000.00
Amortization of Premium:
Debt Investment - FVTOCI 15,879.00

Journal Entries:
Fair Value Adjustment:
Fair Value Adjustment loss 18,021.00
Debt Investment - FVTOCI 18,021.00
Disposal:
Cash 1,017,610.00
Loss on sale of debt investment 18,021.00
Debt Investment - FVTOCI 1,017,610.00
Fair Value adjustment loss 18,021.00

NotesonClassificationandMeasurementof FinancialAssets
Investments in debt instruments (such as bonds) are
financial assets since they represent a contractual right to
receive cash or another financial asset from another entity.
PFRS 9 requires entities to measure their financial assets based
on both:
a) The contractual cash flow characteristics of the financial asset
b) The entity’s business model for managing its financial asset

Summary of classification of financial asset in accordance with
PFRS 9:
Subsequently measured at SPPI? Business model Type of Instrument
Amortized Cost (AC) Yes Held for collection Debt
Fair Value through Other Yes Held for collection Debt or equity
Comprehensive Income and for sale
(FVTOCI)
Fair Value through Proft Yes or No Other than Held for Debt or equity
or Loss (FVTPL) collection and held for
collection and for sale

Summary of the measurement of financial assets in accordance
with PFRS 9:
Classification Initial measurement Subsequent measurement Changes in Fair Value
FA at FVTPL Fair Value Fair Value Recognized in profit or loss
FA at FVTOCI Fair Value plus Fair Value Recognized in OCI and
transaction costs accumulated in equity
FA at AC Fair Value plus Amortized cost using the Not recognized
transaction costs effective interest method

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