PFRS 9 Financial

Instruments and PAS 28

Investment in
Associates
Basic Concepts
Review Activity
Question No. 1
The default classification of investments in equity securities is
At FVTPL
a) At FVTOCI
b) Either FVTPL or FVTOCI whichever will give the entity a higher total
comprehensive income
c) There is no default classification.
Classification of Investments in
Equity Securities under PFRS 9
Is the investment in equity
securities held for trading?

No
Did the entity make an
Yes irrevocable election on initial Yes
recognition to present the
changes in FV in other
comprehensive income (OCI)?

No
Account for the investment Account for the investment
at FVTPL at FVTOCI
Question No. 2
An entity had the following investments in equity securities:
Investment 1 - A held-for-trading equity investment that was acquired
three months ago.
Investment 2 – An equity investment not held-for-trading but acquired
today.

Which of these investments can be irrevocably designated at FVTOCI?

a) Investment 1 only c) Both Investment 1 and 2
b) Investment 2 only d) Neither Investment 1 nor 2
Classification of Investments in
Equity Securities under PFRS 9
1. If the investment is held for trading, it shall be automatically accounted for at FVTPL (not
allowed to be at FVTOCI). Held for trading is a financial asset that:
a) is acquired for the purpose of selling or repurchasing it in the near term
b) on initial recognition is part of a portfolio of identified financial instruments where there is evidence of
recent actual pattern of short-term profit-making or
c) derivative (except those designated and effective hedging instrument)
2. If the investment is not held for trading, the election to account the financial asset at
FVTOCI is irrevocable. In other words, it cannot be changed to FVTPL later on. In addition,
the irrevocable election shall be made on the date of acquisition of the investment.
Consequently, currently recognized investment in equity securities at FVTPL cannot be
reclassified to FVTOCI later on.
3. The default classification of investment in equity securities is at FVTPL.
4. An entity can have some of its investment in equity securities accounted for at FVTPL and
some accounted for at FVTOCI, depending on the circumstances.
Question No. 3
Which of the following is true in relation to the initial measurement of
the investments in equity securities?
a) FVTPL equity securities are initially measured at the purchase price,
regardless of the amount of fair value plus transaction costs, if any.
b) FVTOCI equity securities are initially measured at the purchase price,
regardless of the amount of fair value plus transaction costs, if any.
c) FVTPL equity securities are initially measured at their fair values,
regardless of the amount of transaction costs.
d) FVTOCI equity securities are initially measured at their fair values,
regardless of the amount of transaction costs.
FVTPL Accounting vs FVTOCI
Accounting
FVTPL FVTOCI
Initial measurement Fair value on initial Fair value on initial
recognition recognition plus
transaction costs
Accounting for incurred Expensed outright Capitalized
transaction costs
Question No. 4
In relation to the subsequent measurement of investments in equity securities as of each
reporting date, which of the following is correct?
a) FVTPL equity securities are measured at their fair values while FVTOCI equity
securities are measured at their fair values less estimated transaction costs to be
incurred in selling these securities.
b) FVOCI equity securities are measured at their fair values while FVTPL equity securities
are measured at their fair values less estimated transaction costs to be incurred in
selling these securities.
c) Both the equity securities as FVTPL and FVTOCI shall be measured at their fair values
without deducting the estimated transaction costs to be incurred in selling these
securities.
d) Both the equity securities at FVTPL and FVTOCI shall be measured at their fair values
less the estimated transaction costs to be incurred in selling these securities.
FVTPL Accounting vs FVTOCI
Accounting
FVTPL FVTOCI
Measurement every Fair value on the reporting date. The fair value shall
reporting date not be reduced by the amount of estimated transaction
costs that are expected to be incurred assuming the
financial asset is to be sold.
Question No. 5
All of the following are correct in connection with the accounting for
the changes in the fair value of investments in equity securities, except
a) Increase in fair value shall be recognized as unrealized gain.
b) Decrease in fair value shall be recognized as unrealized loss.
c) Realized gain or loss on sale of FVTPL equity securities shall be
recognized in profit or loss.
d) Realized gain or loss on sale of FVTOCI equity securities shall be
recognized in profit or loss.
FVTPL Accounting vs FVTOCI
Accounting
FVTPL FVTOCI
Accounting for changes in Changes in fair value is Changes in fair value is
fair value reported in profit or loss reported in OCI

Increase in fair value is Increase in fair value is

reported as unrealized reported as unrealized
gain. gain.

Decrease in fair value is Decrease in fair value is

reported as unrealized reported as unrealized
loss. loss.
Question No. 6
Which of the following statement is incorrect regarding the
classification of investments in equity securities?
a) Held-for-trading equity securities shall be classified at FVTPL
b) Equity securities not held-for-trading may be classified as either
FVTPL or FVTOCI.
c) Equity securities that are related to the short-term profit-taking
activities of an entity shall be accounted for at FVTPL.
d) Equity securities that are held for strategic or statutory purposes are
required to be accounted for at FVTPL.
Question No. 7
An entity had the following investments in equity securities:
Investment 1 – A held-for-trading equity investment that was acquired
today.
Investment 2 – An equity investment not held-for-trading but was
acquired two years ago.

Which of these investments can be irrevocably designated at FVTOCI?

a) Investment 1 only c) Both Investment 1 and 2
b) Investment 2 only d) Neither Investment 1 nor 2
Question No. 8
All of the following are true in relation to accounting for transaction costs, except
a) Transaction costs related to the acquisition of FVTOCI equity securities shall
be capitalized.
b) Transaction costs that are expected to be incurred in selling equity securities
shall not be deducted from the fair value for purposes of measuring the
securities as of each reporting date.
c) Transaction costs related to the selling of FVTOCI equity securities shall be
capitalized, similar to transaction costs incurred in acquiring these securities.
d) Transaction costs related to the selling of FVTPL equity securities shall be
recognized in profit or loss.
Question No. 9
In relation to the amounts that shall appear in an entity’s financial statements, which
of the following is not correct?
a) Amounts to be reported in profit or loss include the unrealized and realized gain or
loss for the current year arising from FVTPL securities only.
b) Amounts to be reported in statement of comprehensive income include the
unrealized and realized gains or losses for the current and previous years arising
from both FVTPL and FVTOCI securities.
c) Amounts to be reported in the shareholders’ equity section of an entity’s balance
sheet include the net unrealized gains or losses for the current and previous years
arising from FVTOCI securities.
d) Amounts to be reported in the other comprehensive income include the unrealized
and realized gains or losses for the current year arising from FVTOCI securities only.
FVTPL Accounting vs FVTOCI
Accounting FVTPL FVTOCI
Total amount to be reported in • Realized and unrealized gain • Cash and property dividends
profit or loss or in the income or loss for the current year
statement • Expensed transaction costs
• Cash and property dividends
Total amount to be reported in • None • Realized and unrealized gain
other comprehensive income or loss for the current year
Total amount to be reported in • Realized and unrealized gain • Realized and unrealized gain
statement of comprehensive or loss for the current year or loss for the current year
income or in the total • Expensed transaction costs • Cash and property dividends
comprehensive income • Cash and property dividends
Total amount to be reported • None Net cumulative unrealized gain
separately in the shareholders’ or loss from FVTOCI securities
equity or the difference between the
fair value and original cost of
FVTOCI securities
Question No. 10
On March 1, 20x3, Donald Company acquired a number of ordinary shares of
Rachelle Company at a total purchase price of P2,000,000 plus transaction costs
of P50,000. On October 1, 2023, the Company sold half of these shares for
P1,100,000 and incurred P10,000 transaction costs. As of December 31, 2023,
the remaining shares had a total fair value of P1,260,000 and estimated
transaction costs of P11,000 are to be incurred in selling the shares.

From this information, the net gain or loss amount to be reported in profit or
loss, assuming the equity securities are accounted for at FVPL shall be
a) P300,000 net loss c) P289,000 net loss
b) P300,000 net gain d) P289,000 net gain
Question No. 11
Which of the following correctly indicates the recognition of cash
dividends in an entity’s financial performance?
a) Dividends from FVTPL equity securities are recognized in profit or loss
while dividends from FVTOCI equity securities are recognized in OCI.
b) Dividends from FVTPL equity securities are recognized in OCI while
dividends from FVTOCI equity securities are recognized in profit or loss.
c) Both dividends from FVTPL and FVTOCI equity securities are recognized
in profit or loss.
d) Both the dividends from FVTPL and FVTOCI equity securities are
recognized in OCI.
FVTPL Accounting vs FVTOCI
Accounting
FVTPL FVTOCI
Accounting for dividends Cash and property dividends are reported in profit or
loss (whether the financial assets is FVTPL or FVTOCI)
Question No. 12
The following are the qualitative criteria that may be used in
determining whether an investor has significant influence over an
investee, except
a) Representation on the board of directors
b) Participation in policy-making processes
c) Interchange of managerial personnel
d) None of the above
Hierarchy of Investments in
Equity Securities
Increasing Ownership Interest

Influence over the No significant Significant Control

investee influence nor influence but not
control control
What is the Investment in Investment in Investment in
investment called? equity securities associate subsidiary
Applicable PFRS 9, Financial PAS 28, PFRS 19,
accounting Instruments Investments in Consolidated
standard Associate and Joint Financial
Ventures Statements
Question No. 13
An investor acquired 30% of the preference shares of
another entity. Based solely on this information, the
investment shall be accounted for
a) Investment in associate
b) Investment in equity securities at FV TPL by default
c) Investment in equity securities at FVTOCI if the
investor made an irrevocable designation on initial
recognition
d) Either b or c
Assessing the Existence of
Significant Influence
Criteria Assessment Procedures
The investor holds directly or indirectly at least 20% but not more than
50% of the voting power of the investee. The following formula is
relevant in computing this percentage:

Quantitative % of voting power = _____ No. of shares held_____

Total no. of outstanding shares
The readers should also take note that outstanding number of shares =
issued shares plus subscribed shares less treasury shares. In addition,
only the common/ordinary shares are granted with voting rights.
Preference shares do not have such voting rights.
Question No. 14
An investor acquired 15% ownership interest in another entity. In
addition, the investor has also elected two out of the ten-member
board of directors of that entity. Based on this information, the
investment shall be accounted for as:
a) Investment in associate
b) Investment in equity securities at FVTPL by default
c) Investment in equity securities at FVTOCI if the investor made an
irrevocable designation on initial recognition
d) Either b or c
Assessing the Existence of
Significant Influence
Criteria Assessment Procedures
The existence of significant influence is usually evidenced in one or more
of the following ways:
a. Representation on the board of directors or equivalent governing
body of the investee;
Qualitative b. Participation in policy-making processes, including decisions about
dividends or other distributions;
c. Material transactions between the entity and its investee;
d. Interchange of managerial personnel; or
e. Provision of essential technical information
Assessing the Existence of
Significant Influence
These quantitative and qualitative criteria are used in conjunction with
each other. For example, if the investor holds less than 20% voting
power over the investee, it may be presumed that it does not have
significant influence, except when qualitative factors indicated
otherwise. Professional judgment shall be used in applying these
qualitative factors.
On the flipside, if the investor holds at least 20% voting power over the
investee, it may be presumed that it has significant influence, except
when the qualitative factors indicated otherwise.
Question No. 15
An investor acquired 14% ownership interest in another entity in addition, the An investors
currently exercisable potential voting rights over that entity which will provide it an
additional 8% voting right for a total of 22% voting right. Based solely on this information,
which of the following is correct?
a) The investment shall be accounted for as an investment in associate and using the actual
14% ownership interest in applying the equity method.
b) The investment shall be accounted for as an investment in associate and using the 22%
total potential voting rights in applying the equity method.
c) The investment shall be accounted for as an investment in associate and using the 8%
potential voting rights in applying the equity method.
d) The investment shall be accounted for at FVTPL by default unless the investor makes
irrevocable designation on initial to account for the investment to be accounted for at
FVTOCI
Question No. 16
On initial recognition and when the information about the fair value of
the associate's net assets is available, the investment in associate shall
be initially measured at
a) Cost.
b) Whichever is the higher of cost and share in the fair value of
associate's net assets.
c) Whichever is the lower of cost and share in the fair value of
associate's net assets.
d) Share in the fair value of associate's net assets.
Initial Measurement of
Investment in Associate
On initial recognition, the investment in associate is measured at cost.
The purchase price is normally the cost of the investment plus
transaction costs.

In addition, if the fair value of the associate's identifiable net assets is

given, an investor entity shall compare its share in this fair value and
the cost of the investment, which will have the following accounting
consequences:
Initial Measurement of
Investment in Associate
Scenario Accounting Consequences
Share in fair value of associate’s No further accounting consequences
identifiable net assets = investment cost
Share in fair value of associate’s Implied goodwill, but will be included in
identifiable net assets < investment cost the carrying amount of the investment
(i.e., not separately reported and not
subsequently amortized)
Share in fair value of associate’s The difference shall be recognized as
identifiable net assets > investment cost investment income in profit or loss
Initial Measurement of
Investment in Associate
Based on the rules above, it can be inferred recorded at the higher of
the following that the investment in associate shall be
a. cost of the investment; and
b. share in fair value of associate's identifiable net assets.
Question No. 17
All of the following are recognized in the investor's total comprehensive
income from its investment in associate, except
a) Share in the dividends.
b) Share in the profit or loss.
c) Share in the OCI
d) Excess of share in the fair value of net assets of associate over the
investment’s cost
Subsequent Accounting for
Investments in Associate
Equity method Accounting under PFRS 9
Initial measurement Cost Fair value (for FVTPL) or fair
value plus transaction costs (for
FVTOCI)
Changes in fair value Not recognized Recognized in profit or loss
(FVPTL) or OCI (FVTOCI)
Dividends received Reduction in investment’s Recognized in profit or loss
carrying amount under both FVPTL and FVTOCI
Share in associate’s profit or Increase or decrease the Not recognized
loss and OCI investment’s carrying amount
Question No. 18
The following are true regarding the equity method, except
a) Equity method provides more relevant information related to
investments in associate.
b) Equity method is applied as long as the investor has a significant
influence over an entity, even if the actual ownership interest is
lower than 20%.
c) Equity method recognizes the changes in the fair value of the
investment in associate only when it goes below the investment's
carrying amount.
d) None of the above.
Why Equity Method?
Since an investor has significant influence over the associate, it can now contribute to the decisions
which directly affect the financial performance of the investee whether it be for the better or worse.
Since the total comprehensive income of the associate directly indicates its financial performance
under the stewardship of the investor and other shareholders, the equity method requires the
investor to report its share in that total comprehensive income
Dividends, on the other hand, do not necessarily reflect the financial performance of the investor as
its declaration is purely discretionary. For example, an associate might be very profitable, but its
Board of Directors may decide not to declare dividends the finance the associate's future projects. In
that case, if the income from associate is based on dividends, no income will be reported and this
does not truly reflect the good performance of the associate.
In addition, fair value of the investments does not provide a more relevant information for
investments in associate since it includes factors in addition to the associate's performance, such as
expectations on the associate's future growth.
In this regard, application of the equity method provides more relevant information about the
investor's net assets and profit or loss. [PAS 28.11].
Question No. 19
At the beginning of the year, an investor is maintaining investment in ABC Company,
which is properly being accounted for at FVTOCI. During the year, the investor acquired
additional shares in ABC Company, which when considered with the existing investment,
will give the investor significant influence over ABC Company. In this case, the following
accounting procedures shall be made, except
a) The difference between the carrying amount of the existing investment and its
corresponding fair value shall be recognized in OCI.
b) The investment in associate shall be measured equal to the sum of the existing
investment's fair value and the payment for the additional investment.
c) The equity method shall be applied from the beginning of the period when the
additional investment was acquired.
d) The changes in the fair value of the investments will not be recognized moving
forward.
Significant Influence Achieved
in Stages
As initially shown in the hierarchy of investments in equity securities, an investor may start with a
small ownership interest and over the years may accumulate a sufficient level of ownership interest to
give it significant influence over an investee. In this case, before achieving significant influence, the
investment in equity securities is accounted for under PFRS 9 (either as FVTPL or FVTOCI).
On the date the significant influence has been achieved, the following accounting procedures are
relevant:
1.The initial cost of investment in associate is equal to fair value of existing investment plus the
amount of cash paid for the latest portion acquired.
2.Difference in the carrying amount of the existing investment and its related fair value shall be
recognized as follows:
a.If the existing investment is accounted for at FVTPL, recognize the difference in profit or loss.
b.If the existing investment is accounted for at FVTOCI, recognize the difference in OCI. Any
cumulative unrealized gains and losses OCI shall be directly transferred to retained earnings.
From the date the significant influence has been achieved, the equity method shall be applied moving
forward.
Question No. 20
Changes in the fair value of investment in associate
a) Shall be considered only when the fair value is higher than the
investment's carrying amount.
b) Shall be considered only when the fair value is lower than the
investment's carrying amount.
c) Shall be recognized in the profit or loss by default unless the
investor made an irrevocable designation on initial recognition to
present the changes in OCI.
d) Shall not be recognized at all.
Question No. 21
As of each reporting period, the carrying amount of an investment in
associate is substantially equal to the
a) Carrying amount of associate's equity x ownership interest of the
investor over the associate.
b) Fair value of associate's equity x ownership interest of the investor over
the associate.
c) Carrying amount of associate's contributed capital x ownership interest
of the investor over the associate.
d) Fair value of associate's contributed capital x ownership interest of the
investor over the associate.
Relationship Between Associate’s Equity and
Carrying Amount of Investment in Associate
In the absence of any differences and any other class of equity
securities, it can be assumed that the initial and subsequent carrying
amounts of the investment in associate is equal to the associate's total
equity x % of voting power currently held. However, differences arise
primarily from the following:
a. Differences in the carrying amount of the associate's net assets and
the corresponding fair value.
b. Purchase price in excess of fair value of associate's net assets (i.e.,
implied goodwill).
Question No. 22
At the beginning of 2023, Solomon Company acquired 35% of the
common shares of another entity for P6,400,000. As of the same date,
the associate’s net assets had fair value of P19,000,000. For the year
2023, the associate reported net income of P2,900,000 and paid the
Company dividends amounting to P840,000. As of the end of 2023, the
shares had total fair value of P6,700,000.
The carrying amount of the investment as of December 31, 2023 shall
be
a) P6,575,000 c) P7,121,000
b) P6,825,000 d) P7,371,000
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