BA 114.

2 2nd Sem AY 2014-2015

FINANCIAL LIABILITIES
IAS 39 FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
A. FINANCIAL LIABILITIES - DEFINITION
Any liability that is
1) A contractual obligation
a. To deliver cash or another financial asset to another entity
b. To exchange financial instruments with another entity under conditions that are
potentially unfavourable to the entity
2) A contract that will or may be settled in the entitys own equity instruments and is
a. A non-derivative for which the entity is or may be obligated to deliver a variable number
of its own equity instruments, or
b. A derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entitys own equity instruments
(which excludes puttable financial instruments classified as equity and instruments that
are themselves contracts for the future receipt or delivery of the entitys equity
instruments)
Financial liabilities within the scope of IAS 39 include
Deposit liabilities
Payables (e.g., trade payables)
Loans from other entities
Bonds and other debt instruments issued by the entity
B. CLASSIFICATION

C. RECOGNITION
An entity should recognize a financial liability on its statement of financial position only when the entity
becomes a party to the contractual provisions of the instrument.
D. INITIAL MEASUREMENT
When a financial liability is recognized initially on the statement of financial position, the liability is
measured at fair value (plus transaction costs in some cases).

Except for those financial liabilities at fair value through profit or loss, transaction costs that are
directly attributable to the issue of a financial liability are capitalized. Transaction costs are expensed
immediately for financial liabilities measured at fair value.
EXAMPLE 1
Face amount = P1 million
Coupon rate = 12%
Date of bonds and issuance = January 1, 2015
Interest to be paid every December 31
Effective interest rate = 10%
Required: Journal entry at date of issuance
EXAMPLE 2
Face amount = P1 million
Coupon rate = 12%
Date of bonds and issuance = January 1, 2015
Interest to be paid every December 31
Effective interest rate = 10%
Bond issue cost = P50,000
Required: Journal entry at date of issuance
EXAMPLE 3
Face amount = P1 million
Coupon rate = 12%
Date of bonds = January 1, 2015
Date of issue = April 1, 2015
Interest to be paid every December 31
Effective interest rate = 10%
Required:
1) Journal entry at date of issuance
2) Clean price
3) Dirty price
EXAMPLE 4
Bond date and issuance date = January 1, 2015
Face value = P5 million (principal of P1 million will mature every year beginning January 1, 2017)
Coupon = 10% (semiannual)
Effective interest rate on January 1, 2015 = 12%
Required: Journal entry at issuance

E. SUBSEQUENT MEASUREMENT
After initial recognition, financial liabilities are subsequently measured at amortized cost, using the
effective interest method.
Financial liabilities classified as at FVTPL are accounted for at fair value, with changes in fair value
recognized in profit or loss in the current period.
EXAMPLE 1
Face amount = P1 million
Coupon rate = 12%
Date of bonds = January 1, 2015
Date of issue = April 1, 2015
Interest to be paid every December 31
Effective interest rate = 10%
Required: Amortization table
F. DERECOGNITION
Removing a financial liability or part of a financial liability from the reporting entitys statement of
financial position is warranted only when the obligation is extinguished. This will be deemed to have
occurred when the obligation specified in the contract is discharged or cancelled or expires.
In some instances, the debt issuer exchanges newly issued debt carrying different terms for outstanding
debt. Under such circumstances, the original debt will be deemed extinguished, and a new liability will be
deemed to have incurred.
Substantial modifications to the terms of existing financial liabilities or to a part of a debt are accounted
for as extinguishments, provided that the discounted present value of cash flows under the terms of the
new debt differs by at least 10% from the discounted present value of the remaining cash flows of the
original debt instrument. In computing the discounted present values for determining whether the 10%
limit has been exceeded, the effective interest rate of the old debt being modified or exchanged is to be
used.
If difference is at least 10% = extinguishment of old debt; the new, modified debt initially
recognized at fair value
If difference is less than 10% = difference to be amortized over the remaining term of the debt
instrument; debt not remeasured at fair value
If there is a difference between the carrying amount of a financial liability extinguished or transferred (or
relevant portion thereof) and the consideration paid to accomplish this, including the fair value of noncash
assets transferred or liabilities assumed, the gain or loss will be recognized in profit or loss.
When only a part of an existing liability is repurchased, the carrying value is allocated pro rata between
the part extinguished and the part that remains outstanding. This allocation is to be based upon relative

fair values. Gain or loss is recognized as the difference between the carrying value allocated to the portion
extinguished and the consideration paid to accomplish the extinguishment.
If the extinguishment of debt does not occur on the interest date, the interest payable accruing between the
last interest date and the acquisition date must also be recorded.
If an exchange of debt instruments or if a modification of terms is accounted for as an extinguishment,
costs or fees incurred are to be recognized as part of the gain or loss incurred in the extinguishment. In
non-extinguishment cases, any costs or fees incurred in the transaction are to be accounted for as
adjustments to the carrying amount of the liability, to be amortized over the remaining term of the
modified loan.
EXAMPLE 1
Face amount = P1 million
Coupon rate = 12%
Date of bonds = January 1, 2015
Date of issue = April 1, 2015
Interest to be paid every December 31
Effective interest rate = 10%
On January 1, 2016, when the market interest rate was 15%, P300,000 face value bonds were acquired in
the open market.
Required:
1) Gain or loss on January 1, 2016
2) Interest expense for 2016
On January 1, 2017, the P300,000 face value bonds are reissued. Market rate is 8%.
Required: Journal entry at issuance
EXAMPLE 2
Principal = P10 million
Unpaid interest = P2 million
Entered into an asset swap.
Land book value = P5 million
Land fair value = P8 million
Required: Journal entry for the asset swap
EXAMPLE 3
Principal = P10 million
Unpaid interest = P2 million
Entered into an equity swap. Issued 1M shares with par value of P1 per share; fair value of P7 per share

Required: Journal entry for the equity swap

EXAMPLE 4
Debt restructuring on December 31, 2014
Balances as of December 31, 2014
Note payable = P10 million (face value)
Discount = P500,000
Coupon rate = 10% (annual)
Effective rate on December 31, 2014 = 11%
Remaining maturity = 2 years
Original effective interest rate = 13%
Unpaid interest = P1 million
New terms:
New principal = P8 million (face value)
Coupon rate = 8% (annual)
Unpaid interest waived
Required: Journal entry at restructuring date
EXAMPLE 5
Debt restructuring on December 31, 2014
Balances as of December 31, 2014
Note payable = P10 million (face value)
Discount = P500,000
Coupon rate = 10% (annual)
Effective rate on December 31, 2014 = 11%
Remaining maturity = 2 years
Original effective interest rate = 13%
Unpaid interest = P1 million
New terms:
New principal = P10 million (face value)
Coupon rate = 10% (annual)
Unpaid interest waived
Required: Journal entry at restructuring date
NOTE: In all examples, the financial liabilities are NOT classified as at FVTPL.