Chapter 11 - Trading Securities

Chapter 11: FINANCIAL INSTRUMENTS, Investment Security to Profit or Loss (Equity)
Investment in Equity Securities _ representing ownership interest in an equity or right to

acquire ownership interest. This term does not encompass callable or redeemable preference
share, treasury share and convertible bonds.
CLASSIFICATION OF EQUITY SECURITIES
1. Investment in subsidiary _ interest is more than 50%

2. Investment in associate _ investor has significant influence over the investee. In the
absence of evidence to the contrary, significant influence should be presumed when the
investor holds 20% or more of the investee’s voting stock.
3. Other equity securities (small investments) _ investments without controlling interest
or significant influence. They are normally classified as:
a) Marketable _equity securities with readily determinable market value
(trading securities and available for sale securities).
b) Non-marketable _ equity securities without readily determinable market
value.
CATEGORIES OF INVESTMENT IN EQUITY SECURITIES (small investments)
1. Trading security _ acquired principally for the purpose of generating a profit from short-
term fluctuations in price or dealer’s margin.
2. Available for sale equity securities _ financial assets that are not (a) loans and
receivables originated by the enterprise, (b) financial assets for trading.
A financial asset is held for trading if it is:
a) Acquired or incurred principally for the purpose of selling or repurchasing it in the near
term
b) Part of the portfolio of identified financial instruments that are managed together
and for which there is evidence of a recent actual pattern of short-term profit
taking
c) A derivative (except for a derivative that is a financial guarantee contract or
designated and effective hedging instrument)
Financial asset held for trading include:

1. Debt and equity securities that are actively traded by the entity
2. Loans and receivables acquired by the entity with the intention of making a
short-term profit from price or dealer’s margin
3. Securities held under the repurchase agreement
Initial measurement of investment security to profit or loss
At the point of acquisition, financial instruments classified as investment assets under

the category “held for trading” are initially recorded at their acquisition cost. The acquisition
cost is the fair value of the securities acquired which is equal to the fair value of the
consideration given up to acquire the instruments. Any transaction costs incurred
related to the acquisition of the instruments is recognized outright as an expense.
Measure subsequent to acquisition
Subsequent to acquisition, financial instruments classified as investment assets under

the category “held for trading” are remeasured at fair market value. Changes in the fair
market value subsequent to acquisition are reported in the profit or loss of the period.
Reclassification of investment security to profit or loss
Once a financial asset has been classified into a particular category on initial
recognition, transfers into or out of that category from or to other categories is impossible
for some categories and should be rare in other circumstances.
In October 2008, in response to market conditions, the IASB amended IAS 39 to allow
reclassification of certain financial assets out of “held-for-trading” or “available-for-sale” and
into another category under limited circumstances.
Derivatives and assets designated as “at fair value through profit or loss” are not
eligible for this reclassification. The IASB also amended IFRS to require various disclosures
where an entity makes such reclassification. Given the urgency of the issue, due process was
suspended and the amendment was effective immediately.
Transfer into and out of fair value through profit or loss
As explained above, entities are permitted to designate on initial recognition any

financial asset at fair value through profit or loss. However, to impose discipline on this
approach, no financial asset can be transferred into or out of this category while it is held or
issued. Such irrevocable designation prevents ‘cherry picking’, because it will not be known
at initial recognition whether the investment’s fair value will increase or decrease.
Disposal of investment security to profit or loss
When a financial instrument, classified as trading security, is to be totally

derecognized because of disposal, the carrying value of the instrument should be eliminated
from the accounting records. The carrying value of the instrument is its recorded fair market
value. Any difference of the disposal price/selling price and the carrying value of the security
is a realized gain or loss to be reported in the current year profit or loss.

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Chapter 11: FINANCIAL INSTRUMENTS, Investment Security to Profit or Loss (Equity)

Investment in Equity Securities _ representing ownership interest in an equity or right to

CLASSIFICATION OF EQUITY SECURITIES

1. Investment in subsidiary _ interest is more than 50%

CATEGORIES OF INVESTMENT IN EQUITY SECURITIES (small investments)

Financial asset held for trading include:

Initial measurement of investment security to profit or loss

At the point of acquisition, financial instruments classified as investment assets under

Measure subsequent to acquisition

Subsequent to acquisition, financial instruments classified as investment assets under

Transfer into and out of fair value through profit or loss

As explained above, entities are permitted to designate on initial recognition any

Disposal of investment security to profit or loss

When a financial instrument, classified as trading security, is to be totally

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