 Hello and welcome to this session. This is Professor Farhad and this session we would look at IFRS 9, which is the classification and measurement of financial assets and liabilities that we covered earlier in IAS 23. This topic is covered in international accounting, minor topic on the CPA exam. It's definitely covered on the ACCA exam. As always, please connect with me on LinkedIn. YouTube is where you would need to subscribe. I have 1500 plus accounting, auditing and tax lectures. If you like my lectures, please like them, press on that like button, share them, put them in playlists. If they're benefiting you, it means they benefit other, share the wealth. This is my Instagram account. Please follow me on Instagram. I'm trying to grow my following. This is my Facebook and this is my website. On my website, if you'd like to support the channel, if you like my recording, you can make a donation. Also on my website, I do have offers on regular basis. Right now, Becker CPA is offering a thousand dollar off of the Becker bundle. Now you don't have to buy the whole thing. I mean, this is with all the extra reviews and everything, but you can buy pieces and now it's on sale. I strongly suggest you go for it. With Becker, you would have over 10,000 plus multiple choice questions between all sections and problems and simulations and hundreds of hours of lectures by Becker qualified faculty. So I strongly suggest you take advantage of it or at least check it out, go through my website. Let's go ahead and get started working with IFRS 9. Now, before we start, I know you're not going to like this, but I always would like to let you know that this topic, investments, basically investing in debt and equity, I do cover this topic in depth in my intermediate accounting using 20 lectures. So I talk about investments in bonds, stocks, but this is US GAAP. Now, US GAAP and IFRS, they have similarities and they have differences. In this session, I will try to explain how IFRS looks at it from a brief perspective and compare it to US GAAP. So if you're interested in more depth, in more examples, in more explanation about US GAAP, go to my intermediate accounting chapter 17. I know you hate to hear this, but this is the truth. I'm going to be summarizing something in 40 minutes that took me five hours in chapter 17. Okay, this is not intermediate accounting, this is an international accounting course. So IFRS 9, it's going to help us classify and measure the financial assets and financial liabilities that we learned earlier about in IAS 23. So we're going to be learning about the initial recognition, which is pretty straightforward. Usually you would record it at cost, how much you paid for that financial asset, or how much that financial liability incurred for you. But the question is subsequent recognition, it means later after you have the asset, what's going to happen? It's going to all depend on the classification of the financial asset and the financial liability. So it depends on how am I classifying this asset, this financial asset and financial liability. And how am I classifying this financial liability? And what do we mean by classification? Well, we're going to have classification. We're going to say we made an investment, we have a financial asset, how are we going to classify it? We now have a financial liability, how are we going to classify it? Let's start with financial assets. So we have three categories, amortized cost, financial asset at fair value through comprehensive income, financial asset at fair value through profit and loss. And as always, when there is a list, I'm going to go through the list and we're going to work an example later. Examples, not one, many examples. So the first thing we're going to explain is when do we classify a financial asset at amortized cost, when at amortized cost, this category here. So amortized costs are for trade receivable, which is a counter receivable, simple loans like short-term loan and bonds held to maturity. So here's what I want you to think. Here's what I want you to think. Every time you think of a financial asset, and you say it's going to be classified as amortized cost, think of bonds. What do I mean by think of bonds? Because this is really what we, that's really the most important one. Bonds means you made an investment, you bought a debt, you bought a corporate bond from someone. And you do have the option of classifying it at amortized cost. You do have that option. So that's what I want you to think. Bonds. And you are planning to hold this bond for maturity. That's another important concept. So you bought this bond. Bond is an investment. It's not only you bought it, you want to keep it until it mature because bond mature. So you will keep those at amortized cost. Now, the term amortized refers to the fact that the carrying debt instrument, the bond, at cost often require that it's recorded at a discount or a premium of its face value. The discount or the premium is amortized generally or using the effective interest rate method. So when you buy the bond, the bond might be might be above the face value or below the face value. It's either going to be a premium or a discount. So you'll amortize the premium or the discount. Now, here's why I don't want you to think of receivable at amortized cost. Because when you have a receivable, usually you don't have a premium or a discount because the period is so short that the period is very short. You're going to get that money pretty soon, 30, 60 days. There's no really time lag. Simple loan, the same thing. If you have a simple loan, that's why when you think about amortized cost and a financial asset, think about a bond held to maturity. So notice no equity or stocks, no equity. Simply put means we cannot have a stock because the stocks don't have a premium, don't have a discount. And also stocks don't mature. There's no maturity date for the stock. And that's why in this category, there is no stock. So we cannot have an equity or stock as a financial asset and say, we're going to treat this as amortized cost. For assets to qualify for inclusion in the amortized cost, it must pass two tests. And notice once we pass this two tests, it's going to exclude the stocks out again. We have a business model test, which state that the business objective must be to hold the asset in order to collect contractual cash flow. Well, guess what? When you have stocks, you don't hold the stocks to collect cash. You may receive them and it may or may not. But a bond, you would hold it to receive the cash because it's the contract between you and the issuer. So that's why under the business model, bonds will pass this loan at the bank pass this test or even loans when the bank make loans. This is basically they have a financial asset and they can listen at amortized cost. The second test is contractual cash flow test, which is the asset must give rise to only interest and principle, no dividend. So again, what we're thinking is thinking of bonds. So bonds, we buy the bond and we wait to be paid interest and principle. Therefore, the bond is the only kind of think of it. It's not the only one, but think of it as the only financial asset that could be reported at amortized cost. Okay, now we're going to move to the second category. Remember, we looked at amortized cost, we're going to look at the second category. Now we're going to look at financial assets at fair value through comprehensive income. Now for financial asset at fair value through comprehensive income, we could have we could have debt and we could have stocks. Okay, just want to let you know though, this category you could have bonds and you could have stocks, you could have equity investments. So simply put, you can have equity investments or equity securities and you can have debt investments or debt securities. Okay, so here now you have both categories. Now, what are financial assets at fair value through comprehensive income? Here's what happened. Roughly it corresponds to something that we know, something called available for sale category. What is available for sale category? Okay, so when do we classify something as financial asset, fair value through comprehensive income? Well, when we buy and when we make an investment either in bonds or stocks, we made an investment, we have a financial asset. The question is, what is our intent? What do we plan to do with this investment? Well, we kind of have three options. Okay, we kind of have three options. Think of these as three options, one, two and three. The first option is to hold forever or to maturity. Let's say hold to maturity, hold to maturity. Well, guess what? If we're going to hold something to maturity, if we are able, like a bond, then we're going to be using the amortized cost. Okay, four bonds for debt. In other words, there's no stocks in this category. So we're going to figure out this category. Okay, well, the other option, why we made an investment, there are two other reasons. Well, the other reason, not two, let's take care of it step by step. The other reason is trading or speculation. Let's put it trading or speculation. What does that mean? That means you bought it, you bought the investment and you're trying to flip it. Flip it means you're trying to make the sale really quick to make a profit on that. So you bought it with the intention of selling the investment trading. Then we have a third category, which in between those two and I put it in the middle because it's in between those two. So you make an investment, you're not planning to hold it forever. You're not planning to flip it in the near future. It's in between. We call this category available for sale. It means I made the investment and I'm not going to sell it in the near future, but I'm not going to hold it forever. But if the time is right, the price is right, I might sell it. So it's available for sale. So financial asset that are considered in a sense available for sale, they will have this classification. Financial asset at fair value through comprehensive income. It means and this is important. I did not emphasize this point yet. It means it's going to be reported at fair value. It means at the end of the year, you have to report it at fair value. Notice when we talked about amortized cost, there was nothing about fair value except when you buy it. It's reported initially at fair value, but there is nothing about fair value about amortized cost. Now those financial assets are going to be reported at fair value. So this category applies to fair value measurement to the financial instrument that falls within it, but allows fair value gains and losses to be recorded in comprehensive income rather than income statement. So you're going to be reporting those financial assets, which are could be investment and bonds, investments and stocks at fair value. Now what does fair value mean? Maybe I should explain this. Let me just give you a simple example. Let's assume you bought a house. I'm going to build a house. I'm really lousy at building at art. This is a house. All right. This is a house. And you paid for that house, you paid $300,000. That's how much you paid for that house. A year later, this house is worth $340,000. This is how much fair value. Obviously, you did not sell this house, but the value of it went up $40,000. Now, if the value went up or the value could have also went down to $250,000, or the value could go down by $250,000. Now, if the value go up, if you have a gain, this $40,000 gain, where are you going to report it? That's the question, because you have a $40,000 gain. If you bought the house and you're planning not to sell it, you bought this house, you're going to live in it. But maybe if the price is right at some point, you might sell it. You're going to report this gain in other comprehensive income. This is what we mean. The gain will go through other comprehensive income. It doesn't go on your income statement. Now, why not? Because the IFRS thinks it should not go through your income. It should not affect your profit, because it's not part of your profit. You bought it as an investment. So if it's not ready to go to the income statement, it will not go to the income statement. So it doesn't affect your profit. As I told you, you could also have a debt for that financial assets. That financial asset means a bond. To qualify for inclusion in this category, they must pass both the business model and the contractual model. Think about bonds. They pass both, similar to the case for amortized cost category. So to have a financial asset that's debt in nature, which is bonds, it has to pass those two categories. That's fine. That's fine. We can look at that. The main difference is that the fair value OCI business model test allow the entity to engage in larger and more frequent asset sales. Remember, the amortized cost, you don't sell it, you keep it. And the reason, think about amortized cost, amortized cost versus fair value OCI. When you buy something for amortized cost, remember, it's bond held to maturity. My pen is not working properly. Bond held to maturity. It means you're going to keep it until it mature. And if you know anything about bond, when they mature, they go back to face value. So if you have a bond, if you have a debt, and it's held to maturity, it means you're not going to sell it. They said report it at cost. Why? Here's why. Because during the life of the bond, during the life of the bond, this bond could go up in value, go down in value, go up in value, go up in value, go down in value at the end of the day, at the end of the day, it's going to go up down, up and down. At the end of the day, it's going to go back to its face value. So what we say is, don't bother booking the gains and the losses when they go up, when they go down, up and down. Because at the end of its life, it's going to go back to its face value. If you don't know this about bond, I just told you this. That's why if it's held to maturity, you keep it at amortized cost. Now, if you want a bond and you want to sell the bond, sell it on regular basis, more frequent sales, not held it, then guess what? Then you could classify it as fair value OCI. Then if the value changes, then you would record the change in the value. So that's why under fair value OCI, you can trade it a little bit. You can trade it. You can trade that. You can trade that bond. It's still the case that the entity primary business objective must, it's still the case that the entity's primary business objective must be to hold the instrument in order to collect contractual cash flow. Although you might be sell it and sell it more frequently, but the purpose of buying a bond is to get the cash. Okay? So a bond can be in this category. A bond at that investment can be fair value OCI. Now, just a little bit more of information about this topic. IFRS 9 also contain an important provision that allow entity to place equity investment in the fair value OCI category if they are not held for trading. Now, as I told you, you can have equity here. You can have equity in this category. Okay? Now, providing a fair value OCI option for equity securities differ from US GAAP. Here's why. Because under US GAAP, let me just kind of tell you this also you need to know this under US GAAP, under US GAAP, if it's equity, if you buy an equity security, all gains and losses go through the income statement. So for equity, all gain and losses goes through the income statement. All gains and losses goes through the income statement. On the other hand, IFRS, you could have equity and you could have it in OCI or you can have it later. You're going to have it in the income statement. And this is one of the major difference between the two. This provision is an important instance of the recent IFRS, US GAAP divergence and it's discussed. We're going to discuss it shortly. Okay? So under US GAAP, if you have equity, it can only be fair, think of it, fair value PL, profit and loss, which we're going to see later. US GAAP only fair value profit and loss. Guess what? IFRS, if you have equity, it can be fair value OCI or fair value, you're going to see shortly PNL. Okay? Fair value PNL. Financial asset reported at fair value through profit and loss. Again, we're still talking about financial asset. Now, what is this category? Well, this category is a residual category. Basically, if it's not available for sale, if it's not held to maturity, it must be trading. Okay? It includes any financial asset not allocated under the other two categories, which is the amortized cost and fair value OCI. So what does it include? Think of it, asset held for trading. And I put this picture here as a trader, stock trader trading stocks. So when you have a financial asset and this asset could be debt, this asset could be equity, it could be stock or it could be bond. It doesn't matter. If it's held for trading, you may buy a bond. That means bond and you want to sell the bond in the near future. Well, guess what? Any fluctuation in the value, you will look it in the profit and loss. Same thing with equity. Other things, that instrument, as I just told you, not qualifying for amortized cost or not qualifying for fair value OCI. So that instruments, that's not the other two categories, can be a trading. Equity, instrument, not included in fair value OCI. And derivative is not qualifying as hedge accounting. We're going to look at derivatives later, but those derivatives are not for hedging purposes. They're for speculation purposes. We'll talk about that later. Just know that derivatives not qualifying for hedge accounting. So those are the things that go under the category of trading. Okay, category of fair value through profit and loss. I call it trading. So if you ask me, I call this category trading. This is trading category. This is the trading category. I call this category F, V, OCI available for sale. And the third category is amortized cost. So if I want to simplify this for you and use simple terminology, okay, this is amortized cost. I call this held to maturity. You're holding the bond and only the only thing that goes under this category is bond or debt. That means bond. I use both words because depending on your textbook, financial asset at fair value through comprehensive income, those are available for sale. And those you could have bonds and stocks. So you could have equity investments as well as debt investments, financial asset at fair value through profit and loss. Again, I call these trading. And you could have bonds, you could have stocks. And as you saw, you could have derivatives, okay, etc. Those are things that you are planning to trade. Okay, so those, if I want to simplify this, this is how I would simplify it for you for financial asset. Now, let's talk about financial liabilities because everything that we talked about here is all financial asset. Let's talk about financial liabilities. Under financial liabilities, we only have two categories. They could either measure measured at amortized cost or the financial liability measured at a measured financial liability at fair value through profit or loss. So notice we don't have OCI category for financial liabilities. And what are financial liabilities? It's when we borrow money. When we sell the bond, not when we buy the bond. When we buy the bond, it's a financial asset. So when we buy a bond, that's a financial asset. Simply put, we debit investment. We debit, let me just kind of clarify this, we debit bond investment or bond security for 100,000, credit cash 100,000. Now, when we sell, issue or sell, when we issue or sell a bond, now we're issuing or selling the bond. We are the company. Then this is a financial liability. Here what we do is we debit cash 100,000 and we credit bonds payable. So now we're talking about financial liabilities. And this is what we're talking about here. This is the financial liability. The bonds payable is the financial liability. So financial liabilities, they could have only two categories. Financial liabilities measured at cost and obviously kind of cost is cost is cost. And financial liabilities at fair value through the P&L. So financial liabilities measured at cost, that's the default category for most financial liabilities. When you borrow money, well, you plan to pay it off. That's what you do. And you would say, I'm going to keep it. I'm going to keep it. I'm going to report it at amortized cost. Financial liabilities at fair value, now this category would include liabilities held for trading. Again, you want to trade them. Derivatives, not designated as part of a hedging relationship. Remember, you have derivatives, but the purpose of that derivative is for speculation, not for hedging, not to protect yourself. And liabilities that the entity up to classify using the fair value option. Simply put, you have a liability. Either you're trading that liability means you're going to buy it back and you can buy back your own debt. You sell a debt and you can buy it back or a derivative, some sort of a financial liability derivatives that's not part of hedging. And there is this category, which we'll talk about later, fair value option. You could always say, this is my liability and I want to treat it as fair value. If that's the case, then the financial liability is reported at fair value with profit and losses going through the profit and loss statement, not profit and loss. The fair value adjustment is going through the profit and loss statement. What are some examples of these financial instruments? Interest rate swap, we'll talk about those in future chapter. Commodities, future contract, forward foreign exchange contract, contingent consideration, promise as part of M&A transaction. Those are financial liabilities that you want to treat at fair value. You just decide that's why you want to do it because usually all liabilities, the default category is cost, which is easy. You just report them at cost. You don't make any changes. You don't make any changes. Let's look at few examples. Example one, we're going to look at financial liabilities measured at amortized cost, which is kind of the default category for financial liabilities. On January 1st, year one, K-Corp issued a 1 million 5% bond at face value. It means they want to borrow $1 million. They're willing to pay 5% on that bond. The bond pay interests annually and mature on December 31st, year two. The company incurred bank and legal fees of $70,000 in conjunction with assuring the bonds. That's fine. So here's how we do it under IFRS. Under IFRS, the debt issue cost reduce the fair value of the liability. The fair value of the liability, we wanted to borrow a million, but it cost us $70,000. Therefore, we're going to debit cash, $930,000. This is how much cash we received, and we're going to have a bond spable of $930,000. Now, USGAP, they treat this differently, but we're not going to look at USGAP. Okay? Now, what's going to happen? Now, we have a financial liability. It's right here. Okay? This is the financial liability. Okay? Now, what are we going to do? We're going to keep it at cost. We're going to keep it at amortized cost. So subsequent to the initial recognition, which you already recognize it, the bond payable are measured at amortized cost. So amortized cost, what's the cost for it $970? So the difference between the fair value of the bond at the issuance date and the face value is amortized to expense over the life of the bond using the effective rate. So the difference between the fair value, the fair value was how much was it was $930. This is how much we received for the bond. And the bond face value, the bond face value is a million. So this was $930. This was a million. The difference is $70,000. Okay? It's going to be expense over the life of the bond using the effective interest rate method. Now, if you don't know what the effective interest rate method, I'm going to cover it briefly, but hopefully you know what the effective interest rate method is. Okay? Let's assume the effective interest rate just happened to, we choose this number, 8.978, doesn't matter. Okay? So now what's going to happen? We issued the bond for $930,000. We consider this the fair value when we issued it because that's how much we received. This bond will pay 5% interest. So every year we're going to get $50,000 computed as a million times 5%. December 31st, interest and principal payment of $1,050,000. This is year 2. December 31st, year 2. They're going to pay us back the bond, plus they're going to pay, plus they're going to make an interest payment. So let's go ahead and look at the journal entries when we actually make, receive the first interest payment. So let's take a look at the interest expense. How do we, how do we compute the interest expense? The interest expense is computed by taking the fair value of the bond, which is $930,000. I like, I prefer to call this the book value. The book value of the bond, the book value of the bond is $930,000. IFRS like to call it fair value. It's because that's how much they received, but regardless, then you multiply this by the effective interest rate. It should be given to you times 8.9781. And that's going to give you interest expense of $83,496. You're going to debit interest expense that much. You're going to credit cash $50,000. Why credit cash $50,000? Because you have to pay cash $50,000. That's how much the bond is paying. Then you're going to amortize $33,496 to the bond payable. Remember the bond, the financial liability initially had a cost of $930,000. Now you just added to it this $33,496. It means now it has a fair, it has an amortized cost of $963,496. So this is the amortized cost after the first year. Now here comes year two. Year two, you have to compute the interest expense. How do you compute the interest expense? You're going to take $963,000, the fair value of the bond, $496,000, which is what we computed earlier times, 8.9781%. That's going to give you this figure right here. That's the interest expense. We're going to credit cash $50,000. Then we're going to add to the bond $33,496. Well, let's do that. Let's add to the bond $33,946. Let's go back here and add to the bond $33,000. I'm sorry. It should be. I made a mistake here. The difference is not $33,496. It's going to be $36,504. So if we add $36,504. Now the bond has a face value of a million because it matured in two years. Always the bond goes back to the face value. Now we're going to pay off the bond. We're going to pay a million dollars. We're going to debit bonds, payable a million, credit cash a million. The bond is gone. Let me go back here. Once we pay off the bond, we debit the bond a million. The bond is gone. The bond is gone. So this is accounting for a financial liability measured at amortized cost. We don't have to worry about the fair value in amortized cost. We just keep it and take care of the transaction. Now under U.S. Gap, that issue cost, that issue cost, which was the $70,000, are deferred as an asset and amortized on a straight line basis. This is for U.S. Gap. So if you really think about it, the total expense for year one and year two for the company, for in year one and in year two, $50,000, $50,000 for the cash interest expense, and amortization of that over two years is $35,000. Every year is $85,000, over two years obviously, because in year two, you did the same thing, $50,000 plus $35,000. So this is for one year. This is for one year, $50,000 cash plus $35,000. Assuming we're going to do this equally, we're going to amortize this equally. So for every year, you incurred $85,000 in cost, in total expense, in total expense in year one, and in year two, we'll be determined the same way. Now equity investment classified, again, I'm using here the straight line, which we did not use the straight line in the example. I'm just telling you as in total, the total expense. Let's take a look at an example, or let's discuss again, the equity investment classified as fair value through OCI. Remember fair value through OCI, it means you bought it, you might sell it, you may not sell it depending on the situation. Okay, now, if you have an equity investment, because here we're talking about equity investment, let's talk about USGAP. If it's equity investment USGAP, as I told you before, all the adjustments go through income. So USGAP is don't worry about OCI, there's no such thing as OCI equity, there is no OCI for USGAP, I just want to clarify this. In the case of equity investment, not held for trading, IFRS allows company to make one time a revocable election at the initial recognition to classify it as fair value OCI. So when you make an investment, you have to say, I'm going to make this, I made an equity investment, I bought, I bought a stock, and I want to classify it, I want it to be part of fair value OCI. So you have to make that adjustment. And by making this adjustment, you're going to shield any gains and losses from profit and loss statement, your shield means you're not, they're not going to go there. Okay, and you have to make this election security by security basis. So under IFRS nine, every time you make an equity investment, you have to say this equity investment is fair value OCI, if you want it to be in fair value OCI. And cumulative gains and losses are not recycled through the income statement upon disposal. So the good thing about not the good thing could be good, it could be bad about IFRS nine, if you say I bought an equity investment and I want it to be fair value OCI, the profit and the loss from that investment, whether it's realized or unrealized never goes on the income statement, it stays in OCI stays in OCI. And let's look at an example to illustrate this concept. Porfirio purchased marketable securities for $20,000 on October 15 year one. At the time of the purchase Porfirio makes fair value OCI election. Well, they said we want it to be fair value OCI. If they did not make this election, it would have been fair value PL profit and loss. It means they bought this investment, they're planning to hold it a little bit, but they're also willing to sell it if the time is right. So we're going to debit marketable securities fair value OCI, which is a financial asset or an investment or an act. So this account, this marketable securities, I can call it equity investment if I want to equity investment, fair value OCI. Okay, it's an equity investment. I can call it a financial asset is too broad, but it's a form of financial asset. Okay, so this is the financial asset. This is the financial asset. Okay, now we're going to credit cash $20,000 on December 31 at the end of the fourth physical quarter, the securities have risen in value to $22,000. There we go. Now it went up in value by 2000. What do we have to do? We have to book that gain, that unrealized gain. We're going to debit marketable securities FCOCI. So basically we're going to go ahead and this marketable securities fair value OCI, fair value OCI, initially was $20,000. Now we're going to add to it 2000. Now it's $22,000. It's marked to market because the market value is $22,000. We mark it up to the market. Then we credit. This is the important part. The income doesn't go on the income statement. It goes into OCI, other comprehensive income. This is a balance sheet account. This is a balance sheet account. So it doesn't go on the income statement. Now then the company on February 1st year to sold it for $23,000 and the company will account for this investment in the following manner. Now they sold the investment for $23,000. They would receive cash $23,000. They will have to remove the investment for $22,000. Now the investment is down to zero. Then they have a gain. Again, the gain goes into OCI. The gain goes into OCI. This is different than USGAP. USGAP, if you have an equity investment, everything goes into the income statement. One more time. If you are using USGAP, you will not have other comprehensive income. You will have a gain that goes into. You'll have a gain income statement. Here you would have a gain. Same thing. You will have a gain income statement. That's the difference. Okay. For IFRS it's a little bit different. Now notice all gains on fair value OCI are recorded in other comprehensive income and never recycled through the income statement. They never see the income statement. Now companies, they have the discretion to take this OCI and close it to retained earnings because it's technically a gain. So if they want to, they can do that. Otherwise, they're both on the balance sheet anyhow. So notice no income statement effect. However, if we received any dividend from that stock, it will go into that income obviously. Okay. If we received any dividend income, it goes through the income statement. But if we received any gains, it doesn't make it to the income statement. Let's work one more example. A debt instrument classified as fair value OCI. Now again, same thing. Now we bought a bond and we're going to classify it fair value OCI. We could have also classified this bond fair value PL, but we don't. We're going to classify it fair value OCI because fair value OCI is what gives us more problems. Fair value PNL just goes into the profit and loss. Okay. So that securities classified as fair value OCI receive a similar accounting treatment to equity securities with one exception. So we need to know what exception is. And that exception is when you sell it upon disposal, realized holding gain a recycle through the income statement. So the realized holding gain, the gain when you sell it, you have to report it on the income statement and take it out of OCI. And I will show you this in a moment and an example. So suppose Santiago purchased 5% bond for $1 million on January 1st, the bond mature December 31st. Year two, Santiago meets the IFRS business model because it sell because it sells its debt securities unfrequently. That's fine. So we're going to debit debt securities, fair value OCI, 1 million credit cash. Again, this account could be called a debt investment. This could be called debt investment, fair value OCI. So basically it's your financial asset. This is your financial asset right here. This is your financial asset. Okay. For simplicity, assume that the bond will pay interest once a year on December 31st. Interest rate in the economy fell during year one because of the bond to appreciate. So when interest rate goes down, the bond value will go up. The fair value of the bond is 1.2 million. Okay. So at the end of the year, the bond paid interest and the fair value went up. That paid interest 50,000. Debit cash, credit, interest income. Why 50,000? It's a million dollar and the bond pays 5% equal to 50,000. That's good. We'll take that. Debit cash, credit, interest income. Now we have to make an adjustment to the debt security because the value went up by 200,000. Remember we have a debt. We have a debt securities, fair value OCI and we have there a million. Now the value of that security is 1.2 million. Therefore we have to debit this account 200,000. We have to increase it by 200,000. Now it's 1,200,000. Now we're going to take the gain and put it into OCI, other comprehensive income. Sorry I did not put the word income there. Okay. So this is the adjustment. This is the credit. The other comprehensive income is the credit. I should have moved a little bit further too. Okay. Now rather than holding them to maturity because we're not going to hold them to maturity, if we're holding them to maturity, we would have to report them at amortized costs. So we're not doing so rather than hold them at maturity. San Diego sold the bond for 1.2 million on January 1st. So San Diego said, I'm going to take advantage of this increase in value and sell the bond for 1.2 million. Okay. So let's record the sale. We're going to debit cash 1.2 million. We're going to credit this account debt securities. We're going to credit this account that securities 1.2 million because remember I had this account here. I should have kept it here. I should have kept it here. Okay. Remember I had 1.2 million in this account just a second ago. So I'm going to remove this. Then I am also going to remove this other comprehensive income. I'm going to have to debit my other comprehensive income. This is a debit. This is a debit. I'm going to debit my other comprehensive income to remove it. Then I'm going to credit again. So this is, let me just show you the entry, the 1.2 million for the cash. This is a debit. This should be a debit. So this is the debit. So now I fixed it. This is the debit. So notice, I have to remove that credit. I have to remove the 200,000 and the realized gain on the debt goes into the income statement. And this is what we're saying at the beginning. Upon disposal, the realized gain is recycled through the income statement. It means we take the gain out of OCI. It went out of OCI and went into the income statement. That's not something that we don't do if we had an equity instrument, an equity investment, an equity investment. But now we have a debt investment. We don't do this with equity, but we do it with debt. Okay, and this is what we did earlier with equity. Let me just show you. Let me just show you the equity, just so you will see what we did. When we sold the equity, the profit went into OCI and it never left OCI. Okay, the gain went into OCI. We have 3000 and OCI. Now again, as I told you, they can close that gain to retained earning if they chose to, but that's up to them. Okay, let's wrap this up. Just a review for financial assets. We have three classification, amortized cost, fair value OCI and fair value profit and loss. Again, think of profit and loss as trading. For amortized cost, think about debt security, about bonds and that are held to maturity. Remember, there are no stocks in this category because stocks don't mature. Fair value OCI, we could have both debt as well as equity securities or investments. You could have stocks and bonds. Remember that equity gains and losses stay in OCI debt. If you have bond gain and losses, they are recycled through the income statement when they are sold. They are recycled, but the equity are not recycled. They stay in OCI. Fair value profit and loss. Remember, this is like trading. You could have both debt and equity securities not classified as amortized cost and not classified. So basically, if it's not amortized cost, if it's not FCOCI, then it must be FVPL. Remember, gain and losses go through the income statement. Financial liabilities, we only have two categories, fair value profit and loss and amortized cost. Under the amortized cost, we have bonds payable and notes payable. Under fair value profit and loss, we have liabilities that are held for trading, derivatives, not for hedging. That means for speculative purposes and fair value option when we choose the fair value option for our debt. Not that investments, our debt. Here we are talking about financial liabilities. Debt, not debt investment, because debt investments are financial assets. And gain and losses is recycled through the income statement. I hope this session clarified IFRS 9. If you happen to visit my website for additional lecture, additional lessons, please consider supporting the channel. If you have any questions, email me. Good luck on your exam and study hard. It's worth it.