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I.
Definition
Held by entity for :
1. Accretion of Wealth
2. Capital Appreciation
3. Other benefits to the investing entity
II.
Investments Includes:
1. Trading Securities
2. Investment in Equity Securities
3. Investment in Bonds
4. Investment in Associates
5. Investment in Subsidiary
6. Investment in Property
7. Investment in Fund
8. Investment in Joint Venture
III.
Purposes
1. Accretion of Wealth
2. Capital Appreciation
3. Ownership Control
4. Meeting Business Requirements
5. Protection
IV.
Statement Classification
1. Current Investments
Readily realizable
Intended to be held for not more than one year
2. Non-current Investments
Not expected to be realized within twelve months
Intended to be held for more than one year
V.
Financial Instruments
Characteristics:
1. There must be a CONTRACT
2. There are at least TWO PARTIES to the contract
3. Contract gives rise to a FINANCIAL ASSET of one party and FINANCIAL
LIABILITY or EQUITY INSTRUMENT of another entity.
VI.
Financial Asset
Asset that is:
1. Cash
2. Contractual right to receive cash or other financial instrument from another
entity
3. Contractual right to exchange financial instrument with another entity under
conditions that are potentially FAVORABLE.
4. Equity instrument of another entity.
VII.
Financial Liability
Liability that is contractual obligation to
1. Deliver cash or other financial asset to another entity
2. Exchange financial instrument with another entity under condition that are
potentially UNFAVORABLE.
Preference share that provides for mandatory redemption by the issuer for a fixed
or determinable amount at a future date
Financial Liability of the issuer
Preference share that gives the holder the right to reacquire the issuer to redeem
the instrument at a particular date for a fixed or determinable amount
Financial Liability
IX.
1. Equity Securities
Any instrument representing ownership shares and right, warrants or options to
acquire or dispose of ownership shares at a fixed or determinable price.
Ownership interest in the entity
2. Debt Securities
Any security that represents a creditor relationship with an entity.
Has a maturity date and a maturity value
Equity Securities
A. Classifications
1.
2.
3.
4.
Equity Investments
1. FV through P/L
2. FV through OCI
Initial Measurement
FAIR VALUE
PURCHASE PRICE (FV)
Unrealized Gains/Losses
Result of changes in fair value at reporting date.
1. Unrealized Gain FV > Cost
2. Unrealized Loss FV< Cost
Gain or Loss on sale of securities
Net proceeds from sale (NP) Carrying amount of the investment (CA)
1. NP > CA Gain
2. NP < CA Loss
C. Transactions subsequent to Initial Recognition
Classifications of the equity investments (whether FVPL or FVOCI) does not affect the
accounting for these subsequent transactions.
Share Split
Dividends
1. Cash Dividends
No Effect on Investment Account
a. Dividends earned but not received
Dividends Receivable
xxx
Dividend Income
xxx
xxx
Dividends Receivable
xxx
3 Dates relevant:
Date of Record
Date of Payment
2.
Property Dividends
Dividends in form of property or Non-Cash Assets
Also considered as Income
Recorded at Fair Value
Non-Cash Assets
xxx
Dividend Income
3.
xxx
Liquidating Dividends
Return of invested capital
Not Income
Payment may be in form of Cash or Non-Cash Assets
Cash or other appropriate amount
xxx
xxx
Stock Dividends
In the form of the issuing entitys own shares
IAS term Bonus Issue
Not Income
No Effect on assets of the entity
Cost of Investment
- No Effect
Cost of Investment per share Decrease
Shares
- Increase
5. Special Assessments
Additional capital contribution of the shareholders
Shareholders - Additional Cost of Investment
Entity
- Share Premium
6. Redemption of Share
same manner as sale of share
redemption price = sales price
Stock Right
Right-On share and the right are inseparable and treated as one
- shares cannot be sold without also selling the right (vice versa)
Ex-Right share can now be sold separate from the right or vice
versa.
Theoretical or Parity Value of stock rights is used in measuring the fair value of the stock
rights.
1. Shares selling Right-On
Value of One Right = MV of share right-on LESS Subscription Price
Number of rights to purchase + 1
2. Shares selling Ex-Right
Value of One Right = MV of share ex-right LESS Subscription Price
Number of rights to purchase
Reclassification of Equity Security
Reclassification
*Reclassification Date
First day of the reporting period following the change in business model that result in an
entity reclassifying the financial asset.
Fair value at the reclassification date becomes the new carrying amount of the financial
asset at amortized cost.
CA financial asset at amortized cost Face value of the financial asset
Amortized through P/L over the remaining life of the financial asset using the
effective interest method
Debt Securities
Debt Securities
Typical examples
1. Bond certificates
2. Treasury Notes
May sell at a price different from the face value of the instruments
1. Rate of Interest stated on the Instrument (Stated rate) = Rate of return desired by
investors (Market Rate)
Instruments will sell at face value
2. Stated Rate > Market Rate
It will pay more than the face value
Instruments sell at premium
3. Stated Rate < Market Rate
Purchasers pay less than the face value
Instruments sell at discount
Classification of Investment in Debt Securities
1. At Amortized Cost
2. At Fair value through Profit or Loss
Should be made on the basis of both:
1. Business model for managing the financial asset
2. Contractual cash flow characteristics of the financial asset
Debt Securities
Securities
NO
YES
NO
YES
YES
NO
Classify as Debt
Investments at FV
through P/L
Classify as Debt
Investment at
Amortized Cost
BOND
Bonds
FAIR VALUE plus Transaction Costs that are directly attributable to the acquisition.
Subsequent Measurement
1. Trading bond investments
Measured Fair value through profit or loss
If held for trading it is not necessary to amortize any premium or discount
2. Bond Investments
Classified as Financial Assets measured at amortized cost using the effective interest method
Acquisition of Bond Investments
1. On Interest date
Purchase Price = Acquisition Cost
2. Between Interest date
Purchase price normally includes accrued interest*
*Accrued Interest - interest that is either payable or receivable has been recognized, but not yet paid or
received.
Investment in Bonds at Amortized Cost
Entry
a. Amortization of Bond Discount
Investment in Bonds
Investment Income
xxx
xxx
xxx
May be made (1) Interest Date or (2) End of the reporting period
Philosophy of Amortization
Reason for amortization
Bring the carrying amount of the investment to face value at the date of maturity.
Bond Premium
Loss on the part of the Bondholder
Paid more than what can be collected at date of maturity.
Bond Discount
Gain on the part of the Bondholder
Paid less than what can be collected
Sale of Bonds Prior to Maturity
Necessary to determine CA of the bond investment to be used as a basis in computing gain or
loss on the sale
Amortization of Premium or Discount should be recognized up to the date of sale.
Callable Bonds
Those which may be called in or redeemed by the issuing entity prior to their date of maturity
Redemption price CA of bond investment
Recognized in P/L
Convertible Bonds
Those which gives the bondholders the right to exchange their bonds for share capital of the
issuing entity at any time prior to maturity.
Serial Bonds
Those which have a series of maturity dates or those bonds which are payable in instalments
Methods of Amortization
A. Straight Line Amortization
Equal amortization of premium or discount each accounting period
Example:
Face Value
2,000,000
Date of Bonds
1/1/11
1,850,000
Date of Maturity
1/1/14
Discount on Bonds
150,000
Amortization of Discount
2011
P 50,000
2012
P 50,000
2013
P 50,000
2,000,000
Date of Bonds
1,900,000
Discount on Bonds
100,000
1/1/11
Amortization of Discount
Year
2011
2012
2013
2014
Bond Outstanding
2,000,000
1,500,000
1,000,000
500,000
P 5,000,000
Fraction
20/50
15/50
10/50
5//50
Discount Amortization
40,000
30,000
20,000
10,000
P 100,000
Date
FV X Nominal Rate
Interest Received
1. PV of 1 = (1+i)-n
2. PV of Annuity of 1 = 1 (1+i)-n
Investment in Associates
Significant Influence
20 % to 50% ownership
If less than 20% ownership it is still has significant influence if :
1. Representation in the Board of Directors
2. Participation in Policy making process
3. Material transactions between the investor and investee
4. Interchange of management personnel
5. Provision of essential technical information
No Significant Influence
Investor holds, directly or indirectly, less than 20% of voting power of the investee
Accounting for Investment in Associate
Methods
1. Equity Method
Applicable when the investor has significant influence over the investee.
Applicable only in investments in ordinary shares.
Initial measurement = Cost
Subsequent measurement
Increase Net income of investee
Decrease Net Loss and Dividend payments
2. Cost Method
Applied with respect to investment in unquoted equity instrument
Applicable when investor does not have significant influence over the investee
Initial measurement = Cost
Subsequent
Does not share in investees profit or loss
Dividends received =Dividend income
Excess
If the assets of the investee are fairly valued, attribute excess cost to Goodwill
attributable to undervaluation of depreciable asset, Amortize over the remaining life of
depreciable asset
attributable to undervaluation of land, Not Amortized
attributable to undervaluation of inventory, Amount is expensed when the inventory is already
sold
Attributable to Goodwill, not amortized but the entire investment is tested for impairment at
the end of each reporting period.
Acquisition Cost
Less: Carrying Amount of Net Assets acquired
p xxx
xxx
p xxx
xxx
xxx
xxx
xxx
Goodwill
p xxx
p xxx
xxx
p xxx
xxx
xxx
p xxx
p xxx
xxx
xxx
p xxx
Compute share of earnings after deducting the preference dividends only when
declared.