CHAPTER 4
INVESTMENTS IN EQUITY SECURITIES
Nature of Equity Securities
Equity Securities – represent equity interest
represented by certificate of share capital or potential
share in other corporate entities.
Reasons to by another enterprise to purchase a share
capital:
1. As temporary placements of excess cash and
held primarily for sale in near term to
generate income in short term price
fluctuations.
2. To obtain long term customer or supplier or
creditor relationship to secure operating or
financing arrangements with these
companies
3. To exercise significant influence or control
over the operating policies of another entity.
Classifications of Equity Securities
Less than 20%
- Investors does not have significant influence
over the investee company
- Equity investments = FAIR VALUE
20% - 50%
- Investors has significant influence over the
investee company
- Investments in Associates or Joint Venture =
use EQUITY METHOD unless expected to
be disposed within 12 months
More than 50%
- Investors has control over the investee
company
- Parent-Subsidiary Relationship
- Consolidate Financial Statements unless
falling under exemption in PAS/IAS 7
*Control may be exercised in some instances even if
holding is less than 50%
Classifications of Equity Investments
A. Equity Investments at Fair Value
through Profit or Loss
Initial Recognition
- Measured at initial recognition and each of
the reporting date at fair value
- Transaction Cost at initial recognition are
not part of initial cost and charge to expense
To record the acquisition
Equity Investments – FVPL xx
Broker’s Commission (if any) xx
Cash xx
To record the entry to appropriate bring the
investment at fair value
Equity Investments – FVPL xx
Unrealized Gains on Equity Investments xx
(Fair Value – Purchase Price)
To record the sold of share during the
subsequent year
Cash xx
Equity Investments – FVPL xx
Gain in Sale of Equity Investments xx
*At reporting date, the investment shall be
adjusted to fair value. Any change in fair value is
taken to income or loss in profit or loss
B. Equity Investments at Fair Value
through Other Comprehensive Income
Initial Recognition
- Measured at purchase price plus directly
attributable transaction cost
To record the acquisition
Equity Investments – FVOCI xx
Cash xx
To record the entry to appropriate bring the
investment at fair value
Equity Investments – FVOCI xx
Unrealized Gains on Equity Investments xx
(Fair Value – Initial Cost)
 To record the sold of share during the
subsequent year
Equity Investments – FVOCI xx
Unrealized Gains on Equity Investments xx
Cash xx
Equity Investments – FVPL
To record the transfer the cumulative balance of
unrealized gains and losses to the retained
earnings
Unrealized Gains on Equity Investments xx
Retained Earnings
(net selling price – initial cost)
C. Investment in Associate or Investment in
joint venture
Investment in Associate - Provides the holder the
ability to participate but not to control the financial
and operating policy decisions of the investee
company
Investment in joint venture – an investor that
jointly controls the operation of another entity
through share capital ownership
D. Investment in Subsidiaries
- Gives the holder the power to govern the
financial and operating of an entity so as to
obtain benefits from its activities
Note:
Trading Equity Securities – FVPL
Non-Trading Equity Securities – Day 1 irrevocable
choice of designating either at FVPL OR FVOCI
If the securities are for trading purposes = FVPL
If the securities are non-trading at initial recognition
= the enterprise shall make an irrevocable decision
Recognition Principle for Financial Assets
When an entity becomes a party to the contractual
provisions of the instruments
The Financial Asset shall be recognized if the
entity becomes the holder of the financial
instrument
Transactions Subsequent to Initial
Recognition
Share Split (stock split) – reduction in the par or
stated value of share capital accompanied by a
proportionate increase in the number of shares
xx outstanding.
- Does not affect the equity shareholder in
the issuing corporation
The investors record the receipt of the additional
shares through a memorandum entry only
indicating the change in the number of shares
xx
Dividends
- Corporate contributions to its shareholders
proportionate to the number of shares held
by the latter
Cash Dividends – recognized as income
when received or receivable
To record the acquisition
Cash xx
Dividend Revenue xx
The distributions of dividends involves 3
significant dates:
1. Date of declaration
2. Date of record
3. Date of Payment
A shareholder selling his securities after the date
of declaration but before the date of record, sell 2
types of financial assets:
1. The investment in shares
2. Dividend Receivable
Liquidating Dividends – return of the
investor’s cost of investment as the
investee’s earnings prior to the date of the
acquisition is logically considered by the
original seller in setting the selling price of
the shares
- Dividends declared come from the balance
of contributed capital accounts of the issuing
corporation
 Bonds Issue or Share Dividend Impairment of Equity Investment measured at
- The investee company distributes as fair Value
dividends, shares in the same class held by
shareholders - No longer tested for impairment
- An investor receiving a bonus issue records
the transaction by making a memorandum
entry Investments in Associates and Joint Ventures

A bonus issue in the form of another class of

share capital also termed as special bonus issue,
is treated similar to property dividends
The share received as bonus issue is recognized
at fair value with a credit to dividend income

To record the receipt of shares

Equity Investments xx
Dividend Revenue xx

Property Dividends
- When dividends are distributable in the form
of the investee’s non cash assets, the
investor records the asset received as
dividend revenue at the asset’s fair value

To record the receipt of dividends

Equity Investments xx
Dividend Revenue xx

Share Rights
Pre-emptive Right – enables them to maintain
their ownership interest in the corporation.
Share Warrant – evidences a shareholder’s
right

Upon exercise of rights, the new shares acquired shall

be measured at the fair value of these shares

Theoretical Fair Value of Share Rights

In the absence of fair value...

TFV = fair value of share ex rights – subscription

price/ number of rights needed to buy one share

Financial Statements presentation

FVPL – current asset

FVOCI – non-current asset
 above all hindi ko pinipigialng sumama ka.
Swear to God, alam ng Diyos nay un laang ang
dahilan ko.

Alam mo nandun man o wala, pumunta ka

nalang, Napapagod na din kase akong i-explain
sarili ko sayo, napapagod na akong ulit ulitin
sayo yung dahilan. Yung paulit ulit ko nalang
sinasabi na pano kung yung ex ko naman yung
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na maging magkaklase kami ni lem habang tayo.
Isipin mo kaya, kayanin mo kaya yon? Yung
lolokohin kami ni sir naldoza kahit meron na
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hindi maling nagalit ako kase aminin man natin
ang laking issue satin ng mga ex nay an diba. O
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mo kase for sure naman kahit pa sabihing okay
kayo ni lem ay may ilang dyan at sakit dahil sa
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respeto nalang din natin sa isa’t isa yon eh. Pero