Financial Instruments- Equity Instruments of Another Entity

Investment in equity securities- representing ownership interest in an equity ( eg. ordinary share or
preference share) or the right to acquire ownership interest (e.g. share options, share warrants, etc.)
This term however does not encompass callable or redeemable preference share, treasury share and
convertible bonds)

Classification of Equity Securities

Investment in Subsidiary- when the ownership interest is more than 50%

Investment in Associate- when the investor has a 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.

Other equity securities (Financial Instruments)- are investments in the investee’s equity without
controlling interest or significant influence. They are normally classified as:

Marketable- equity securities readily determinable market value (e.g. trading securities, and available
for sale securities)

Non-marketable-equity securities without readily determinable market value

Designation of Investment in Equity Securities (IFRS 9)

Investment security to profit or loss- these are equity securities that are required principally for the
purpose of generating a profit from short-term fluctuations in price or dealer’s margin

Investment in equity through other comprehensive income- are those that are not (a) loans and
receivables originated by the enterprise (b) financial assets for trading.

Equity investments where an investor has no significant influence over the operation of an investee
should be designated as investments in equity measured at fair value through profit or loss. However,
some equity instruments are purchased for strategic purposes and are not held with the primary
objective of realizing a profit from increases in the value of the instruments. An equity investment in an
investee company that is made for the purpose of cementing or establishing a long-term trading
relationship. IFRS 9 permits an entity, on initial recognition of equity investments that are not held for
trading, to make an irrevocable election to present changes in the fair value of those instruments in
other comprehensive income. However, dividends on such investments would be presented in profit or
loss to the extent that they are a return on, rather than a return of, investments. With these changes,
there would be no transfers from other comprehensive income to profit or loss (no recycling or
reclassification adjustments, and hence no impairment requirements. In other words, all fair value
changes, including impairment losses, would be dealt with in other comprehensive income and remain as
component of equity.

IFRS For SMEs Based Designation:

Investment security to profit or loss – these are equity securities that are acquired principally for the
purpose of generating a profit from short-term fluctuations in price or dealer’s margin.

Classification of investments depends on the percentage of the investee voting shares that is held by
the investor

Holdings of less than Holdings between 20 to Holdings of more than

20% 50% 50%
Level of influence Little or none Significant Control
Valuation method Fair value method Equity method Consolidation

The accounting and reporting for equity investments depend on the level of influence and type of
security involved:

Category Valuation Unrealized Gain or Loss Other Income Effects

Holding less than 20%: Dividends declared and
a) Trading Fair Value To profit or loss gain or loss from sale
b) Non-trading Fair Value To OCI Dividends declared
Holdings between 20% Equity Not recognized Proportionate share of
to 50% net income and gain or
loss from sale
Holdings of more than Consolidation Not recognized Not applicable
50%

Measurement at financial reporting date (Balance Sheet Date)

Fair Value to Profit or Loss (FVPL) – the instruments are remeasured at the current fair value
with the changes in the fair value being reported in the profit or loss in the statement of
comprehensive income.

Fair Value to Other Comprehensive Income- the instruments are being remeasured at the
current fair value with the changes in the fair value being reported in the other comprehensive
income of the statement of comprehensive income.

Acquisition of two or more securities at a lump sum price-

a. When both market values of the securities are known, the acquisition cost should be allocated
using their relative market value ratio.
b. When only one security has a known market value, the market value of the security with a
known market value be its assigned value and the excess amount of the acquisition cost over
the market value of the security with a known value will be the assigned value of the security
with-out a known value.
 c. When the market values of both securities are unknown, then the total acquisition cost will be
temporarily charge to the account “Investment in Financial Instrument” until such time the
market value of one or both securities are available.

Accounting for the dividends on equity (ordinary stock) instruments:

Cash dividend – is recognized as income on the date of declaration and measured at the dace amount of
dividend.

Property dividend – also a dividend income on the date of declaration but it should be measured at the
fair market value of the property.

Stock dividends – no amount of income is recognized. Only a memorandum entry is required to

acknowledge the receipt of new shares.

Shares in lieu of cash dividends – are recognized as income and measured at the fair market value of
the shares.

Cash in lieu of shares – not a dividend income, the cash received is the proceeds on the as if sale of
shares.

Preference share (new financial debt or equity instrument) dividend – not an income, allocate the
carrying value of the equity instrument to the new instrument (preference) and equity instrument
(ordinary share) using their relative market value ratio.

Shares received in exchange for old shares or stock splits (split-up or reverse split):
Only a memorandum entry us required to acknowledge to receipt of new shares in exchange for shares
originally held.
 Financial Instruments-Equity Instruments
1. Brooks Company purchased the following portfolio of equity instruments during 2018 and
reported the following balances at December 31, 2018. No sales occurred during 2018. All
declines are considered to be temporary.

Security Cost December 31, 2018

Market Value
X P800,000 P820,000
Y 1,400,000 1,500,000
Z 1,320,000 1,300,000
Income tax rate is 30%
Question 1: If the securities were designated as investment to profit or loss, how much should
Brooks Company report as unrealized gain or loss related to the securities in its 2018 statement
of comprehensive income?
a. None
b. P20,000 unrealized gain
c. P70,000 unrealized gain
d. P100,000 unrealized gain

Question 2: If the securities were designated as investment to other comprehensive income,

how much should Brooks Company report as unrealized gain or loss related to the securities in
the statement of comprehensive income?
a. None
b. P20,000 unrealized gain
c. P70,000 unrealized gain
d. P100,000 unrealized gain

Question 3: if Brooks Company is a medium-sized entity, what amount of unrealized gain or loss
should be reported in the statement of comprehensive income?
a. None
b. P20,000 unrealized gain
c. P70,000 unrealized gain
d. P100,000 unrealized gain

2. Morgan Company began business in October of 2017. During the year, Morgan purchased a
portfolio of securities listed below. In its December 31, 2017 balance sheet, Morgan
appropriately reported a P300,000 credit balance in its “Fair Value Adjustment-Equity Security”
account. The composition of the securities did not change during the year 2018. The current and
future tax rate is 32%. Pertinent data are as follows:
 Security Cost Market Value, December 31,
2018
P P2,400,000 P2,450,000
Q 2,500,000 2,550,000
R 1,900,000 2,000,000
P6,800,000 P7,000,000

Question 1: What amount of unrealized gain or loss on these securities should be disclosed in
Morgan’s profit or loss for the year ended December 31, 2018 assuming the securities were
designated as investment to profit or loss?
a. P200,000
b. P300,000
c. P340,000
d. P500,000

Question 2: What amount of unrealized gain or loss on these securities should be disclosed in
Morgan’s other comprehensive income for the year ended December 31, 2018 assuming the
securities were designated as investment at fair value to other comprehensive income?
a. P200,000
b. P300,000
c. P340,000
d. P500,000

Question 3: What amount of unrealized gain or loss on these securities should be disclosed in
Morgan’s shareholders’ equity as of the year ended December 31, 2018 assuming the securities
were designated as investment in at fair value to other comprehensive income?
a. P136,000
b. P200,000
c. P400,000
d. P500,000

3. Tower Company with an income tax rate of 32% for current and future years, reported the
following investment in long-term marketable equity securities investment to other
comprehensive incomes in its December 31, 2018, statement of financial position:

Investment in non-current equity securities, at P2,600,000

cost
Fair value adjustment (400,000)
Fair market value, December 31, 2018 P2,200,000
 Question 1: On December 31, 2019, the market value of the portfolio was P2,500,000. How
much should Tower report in its 2019 statement of comprehensive income as a result of the
increase in the increase in the market value of the investments in 2019?
a. P200,000
b. P204,000
c. P272,000
d. P300,000

Question 2: What amount of unrealized gain or loss should the company disclose in the
December 31, 2019 statement of financial position?
a. P68,000
b. P100,000
c. P272,000
d. P300,000
4. Guess Company purchased 50,000 shares (5% ownership) of Casio Company on January 15,
2018. Guess received a share dividend of 15% on March 31, 2018 when the market price of the
share is P40. On December 15, 2018 Guess received a cash dividend of P8 per share. In the
statement of comprehensive income for the year ended December 31, 2018, what amount
should Guess report as dividend income?
a. P60,000
b. P150,000
c. P400,000
d. P460,000
5. Comfort Company purchased 10,000 shares of Velvet ordinary shares at P90 share on January 3,
2018. On December 31, 2018 Comfort received 2,000 shares of Velvet ordinary shares in lieu of
cash dividend of P10 per share. On this date, the Velvet ordinary share has a quoted market
price of P60 per share.

In its 2018 statement of comprehensive income, Comfort should report dividend income at
a. P120,000
b. P100,000
c. P10,000
d. None

6. January 2, 2018 Tender Company acquired 16,000 shares of A Company ordinary shares at P50
per share. On July 1, 2018, the A Company shares were split 5 for 1. On October 1, 2018 Tender
Company received from A Company a preference share dividend of one share for every 10
ordinary shares held. On this date, the market price of A Company’s ordinary shares is P15 per
share and the preference shares is P10 per share. On December 31, 2018, A Company
 transferred to Tender Company its investment in B Company representing 5,000 ordinary shares
as dividend. The market price of B Company shares is P15 per share and its par value is P10 per
share. What is the amount of dividend income that should appear in December 31, 2018
financial statement of Tender Co.?
a. None
b. P50,000
c. P75,000
d. P90,000
7. On November 1, 2018, Ribbon Company invested P600,000 in equity securities representing
20,000 ordinary shares of Carbon Company. On December 31, 2018, this investment has a
market value of P580,000. On April 15, 2019, Ribbon Company sold the investment for
P630,000.

Question 1: What amount of realized gain should Ribbon Company recognized on the disposal of
the security assuming the security was classified as investment in profit or loss?
a. P20,000
b. P30,000
c. P40,000
d. P50,000

Question 2: What amount of realized gain should Ribbon Company disclosed in the profit or loss
as a result of the disposal assuming the security was classified as an investment at fair value to
other comprehensive income under the revised PFRS 9?

a. None
b. P30,000
c. P40,000
d. P50,000