INVESTMENT IN EQUITY SECURITIES

INVESTMENT IN EQUITY SECURITIES

Means

the acquisition of equity securities for the purpose of accruing income through dividends and increase in market value, or controlling another entity.

Equity securities represent ownership

shares such as ordinary shares, preference shares and other share capital. They may also represent rights

ACQUISITION OF EQUITY SECURITIES

PFRS 9: INITIALLY, the entity shall measure the

financial asset at FAIR VALUE PLUS TRANSACTION COSTS. The fair value is usually the TRANSACTION PRICE, meaning the fair value of the consideration given. As a rule, transaction costs directly attributable to the acquisition of the financial asset shall be capitalized as cost of the financial asset. Transaction costs directly attributable to the acquisition of the financial asset held for trading or thru profit or loss shall be expense

Investment Categories
Trading securities Financial assets at fair value

thru other comprehensive income Investment in associate Investment in subsidiary Investment in debt securities

CASH DIVIDENDS

Date of declaration
Date of record

Date of payment

Entry:
When the dividends are earned but not received:

DIVIDEND RECEIVABLE DIVIDEND INCOME

When the dividends earned are subsequently

received:
CASH DIVIDEND RECEIVABLE

WHEN TO RECOGNIZE DIVIDENDS AS INCOME

The

dividends shall be recognized as revenue on the DATE OF DECLARATION.

PROPERTY DIVIDENDS
Are dividends in the form of property or

non cash assets. It is also considered as INCOME and recorded at FAIR VALUE as follows:
NON CASH ASSETS DIVIDEND INCOME

LIQUIDATING DIVIDENDS
Represent return of invested capital. The

payment maybe in form of cash or non cash. Entry: CASH/ OTHER APPROPRIATE ACCOUNT INVESTMENT IN EQUITY SECURITIES

STOCK DIVIDENDS
Are in form of the issuing entitys

own shares. The IAS term for stock dividend is BONUS ISSUE. The stock dividends create only a change in the composition of the stockholders equity, that is, a transfer from retained earnings to share capital.

Accounting for stock dividends

Stock dividends of the same class are recorded

only by means of a memorandum entry on the part of the shareholder. for example: Received 2,000 shares representing 20% stock dividend on 10,000 original shares held. Shares now held, 12,000 shares.
Stock dividends do not affect the total cost of

the investment but reduce the cost of the investment per share.

Stock dividends different from those held

Stock dividends of different class are not

income. The original cost of investment is apportioned between the original shares and the stock dividends on the basis of the market value of each at the date of receipt For example, a shareholder owns 10,000 ordinary shares costing P 800,000. subsequently, the shareholder received 10% stock dividend in the form of preference share. The market value of

Shares received in lieu of cash dividend

When

cash dividends are declared and received, it is without doubt that they are INCOME. The shares received in lieu of cash dividends are INCOME AT FAIR VALUE of the shares received. In the absence of fair value of the shares received. The INCOME is equal to the cash that would have received. For example: a shareholder owns 10,000 shares costing 1,000,000. subsequently the shareholder receives 1,000 shares in lieu of cash dividend of

Cash received in lieu of stock dividends

When

stock dividends are declared and received, they are NOT INCOME. In this case the AS IF APPROACH is followed. This means that the stock dividends are assumed to be received and subsequently sold at the cash received. Therefore, a gain or loss may be recognized. For example: a shareholder owns 10,000 shares costing P 1,100,000. subsequently, the shareholder received P 150,000 cash in lieu of 1,000 shares originally declared as 10%

Share split
Share split may be split up or split down.

Split up- outstanding shares are called in and

replaced by a larger number, accompanied by a reduction in the par or stated value of each share. Split down- is the reverse of the split up. Whereby the outstanding shares are called in and replaced by smaller number, accompanied by an increase in the par or stated value. For example: if a stockholder owns 10,000 shares and the share is split down 5 for 1.

STOCK RIGHT
When a corporation issues additional or

new shares, shareholders of record are given the legal right to subscribe for the same before the new shares are offered for sale to the public. Stock right is known as right of preemption. The IAS term for stock right is RIGHT ISSUE. The purpose of the stock right is to give the shareholders the chance to preserve

Accounting for stock rights

Stock rights are accounted for separately Stock rights as a form of financial assets are measured initially at FAIR VALUE. A portion of the carrying amount of the original investment in equity securities is allocated to the stock rights at an amount equal to the fair value of the stock rights at the time of acquisition. Stock rights are not accounted separately Stock rights are recognized as embedded derivative but not a stand alone derivative. The stock right as an embedded derivative is not accounted for separately because the host contract investment in equity securities is a financial asset

 Receipt of the stock rights

STOCK RIGHTS INVESTMENT IN EQUITY SECURITIES Exercise of stock rights INVESTMENT IN EQUITY SECURITIES CASH STOCK RIGHTS
Sale of stock rights

CASH STOCK RIGHTS GAIN ON SALE OF STOCK RIGHTS Expiration of stock rights
LOSS ON STOCK RIGHTS STOCK RIGHTS

ILLUSTRATION
A shareholder acquired 10,000

shares costing 1,800,000. Subsequently, the shareholders received 10,000 stock rights to subscribe for new shares at P 100 per share for every five rights held. The market value of the share is 150 and the market

Theoretical or parity value of stock right

When the share is selling right on:

Market value of share right onsubscription price Number of rights to purchase one share plus 1
When share is selling ex-right:

Market value of share ex-right subscription price

EXERCISE 1
Zest Company holds shares of Abba Company as permanent investment as follows: January 2, 2010 2,000 shares @ 50 100,000 December 20, 2010 3,000 shares @ 66 198,000 Transactions for 2011 follow: July 15 Received cash dividend of 5 per share Dec. 15 Received 20% stock dividend Dec. 28 Sold 3,000 shares @ P 60 per share.

EXERCISE 2
Civil Company held 40,000 shares purchased for P 75 per share as non-current investment. The following transactions pertain to such investment in the chronological order. 1. Received stock rights to purchase one new share at P 80. two rights are required to acquire one share. The market value of the right at issuance date is P 10. 2. Exercised 30,000 rights 3. Sold 6,000 rights at 12 per right

INVESTMENT IN ASSOCIATE

IAS 28 Objective and Scope

Accounting requirements for investments in

associates unless entity is preparing separate financial statements under IAS 27 Associates
an entity over which an investor has significant

influence, but which is not a subsidiary or an interest in a joint venture may be an unincorporated organization such as a partnership
Exclusions from complying with IFRS: investments in associates held by venture capital organizations, mutual funds, unit trusts, similar

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IAS 28 Objective and Scope

Significant Influence power to take part in the financial and operating policy decisions of the investee but not to the extent of having control or joint control usually when holding, directly or indirectly, 20% to 50% of the voting power of another entity equity method of accounting required for investments in associates Control a higher level of power exists when an investor can govern the financial and operating policies of an investee and through this

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IAS 28 Objective and Scope

Significant influence over strategic decisions of

another entity without control:

(a) through representation on its board or governing body (b) participation in policy-making including decisions about distributions (c) entering into significant inter-company transactions (d) exchanging managerial personnel (e) providing necessary technical information
Changes in significant influence lost when an entity no longer has the power to participate in the financial and operating decisions of the investee

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IAS 28 Objective and Scope

Equity Method of accounting for investments
investment originally recognized at cost
adjusted after acquisition for the investors share of the post-acquisition

changes in the investees book value or net assets

investors share of investees profit or loss is recognized in the profit

or loss of the investor distributions from the investee reduce the carrying amount of the investment

Benefits of the equity method

better information in the statement of comprehensive income about

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the investors (and associates) performance than recognizing the dividend received if investor exercises influence that is beneficial to the investee, it recognizes the positive effect on the investees profit in its own profit

IAS 28 Application of the Equity Method

Exceptions to applying the equity method for investments in associates
1. the investment is classified as held for sale 2. the investors parent company is exempt from preparing consolidated financial statements 3. the investor itself meets all the same criteria in 2 above that exempt a parent from preparing consolidated statements

The equity method is often called one-line consolidation procedures are similar to those used to account for acquisition of a subsidiary and for subsequent consolidation procedures in IAS 27 28 both methods are concerned with accounting for the investments

IAS 28 Application of the Equity Method

At Acquisition
investor prepares an analysis of the purchase cost

investor identifies any difference between the investors cost and its

share of the fair value of the associates identifiable net assets at acquisition as goodwill

Goodwill
not recognized separately from the investment itself represents a portion of the investments carrying amount is not amortized if negative, is recognized in the investors profit or loss in the year of

acquisition

Associate's Fair Value Differences

difference between fair values and carrying amounts on the investees

books
explains another portion of the purchase cost of the investment
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investors share of these differences are amortized as the underlying

IAS 28 Application of the Equity Method

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IAS 28 Application of the Equity Method

After Acquisition
As associate earns a profit -- its net assets increase
the investor recognizes its share of the profit and increases the carrying

amount of the investment for its share of the increase in the associates net assets

Fair value differences

not recognized in the associates records

not amortized in the profit or loss that the associate reports

are amortized by the investor as they are included in the investment

account balance usually has the effect of reducing the investment income reported
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IAS 28 Application of the Equity Method

Dividends as associate declares/pays dividends, its net assets decrease investor recognizes its share of the reduction as the dividend is received This entry reflects the conversion of the investment into

cash by the investor

Adjustments needed each period

elimination of profits and losses on intercompany transactions between

the investor and the associate for upstream (associate to investor) and downstream (investor to associate) transactions the investors share of any unrealized profits and losses are 32 eliminated with adjustments to the investment and the investment

IAS 28 Application of the Equity Method

Other Adjustments investor adjusts investment account and its OCI or other equity account for its share of associates OCI and changes in other equity accounts investors share of associates losses is more than the carrying amount of the investment continue to recognize losses and resulting liability to extent investor has legal or constructive obligations to make payments on behalf of associate Other Issues associates accounting policies are required to be the same as those of the investor, otherwise they are conformed before its financial statements are used in the equity method associates financials must be dated no more than three months from the investors reporting date, adjusted for significant transactions and

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IAS 28 Application of the Equity Method

Impairment Losses investment account reduced by investors share of losses reported by associate investor applies IAS 39 to determine whether an impairment loss carrying amount of investment as a whole is compared with its recoverable amount
the higher of value in use and fair value less selling

costs
impairment loss is not allocated to specific assets

underlying the investment investment tested for impairment as a single asset 34 impairment loss may be reversed in the future

IAS 28 Application of the Equity Method

Loss of Significant Influence
When investor ceases to have significant influence over

an associate Unless associate becomes a subsidiary or joint venture, the investment is accounted for under IAS 39
investment that remains is remeasured at its fair value proceeds on disposal are recognized difference between total of these two amounts and carrying value

of investment when significant influence is lost is recognized in profit or loss

Amounts remaining in entitys OCI attributable to the

associate
account for as if associate had disposed of the related
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assets/liabilities

IAS 28 Disclosure
Investments in associates under equity method

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reported as non-current assets Disclose (a) carrying amount of investments (b) investors share of profit or loss for the period (c) investors share of any discontinued operations of associates, report separately in discontinued operations (d) investors share of changes recognized in OCI by associate, report in OCI (e) information about any related contingent

IAS 28 Disclosure
Other information required info that provides reader with a better

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understanding of circumstances and financial position of associates Examples summarized financial information about associates reasons supporting use of equity method with holdings of < 20% reasons why any associates not accounted for using equity method

Exercise 1
Poor Company acquired a 30% interest in Rich Company for P 5,000,000 on October 1, 2011. This cost exceeds the underling net assets of the investee by 1,000,000 which is attributed to an undervalued depreciable asset by the investee with useful life of five years. Rich Company reported the following for 2011 and 2012. 2011 2012 NET INCOME 4,000,000 6,000,000 DIVIDENDS 3,000,000 5,000,000

Required: Prepare journal entries

Exercise 2
On January 1, 2011, Haven Company acquired 20% of the ordinary shares of an associate for P 6,000,000. On this date, all the identifiable assets and liabilities of the associate were recorded at fair value. The net income and dividend of the associate for 2011 and 2012 were as follows: 2011 2012 NET INCOME 3,000,000 4,000,000 DIVIDENDS 1,000,000 1,500,000 REQUIRED: 1. Determine the investors share in net income for 2011. 2. Determine the investors share in net income for 2012. 3. Prepare all journal entries 4. Determine the carrying value of the investment in associate in 2011 and 2012.

INVESTMENT PROPERTY

INVESTMENT PROPERTY
Is defined as property held by an owner or by

the lessee under the finance lease to EARN RENTALS or for CAPITAL APPRECIATION or both. Only LAND AND BUILDING can qualify as INVESTMENT PROPERTY. An equipment or any movable property cannot qualify as investment property. An investment property is NOT HELD: For use in the production or supply of goods or services or for administrative purposes.

Examples of investment property

a. Land held for long term capital b. c.

d. e.

appreciation Land held for undetermined use. Building owned by the entity, held by the entity under the finance lease and leased out under the operating lease Building that is vacant but is held to be leased out under the operating lease Property that is being constructed or developed for future use as investment

INITIAL MEASUREMENT
Investment property shall be measured initially AT

COST The cost of purchased investment property comprises its PURCHASE PRICE AND ANY DIRECTLY ATTRIBUTABLE EXPENDITURE. Directly attributable expenditure includes: professional fees for legal services, property transfer taxes and other transaction costs. The cost of a self-constructed investment property is its COST at the date when the construction or development is complete. If payment for an investment is deferred, its cost is the CASH PRICE EQUIVALENT.

SUBSEQUENT MEASUREMENT
An entity shall choose either of the following models: FAIR VALUE MODEL- the investment property is carried at FAIR VALUE. Any changes in fair value are included in the net income or loss of the period in which they arise and shown in the income statement. COST MODEL- the investment property is carried at COST LESS ANY ACCUMULATED DEPRECIATION AND ANY ACCUMULATED IMPAIRMENT LOSSES. Fair value of the investment property shall be disclosed. When a property interest held by a lessee

ILLUSTRATION
An entity ventured into construction of a mega shopping mall in South Asia which is rated as the largest shopping mall of Asia. The entitys board of directors decided that instead of selling the shopping mall to a local investor, the entity would hold this property for purposes of earnings rental by letting out space in the shopping mall to tenants. The construction of the shopping mall was completed and the property was placed in service on January 1, 2011. The cost of the construction of the shopping mall was P 100,000,000.00. The useful life of the shopping mall is 10 years and its residual value is P 10,000,000. An independent valuation expert provided the following fair value at each subsequent year-end: 2011

Exercise 1
Galore Company ventured into construction of condominium in Makati which is rated as the largest stateof-the-art structure. The entitys board of directors decided that instead of selling the units, the entity would hold this property for purposes of earning rentals by letting out space to business executives in the area. The construction of the unit was completed and the property was placed in service on January 1, 2011. The cost of the construction was 50,000,000. The useful life of the unit is 25 years and its residual value is 5,000,000. An independent valuation expert provided the following fair value at each subsequent year-end: 2011 55,000,000; 2012 53,000,000; 2013 60,000,000.