INTERMEDIATE ACCOUNTING II

INVESTMENT IN
EQUITY SECURITIES

JAN PAULO P. SANTOS

Accounting Instructor
Department of Business Education
INVESTMENTS DEFINED

 Investments are assets held by the

entity for the accretion of wealth
through distribution such as interest,
royalties, dividends, and rentals, for
capital appreciation or for other
benefits to the investing entity such
as those obtained through trading
relationships
INVESTMENTS DEFINED

 PURPOSES OF INVESTMENTS

Investments are held for diverse reasons

such as:
1. For Accretion of wealth
2. For Capital Appreciation
3. For Ownership control
4. For Meeting business requirements
5. For Protection
FINANCIAL INSTRUMENTS

International Accounting Standards

(IAS) 32 Financial Instruments:

A Financial Instrument is any contract

that gives rise to a financial asset of
one entity and a financial liability or
equity instrument of another entity.
FINANCIAL INSTRUMENTS

3 characteristics:

1. It is a contract
2. 2 parties involved
3. Wherein one received financial
asset while the other received
financial liability or equity
instruments
FINANCIAL INSTRUMENTS
DEFINITION OF TERMS:

FINANCIAL ASSETS. A financial asset is

any asset that is :
a. Cash
b. A contractual right to receive cash or other
financial asset from another entity
c. A contractual right to exchange financial
instrument with another entity under
conditions that are potentially favorable
d. An equity instrument of another entity
FINANCIAL INSTRUMENTS
DEFINITION OF TERMS:

FINANCIAL LIABILITIES(DEBT
SECURITIES). is any security that
represents a creditor relationship with
an entity.

A debt security has a MATURITY DATE

and a MATURITY VALUE
FINANCIAL INSTRUMENTS
DEFINITION OF TERMS:

FINANCIAL LIABILITIES
Examples:
a. Corporate Bonds
b. BSP Treasury Bills
c. Government Securities
d. Commercial Papers
e. Preference Shares with Mandatory
Redemption Date or Redeemable at the
option of the holder
FINANCIAL INSTRUMENTS

DEFINITION OF TERMS:

EQUITY INSTRUMENTS(EQUITY
SECURITIES). Any instrument
representing ownership shares and
right, warrants, options to acquire
or dispose of ownership shares at a
fixed or determinable price.
FINANCIAL INSTRUMENTS
DEFINITION OF TERMS:

EQUITY INSTRUMENTS

In simple language, equity securities

represent an ownership interest in an entity-
ordinary shares, preference shares and rights
or options to acquire ownership shares.

The owners are legally known as

SHAREHOLDERS.
FINANCIAL INSTRUMENTS
DEFINITION OF TERMS:

EQUITY INSTRUMENTS

In simple language, equity securities

represent an ownership interest in an entity-
ordinary shares, preference shares and rights
or options to acquire ownership shares.

The owners are legally known as

SHAREHOLDERS.
ACCOUNTING FOR EQUITY INVESTMENTS

ACQUISITION OF EQUITY
INVESTMENTS

PFRS 9 provides that when financial

asset is recognized initially, an entity
shall measure it at fair value plus
transaction costs that are directly
attributable to the acquisition.
ACCOUNTING FOR EQUITY INVESTMENTS

ACQUISITION OF EQUITY
INVESTMENTS

The fair value is usually the

transaction price (fair value of
the consideration given)
ACCOUNTING FOR EQUITY INVESTMENTS

ACQUISITION OF EQUITY
INVESTMENTS

Acquisition by Exchange

Order of Priority:
a. Fair Value of the Asset Given
b. Fair Value of the Asset Received
c. Carrying Amount of the Asset Given
ACCOUNTING FOR EQUITY INVESTMENTS

DIVIDENDS

Dividends may be received from

investments in equity securities.
Such dividends may include the
following:
1. Cash Dividends. Dividends that
are receivable in cash
ACCOUNTING FOR EQUITY INVESTMENTS

DIVIDENDS

Such dividends may include the

following:
2. Property Dividends. Dividends that
are receivable in non-cash assets.
3. Share Dividends. Dividends that are
receivable in the form of the investee’s own
equity securities.
ACCOUNTING FOR EQUITY INVESTMENTS

DIVIDENDS

Such dividends may include the

following:
2. Property Dividends. Dividends that
are receivable in non-cash assets.
3. Share Dividends. Dividends that are
receivable in the form of the investee’s own
equity securities.
ACCOUNTING FOR EQUITY INVESTMENTS

Recognition of Dividend
Revenue

Only cash and property dividends

can be recognized as revenue .
Share dividends are not
recognized as dividend revenue.
ACCOUNTING FOR EQUITY INVESTMENTS

Recognition of Dividend Revenue

Dividends are recognized in profit or loss only
when:
a. The entity’s right to receive payment
of the dividend is established;
b. It is probable that the economic
benefits associated with the dividend
will flow to the entity;
c. The amount of the dividend can be
measured reliably.
ACCOUNTING FOR EQUITY INVESTMENTS

when are dividends considered

earned?

Dividends shall be recognized as

revenue when the shareholder’s right
to receive payment is established

Accordingly, the dividends shall be

recognized as revenue on the date of
declaration
ACCOUNTING FOR EQUITY INVESTMENTS

when are dividends considered

earned?
DATE of
DECLARATION
DIVIDENDS-ON. Purchase price
includes dividends
DATE of RECORD

EX-DIVIDEND. Purchase price

DATE of excludes dividends
DISTRIBUTION/
PAYMENT
ACCOUNTING FOR EQUITY INVESTMENTS

Measurement of dividends
1. Cash dividend. Recognized as
dividend revenue at the amount of
cash received
2. Property Dividend. Recognized
as dividend revenue at the fair value of
the non-cash assets received
determined as of the date of
Declaration
ACCOUNTING FOR EQUITY INVESTMENTS

Measurement of dividends

Share Dividend. Are not recognized

as revenue because no asset is
distributed.
The investor’s number of share are
increased because of the shares
distributed.
ACCOUNTING FOR EQUITY INVESTMENTS

Measurement of dividends

Share dividend received from financial

assets FVPL or FVOCI are recognized
with corresponding credit to unrealized
gain.
Liquidating Dividend. It represents a
return of capital, and therefore, are not
income. The payment may be in the
form of cash or non-cash assets.
ACCOUNTING FOR EQUITY INVESTMENTS

Share received in lieu of cash

dividends

it is recognize as 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 dividends
that would have been recognized.
ACCOUNTING FOR EQUITY INVESTMENTS

Cash received in lieu of share

dividends
the “as if” approach is followed. This
means that the share dividends are
assumed to be received and
subsequently sold at the cash received.
Therefore, there is no dividend revenue
to be recognized but gain or loss may
be recognized.
ACCOUNTING FOR EQUITY INVESTMENTS

Special Assessments
are additional capital
contribution of the
shareholders.
ACCOUNTING FOR EQUITY INVESTMENTS

Redemption of Shares
Preference shares may be
called in for redemption and
cancelation by the entity
issuing shares.
ACCOUNTING FOR EQUITY INVESTMENTS

Share right or Stock Right

it is a legal right granted to
shareholders to subscribe for new
shares issued by a corporation at a
specified price during a definite
period.
The IAS term for share right is
“right issue”
ACCOUNTING FOR EQUITY INVESTMENTS

Share right or Stock Right

two school of thought on the matter,
namely:
1.Share rights are accounted for
separately
2.Share right are not accounted for
separately
ACCOUNTING FOR EQUITY INVESTMENTS

Accounting for Stock Right

Stock rights are measured at fair value.

The accounting for stock rights depends on the

following important dates:

1. Date of Declaration. The date the

entity declares its intention to issue stock
rights to existing stockholders.
ACCOUNTING FOR EQUITY INVESTMENTS

Accounting for Stock Right

The accounting for stick rights depends on the
following important dates:

2. Date of Record. The last day of

registration in the entity’s stock and transfer
books. Only those registered as of this date
are entitled to receive stock rights.
3. Date of Issuance. The stock rights are
issued to the registered shareholders.
ACCOUNTING FOR EQUITY INVESTMENTS

Accounting for Stock Right

The accounting for stick rights depends on the
following important dates:

4. Exercise Period. The period over which

the holder can exercise the stock rights.
5. Date of Expiration. The last day the
stock rights can be exercised, after which the
stock rights are forfeited.
ACCOUNTING FOR EQUITY INVESTMENTS

Accounting for Stock Rights

DATE of
DECLARATION
RIGHTS-ON. Shares are sold
together with the stock rights
DATE of RECORD

EX-RIGHTS. Shares are sold

DATE of separately from the stock rights
ISSUANCE