INVESTMENT IN EQUITY SECURITIES
By: Mhelka J. Tiodianco
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
Ordinary Shares
Other Share Capital
Preference Shares
Equity securities
To acquire
OWNERSHIP
SHARES
SHAREHOLDERS
Rights
Options
SHARE
Ownership interest or
Right of a shareholder in
an entity.
Share in earnings
Election of Directors
SHARE
CERTIFICATE
Subscription of additional
shares
Share in net assets upon
liquidation
Acquisition
of equity
securities
The Application Guidance of PFRS 9, provides
that when a financial asset is recognized liability,
an entity shall measure it at fair value plus
transaction costs that are directly attributable to
the acquisition.
“The fair value is usually the transaction price,
meaning, the fair value of the consideration
given.”
As a rule, transaction costs that are directly
attributable to the acquisition of the financial
asset shall be capitalized as cost of the financial
asset.
However, transaction costs directly attributable
to the acquisition of financial asset held for
trading or financial asset at fair value through
profit or loss shall be expensed immediately.
Acquisition by Exchange
If the equity securities are
acquired in an exchange,
the acquisition cost is
determined by reference to
the following in the order of
priority.
Fair value of the asset
given
Fair value of the asset
received
Carrying amount of the
asset given
Lump sum
Acquisition
If only one security has a
known market value, an
amount is allocated to the
security with a known market
value equal to its market
value.
If two or more equity securities
are acquired at a single cost or
lump sum, the single cost is
allocated to the securities
acquired on the basis of their fair
value.
The remainder of the single cost
is then allocated to the other
security with no known market
value.
Investment
Categories
Investments in equity securities are
accounted for as one of the following
categories:
a.Trading securities or financial assets at fair
value through profit or loss
b. Financial assets at fair value through other
comprehensive income
c. Investment in associate
d. Investment in subsidiary
e. Investment in unquoted equity instrument
Investment in
unquoted equity
instruments
Under the Application Guidance
B5.4.14 of PFRS 9, all investments in
equity
instruments
must
be
measured at fair value.
However, investments in unquoted
equity instruments are measured at
cost if the fair value cannot be
measured reliably.
Sale of
equity
securities
PFRS 9, paragraph 3.2.12, provides that on
derecognition of financial asset measured at
fair value through profit or loss, the
difference between the consideration
received and the carrying amount of the
financial asset shall be recognized in profit
or loss.
When equity securities are of the
same class acquired on different
dates at different costs, a problem
will arise as to the determination of
cost of securities sold when only a
portion of this securities is
subsequently sold.
In such case, the entity
shall determine the cost of
the securities sold using
either the FIFO or average
cost approach.
Cash
Dividends
If the equity securities are measured at fair
value through profit or loss, or at fair value
through other comprehensive income or at
cost, dividends earned are considered as
income.
a. When the cash dividends are earned but not received:
Dividends receivable
xx
Dividend income
xx
#
b. When the cash dividends are subsequently received:
Cash
xx
Dividend receivable
#
The Cash Dividends do not affect investment
xx
When are dividends
considered earned?
Date of declaration
This is the date on which the
payment of dividends is approved
by the Board of Directors.
Date of payment
This is the date on which the
dividends declared shall be paid.
Date of record
This is the date on which the stock and
transfer book of the corporation is
closed for registration.
Between the date of declaration and the record date, the
shares are selling “dividend-on”
This means that when shares are sold after the date of
declaration but prior to record date, they carry with them
the right to receive dividends.
Between the date of record and the date of payment, the
shares are selling “ex-dividend”
This means that the shares can be sold, and still the
original shareholder has the right to receive the dividends
on payment date.
Example of Formal
dividend Declaration
“The Board of Directors at their meeting on
November 15, 2015, declared an annual
dividend on ordinary share of P5, payable on
January 30, 2016, to shareholders of record
at the close of business on January 15, 2016.”
Date of declaration – November 15, 2015
Date of record
– January 15, 2016
Date of payment
– January 30, 2016
When to
recognize
dividends as
income?
Only the remainder of the
sale price should be used
as basis for determining
gain or loss on the sale of
the investment.
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.
The reason is that when dividends are declared, the
shareholder has already acquired the right thereto so
much so that if the shares are subsequently sold, the
sale price normally includes the accrued dividends.
Once a dividend has been declared, a legal liability
binding on the corporation is created.
When shares are sold “dividend-on” and the dividend
accrued is specifically included in the sale price, that
portion of the sale price pertaining to the accrued
dividend should be credited to dividend income.
Property
dividends
Property dividends
or dividends in
kind are dividends
in the form of
property or
noncash assets.
Property dividends are also considered as income and
recorded at fair value.
Noncash assets
xx
Dividend income
xx
Liquidating
dividends
Liquidating dividends
represent return of
invested capital, and
therefore, are not
income. The payment
may be in the form of
cash or noncash
assets.
The liquidating dividend is recognized as follows:
Cash or other appropriate amount xx
Investment in equity securities
xx
Problem 23-4
Acclaim Company purchased shares of another entity as permanent
investment.
January 2, 2015
2,000 shares at 50
100,000
December 20, 2015
3,000 shares at 66
198,000
The transactions for 2016 are as follows:
July 15 Received cash dividend of P5 per share.
Dec. 15 Received 20% stock dividend.
28 Sold 3,000 shares at P60 per share. Use FIFO approach.
Shares
Cost per share
Total cost
Original shares 2,000
50
July 15 Cash
25,000
3,000
66
Dividend Income (5,000xP5)
Dec. 28 Cash (3,000x60)
180,000
Stock dividend
1,000
Investment in equity securities
New shares
6,000
49.67
Gain on sale of investment
100,000
198,000
25,000
133,000
298,000
47,000
3,000 sharesx20%=600/3,600 x 198,000
33,000
133,000
Dec. 15 Memo-Received 1,000 shares representing 20% stock dividend
2,000 sharesx20%=400
+ 2,000
X 100,000
on 5,000 original
shares
held. Shares now100,000
held, 6,000 shares.
Problem 32-2
Accessible Company
Accessible Company purchased for a lump sum of P3,075,000
the following long-term instruments.
A Corporation share capital
8,000 shares
B Corporation share capital
16,000 shares
C Corporation bond
P 1,000,000 face value
At the time of Purchase, the securities were quoted at the following
prices:
A share, P100
B share, 150
C bond, 90
Required:
Prepare Journal Entry to record the lump sum acquisition with proper
allocation of the single cost.
Problem 32-2
Accessible Company
Market Value
Fraction
Allocated cost
800,000
8/41
600,000
2,400,000
24/41
1,800,000
900,000
9/41
675,000
A (8,000x 100)
B (16,000 x 150)
C (1,000,000 x 90%)
4,100,000
Investment in A shares
Investment in B shares
Investment in C shares
Cash
3,075,000
600,000
1,800,000
675,000
3,075,000
Problem 23-5
1. Distraught Company acquired 40,000 ordinary shares of Aye Company at P50 per
share.
Investment in Aye Company shares (40,000 x 50)
Cash
2,000,000
2,000,000
Market Value
Fraction
Cost
2. The Aye Company shares are exchanged in a 5-for-1 split.
Ordinary Shares (200,000 x 15)
3,000,000
30/32
1,875,000
Preference Shares (20,000 x 10)
200,000
2/32
125,000
Memo- Received 200,000 Aye Ordinary3,200,000
shares as a result of 5 for 1 split of 40,000
2,000,000
original shares.
3. Received a preference share dividend of 1 share for every 10 ordinary shares held.
Ordinary shares is selling ex-dividend at 15 and preference share is selling at 10
Investment in Aye preference shares
125,000
Dividend income (200,000/4 = 50,000 x 6)
125,000
Problem 23-5
4. Received a dividend in kind of 1 ordinary share of Bee Company, market price, P6,
for every four Aye ordinary shares held.
Investment in Bee Ordinary shares
Dividend Income (200,000/4 = 50,000 x 6)
300,000
300,000
Sold 80,000 ordinary shares of Aye Company at P15 per share.
Cash (80,000 x 15)
1,200,000
Investment in Aye Ordinary shares (80,000/200,000 x 1,875,000) 750,000
Gain on sale of investment
450,000
Problem 23 - 21
Maxim Company acquired 40,000 ordinary shares on
October 1 for P6,600,000 to be held for trading. On
November 30, the investee distributed a 10% ordinary stock
dividend when the market price of the share was P250. On
December 31, the entity sold 4,000 shares for P1,000,000.
What amount should be reported as gain on sale of
investment in the current year?
a.) 340,000
b.) 400,000
c.) 500,000
d.) 600,000
Problem 23 - 21
Original shares on October 1
40,000
Stock dividend on November 30 (10%)
Total Shares
Shares sold on December 31
Balance
4,000
44,000
( 4,000)
40,000
Sales price
1,000,000
Cost of shares sold (4,000/44,000*6,600,000) (600,000)
Gain on sale
400,000
Problem 23 - 22
Presumptuous Company revealed the following information pertaining
to dividends from nontrading investments in ordinary shares during
the year ended December 31, 2015:
• The entity owned a 10% interest in Beal Company, which declared a
cash dividend of P500,000 on November 30, 2015 to shareholders of
record on December 31, 2015 and payable on January 15, 2016.
• On October 15, 2015, the entity received a liquidating dividend of
P100,000 from Clay Mining Company.
What amount of dividend income should be reported for the current
year?
a.) 500,000
b.) 600,000
c.) 150,000
d.) 50,000
Cash Dividend
500,000
x 10%
Dividend Income 50,000 (D.)