Equity Investment 16

Thursday, June 11, 2020 7:56 PM

Acquisition of Equity Investments

PFRS 9 - initial recognition of financial asset → Fair Value + Transaction Cost
Transaction Cost of Financial Assets → Capitalized
Transaction Cost of Financial Asset held for trading or FVTPL → Expensed

Acquisition by Exchange
Acquisition cost is determined by order of priority:
1. Fair Value of asset given
2. Fair Value of asset received
3. Carrying amount/Book value of asset given

Lump Sum Acquisition

2 or more equity security acquired at single cost or lump sum → Fair Value
If only one has known market value:
Security with known value → Market Value
Security without known value → Remainder of the Single Cost

Investment Categories:
1. Trading securities or FA at FVTPL
2. FA at FVOCI
3. Investment in Associate
4. Investment in Subsidiary
5. Investment in Unquoted Equity Instruments

Investment in Unquoted Equity Instruments

Measured at Fair Value
If Fair value cannot be measured reliably → Cost

Sale of Equity Shares

Derecognition of FA at FVTPL - difference between consideration received and carrying amount
→ recognized in Profit or Loss
Sale of portion of ES of the same class acquired on diff. dates & costs → FIFO or Average Cost
Approach

Cash Dividends
ES at FVTPL or FVOCI - Dividends → Income
Journal Entries
a. Earned but not received
Dividends receivable XX
Dividend income XX

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 Dividend income XX
b. Subsequently received
Cash XX
Dividend receivable XX
*Cash dividends do not affect investment account

When are Dividends considered earned?

a. Date of declaration - payment of dividends are approved by BOD
b. Date of record - stock and transfer book is closed for registration
c. Date of payment - dividends are paid
• Dividend on - between declaration & record, shares sold carry the right to receive
dividends
• Ex-Dividend - between record & payment, shares can be sold, but original shareholder has
the right to receive dividends

Formal Dividend Declaration

"The Board of Directors at their meeting on November 15, 2020, declared an annual dividend on
ordinary share of ₱5, payable on January 30, 2021, to shareholders of record at the close of
business on January 15, 2021."
Date of Declaration November 15, 2020
Date of Record January 15, 2021
Date of Payment January 30, 2021

When to Recognize Dividends as Income

Dividends shall be recognized as revenue when the shareholder's right to receive payment is
established. Date of Record
When Sold Dividend-on:
• Sale price include accrued dividends
• Accrued dividends portion of sale price - Credited to Dividend Income
• Only the remainder should be used as basis for - Gain or Loss of the Investment
Example:
1,000 shares costing ₱100,000 w/ dividend declaration of ₱5 per share or ₱5,000 was sold
dividend-on for ₱150,000 which includes dividend of ₱5,000.
Journal Entry to record Sale

Cash 150,000
Investment in shares 100,000
Dividend income 5,000
Gain on sale of investment 45,000

Property Dividends
Dividends in form of property or noncash assets.
Income - Fair Value
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Income - Fair Value
Journal Entry

Noncash assets xx
Dividend income xx
Example:
1. Shares of another entity
Shareholder A receives 500 shares with a market value of ₱ 100 per share of Y company as
dividend from X Company.
Journal Entry:
Investment in shares (500 x 100) 50,000
Dividend income 50,000
2. Merchandise as Property dividends
Journal Entry:
Merchandise Inventory xx
Dividend income xx

Liquidating Dividends
Return of invested capital in form of cash or noncash
Paid when company is dissolved or liquidated
Not Income
Journal Entry:
Cash or other appropriate account xx
Investment in shares xx
In terms of wasting asset corporation or mining entity may pay liquidating dividends before
dissolution or liquidation.
Partly Income, Partly Return of Capital
Example:
Shareholder receives a ₱100,000 dividend, designated as income ₱60,000 and liquidating ₱40,00.
Journal Entry:
Cash or other appropriate account xx
Investment in shares xx
• When liquidating dividends exceed cost of investment, difference is credited to gain on
investment
• When liquidation is completed and carrying amount of investment is not fully recovered,
balance is written off as loss

Share Dividends or Stock Dividends

Form of the issuing entity's own share
IAS term "Bonus Issue"
Share of another entity declared as dividends are not Share Dividends - Property Dividends
Not Income
Asset of the company are the same before and after share dividends
Shareholder receives additional shares but still has the same equity interest

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Shareholder receives additional shares but still has the same equity interest
More shares but at reduced Market value

Share Dividends of Same Class

Not Income - Memorandum Entry
Do not affect the total cost of investment but reduce cost per share
Memorandum Entry:
"Received 2,000 shares representing 20% share dividend on 10,000 original shares held. Shares
now held, 12,000 shares."
Example:
Share holder owns 10,000 shares costing ₱120 each or a Total cost of ₱1,200,00.
Effect of share Dividend:

Shares Cost per share Total cost

Original shares 10,000 120 1,200,000
Share dividends 2,000 - -
12,000 100 1,200,00

Share Dividends Different from those Held

Not Income
Memorandum
Original cost is apportioned between original shares and share dividends on the basis of Market
value of each at date of receipt
Example:
Share holder owns 10,000 ordinary shares costing ₱800,000, receives 10% share dividend in form
of Preference share. Ordinary share has market value of ₱150 and preference is ₱100.
Effect of share Dividend:

Market Value Fraction Allocated Cost

Ordinary shares 1,500,00 15/16 750,000

(10,000 x 150)
Preference shares 100,000 1/16 50,000
(1,000 x 100)
1,600,000 800,00

• Fractions are developed from market value multiplied by original cost of ₱800,000 to arrive
at the allocated cost.
Journal Entry:
Investment in preference shares 50,000
Investment in ordinary shares 50,000

Shares received in Lieu of Cash Dividends

Income - Fair Value of Shares Received
In the absence of Fair Value - Income is equal to cash dividends that would have been received.

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In the absence of Fair Value - Income is equal to cash dividends that would have been received.

Cash received in Lieu of Share Dividends

a. As if Approach
Share dividends are assumed to be received and sold at cash received
Gain or Loss in recognized
Followed in Financial accounting
Example:
Share holder owns 10,000 shares costing ₱1,100,000 and receives ₱150,000 cash in lieu of
1,000 shares originally declared as 10% share dividend
• ₱1,100,000 now applies on 11,000 share, the cost per share is now ₱100
Journal Entry:
Cash 150,000
Investment in shares 100,000
(1,000 x 100)
Gain on Investment 50,000

a. BIR Approach (Disregard)

All cash received whether originally designated as share or cash dividends is recognized
as Income
Journal Entry:
Cash xx
Dividend Income xx

Share Split
Change in the number of shares without capitalizing retained earnings or changing the amount of
legal capital
Does not affect total cost of investment
Memorandum Entry
a. Split up
Outstanding shares are called in and replaced by larger number, reduction in the par or
stated value of each share
Example:
Shareholder owns 10,000 share and the share is split up 5-for-1, the shareholder receives 50,000
new shares in exchange for the 10,000 original shares
b. Split down
Outstanding shares are called in and replaced by smaller number, increase in par or stated
value
Example:
Shareholder owns 10,000 share and the share is split down 5-for-1, the shareholder receives
2,000 new shares in exchange for the 10,000 original shares
Memorandum Entry Example:
"Received 20,000 new shares as a result of a 2-for-1 split of 10,000 original shares."

Special Assessments
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Special Assessments
Additional capital contribution of shareholders
On part of shareholders, the payment is recorded as additional cost of investment
Example:
Shareholder owns 10,000 shares costing ₱500,000, directors pass a resolution for shareholders to
contribute ₱5 for each share held.
Journal Entry - Shareholder:
Investment in shares (10,000 x 5) 50,000
Cash 50,000

Redemption of Shares
Shares especially Preference can be called for redemption and cancelation by issuing entity
On part of shareholder redemption is recorded in a manner as sale of share
Journal Entry - Shareholder:
Investment in preference shares xx
Cash xx
Gain on investment (if there is) xx

Share Right or Stock Right or Preemptive Right

Legal right granted to shareholders to subscribe for new shares at specified price during definite
period.
Financial Asset - Equity Instrument
Fair Value - Initial Measurement
IAS term "Right Issue"
One right for every share owned
Purpose is to give shareholders chance to preserve their equity interest
Ownership of share right is evidenced by instrument - Share warrants

SR Accounted for Separately

Portion of the carrying amount of the original investment is allocated to share rights at amount
equal to fair value of share right at time of acquisition.
When share right is issued shareholder becomes owner of 2 financial assets
Rights accounted separately are Current Assets - Journal

Not Accounted for Separately

Share rights recognized as - Embedded Derivative - Not stand alone - Memo
PFRS 9 - if the host contract is a financial asset and measured at FVTPL, embedded derivative is
not separated

Formal Announcement of Share Right

"The Board of Directors in their meeting on December 15, 2020 approved to issue share right to
the shareholders of record on January 15, 2021, entitling the shareholders to acquire one share at
₱100 par for every five shares held, the right to expire on March 31, 2021."
Date of Declaration - issuance of share right is approved by BOD - December 15, 2020
Date of Record - stock and transfer book is closed for registration - issue share warrant - January
15, 2021
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15, 2021
Expiration Date - date up to which share right shall be exercised - March 31, 2021
a. Right on - between date of declaration and record - share and right are treated as one -
share cannot be sold w/o selling right or vice versa
Difference between sale price and carrying amount - Gain or Loss of Investment
Example:
Shareholder owns 5,000 shares costing ₱500,000, receive notice of share rights to subscribe for
1,000 shares at par value of ₱100 per share, sol investment for 750,000
Journal Entry:
Cash 750,000
Investment in shares 500,000
Gain on Investment 250,000
a. Ex-right - on or after Record date - share can be sold separate for right

Example - Accounted for Separately:

Shareholder acquires 10,000 shares costing ₱1,800,000, subsequently received 10,000 share
rights for new shares at ₱100 per share for every five rights held. Market value of share is 150
and Market value of right is 10
Journal Entry - Original Investment
Investment in shares 1,800,000
Cash 1,800,000
Journal Entry - Receipt of Share right
Share Rights 100,000
Investment in shares 100,000

Exercise of Share Right

Cost of new investment includes - Subscription price and cost of share rights
Journal Entry
Investment in shares xx
Cash xx
Share rights xx

Sale of Share Right

Sold independently of the original investment
Journal Entry
Cash xx
Share rights xx
Gain on sale of share rights xx

Expiration of Share Right

Rights not exercised up to certain date become worthless
Journal Entry
Loss on share rights xx
Share rights xx

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Theoretical or Parity Value of Share Right
Assumed fair value of right
Used when share right don't have market value
a. Selling Right on

b. Selling Ex-right

Example - Right-on:
Shareholder acquired 10,000 shares costing ₱2,500,000, share right for new shares at ₱150 per
share for every five rights held, Market value of share is ₱210 per share. The right has no known
value. Right-on

Allocation of Cost
Cost of original investment 2,500,000
Theoretical value (10 x 10,000) 100,000
Remaining cost of Original Investment 2,400,000
• Note that ₱210 market value, since it is right on it includes value of right ₱10, Therefor Ex-
right Market value is ₱200
Example - Ex-right:
Market value of share is ₱210 Ex-right

Allocation of Cost
Cost of original investment 2,500,000
Theoretical value (10 x 10,000) 120,000
Remaining cost of Original Investment 2,380,000
Example - Not Accounted for Separately:
Shareholder acquired 10,000 shares for ₱1,500,000, received 10,000 share rights for new shares
at ₱100 per share for every five rights held. Market value of share is ₱140 and market value of
right is ₱10. Share rights are exercised by shareholder
Journal Entries:
a. To record Original Investment
Investment in shares 1,500,000
Cash 1,500,000

b. To record Receipt of share rights:

Memo entry - Received 10,000 share rights to subscribe for new shares at ₱100 per share
for every five rights held, or a total of 2,000 new shares.

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 for every five rights held, or a total of 2,000 new shares.

c. To record exercise of rights:

Investment in shares 200,000
Cash 200,000

d. If sold for ₱ 150,000 - NO GAIN OR LOSS RECOGNIZED

Cash 150,000
Investment in shares 150,000

e. If expired - Memo only

f. Subsequent transaction affecting shares - FIFO or Average Method

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