FINANCIAL ACCOUNTING AND REPORTING
Investment in Equity Securities
Investments
These are assets not directly identified
with the operating activities of an entity and
occupy only an auxiliary relationship to the central
revenue producing activities of the entity.
Purposes of Investments
1. Accretion of wealth – e.g., interest,
dividends, royalties, rentals, etc.
2. Capital appreciation – e.g., land, real
estate, gold, diamonds, etc.
3. Ownership control – e.g., investments in
subsidiaries and associates
4. Meeting business requirements – e.g.,
sinking fund, preference share redemption
fund, plant expansion fund, etc.
5. Protection – e.g., cash surrender value
Classification of Investments
1. Current asset – if investments are readily
realizable and are intended to be held for
not more than one (1) year.
2. Noncurrent asset – if investments are
intended to be held for more than one (1)
year or are not expected to be realized
within twelve (12) months after the end of
the reporting period.
Financial Instrument
It is any contract that gives rise to a
financial asset of one entity and a financial liability
or an equity instrument of another entity.
Financial Asset
It is any asset that is:
1. Cash;
2. A contractual right to receive cash or
another financial asset from another entity
(e.g., trade accounts receivable, notes
receivable, loans receivable, bonds
receivable, etc.);
3. A contractual right to exchange financial
instrument with another entity under
conditions that are potentially favorable
(e.g., option held by the holder to purchase
shares of another entity at less than
market price); or
4. An equity instrument of another entity
(e.g., trading securities).
Items Not Considered Financial Assets
1. Intangible assets
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2. Physical assets – inventory and property,
plant and equipment
3. Prepaid expenses
4. Leased assets
Equity Security
It refers to any instrument representing
ownership shares and right, warrants or options
to acquire or dispose of ownership shares at a
fixed or determinable price (e.g., ordinary shares,
preference shares, etc.).
Debt Security
It refers to any security that represents a
creditor relationship with an entity (e.g., corporate
bonds, BSP treasury bills, etc.).
Classification of Financial Assets
5. Those held at fair value through profit or
loss (FVPL) – equity and debt instruments
6. Those held at fair value through other
comprehensive income (FVOCI) – equity
and debt instruments
7. Those held at amortized cost – debt
instruments only
Measurement of Equity Investments
1. At fair value through profit or loss
• Those held for trading (i.e., trading
securities)
• Those not held for trading
• All other investments in quoted equity
instruments
2. At fair value through other comprehensive
income
• Those not held for trading but
irrevocably elected to be measured at
FVOCI
3. At cost
• Investment in unquoted equity
instruments
4. Under equity method of accounting
• Investment of 20% to 50% interest
against investee
5. Under consolidation method
• Investment of more than 50% interest
against investee
Fair Value of an Asset
It is the price that would be received to sell
an asset in an orderly transaction between market
participants at the measurement date. At initial
recognition, the fair value of a financial asset is
 FINANCIAL ACCOUNTING AND REPORTING
normally the transaction price (i.e., equal to the
consideration given).
Quoted Price of Equity Security
It means the price per share of such
security in pesos.
Initial Measurement of Financial Assets
1. In case of financial asset held at FVPL – at
fair value
2. In case of financial asset held at FVOCI –
at fair value plus transaction costs directly
attributable to the acquisition of the
financial asset
3. In case of financial asset held at amortized
cost – at fair value plus transaction costs
directly attributable to the acquisition of
the financial asset
Directly Attributable Transaction Costs
These are costs that would not have been
incurred had the entity not acquired a financial
asset.
Treatment for Directly Attributable Transaction
Costs
General rule: These are capitalized as part
of the financial asset.
Exception: If the financial asset is
measured at FVPL, such costs are expensed
outright.
Recognition of Gain or Loss on Change in Fair
Value
1. Financial asset held at FVPL– such gain or
loss shall be presented in the profit or loss
(i.e., income statement).
2. Financial asset held at FVOCI – such gain
or loss shall be presented in the other
comprehensive income.
3. Financial asset held at amortized cost –
such gain or loss are not recognized
because the investment concerned is not
reported at fair value.
Unrealized and Realized Changes in Fair Value
1. Unrealized gain – fair value at the
reporting date is higher than carrying
amount before adjustment (no sale)
2. Unrealized loss – fair value at the
reporting date is lower than carrying
amount before adjustment (no sale)
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Investment in Equity Securities
3. Realized gain – fair value at the date of
sale of financial asset is higher than
carrying amount
4. Realized loss – fair value at the date of
sale of financial asset is lower than
carrying amount
Journal Entries Related to Equity Investment Held
at FVPL
1. Acquisition – Dr. Trading securities,
Commission expense (transaction cost);
Cr. Cash
2. Increase in fair value at reporting date –
Dr. Trading securities; Cr. Unrealized gain
– Trading securities (fair value less
carrying amount)
3. Decrease in fair value at reporting date –
Dr. Unrealized loss -TS – Trading
securities (carrying amount less fair
value); Cr. Trading securities
4. Sale at higher than carrying amount – Dr.
Cash (proceeds from sale); Cr. Trading
securities (carrying amount), Gain on sale
of trading securities (balancing figure)
5. Sale at lower than carrying amount – Dr.
Cash (proceeds from sale), Loss on sale of
trading securities (balancing figure); Cr.
Trading securities (carrying amount)
Journal Entries Related to Equity Investment Held
at FVOCI
1. Acquisition – Dr. Financial asset – FVOCI
(fair value plus transaction cost)
(alternative account: Available for sale
securities); Cr. Cash
2. Increase in fair value at reporting date –
Dr. Financial Asset – FVOCI; Cr. Unrealized
gain – OCI (fair value less carrying
amount)
3. Decrease in fair value at reporting date –
Dr. Unrealized loss – OCI (carrying amount
less fair value)
4. Sale at higher than carrying amount – Dr.
Cash (proceeds); Cr. Financial asset –
FVOCI (carrying amount), Retained
earnings (balancing figure)
5. Sale at lower than carrying amount – Dr.
Cash (proceeds), Retained earnings
(balancing figure); Cr. Financial asset –
FVOCI (carrying amount
6. Reclassification of cumulative unrealized
gain and/or loss upon sale of financial
asset – Dr. Unrealized gain – OCI
 FINANCIAL ACCOUNTING AND REPORTING
Investment in Equity Securities

(cumulative balance); Cr. Unrealized loss 2. It is applied prospectively from the

– OCI (cumulative balance), Retained
earnings (balancing figure, may also be
debited)
Reclassification of Financial Asset
1. It is required only when an entity changes
its business model for managing the
financial asset.
reclassification date.
Reclassification Date
It is the first day of the reporting period
following the change in business model that
results in an entity’s reclassification of financial
asset.

Reclassification Procedures

From FVPL From FVOCI From Amortized Cost

To FVPL n/a 1. Recognize any 1. The fair value on
unrealized gain or loss reclassification date
(in OCI) to measure the becomes the new gross
financial asset at the carrying amount.
latest fair value. 2. The difference between
2. The financial asset the previous carrying
continues to be amount and fair value at
measured at fair value. the date of
3. The cumulative gain or reclassification is
loss previously recognized in the profit or
recognized in OCI is loss.
reclassified to profit or 3. Effective interest rate is
loss at reclassification calculated based on the
date. new gross carrying
amount.
To FVOCI 1. Recognize any unrealized n/a 1. The fair value on
gain or loss (in profit or reclassification date
loss) to measure the becomes the new gross
financial asset at the latest carrying amount.
fair value. 2. The difference between
2. The financial asset the amortized cost
continues to be measured carrying amount and fair
at fair value. value is recognized in
3. Recognized any other comprehensive
subsequent changes in fair income.
value in OCI. 3. Effective interest rate at
initial recognition and
the measurement of
expected credit losses
are not adjusted as a
result of reclassification.
To 1. Recognize any unrealized 1. Recognize any n/a
Amortized gain or loss (in profit or unrealized gain or loss
Cost loss) to measure the (in OCI) to measure the
financial asset at the latest financial asset at the
fair value. latest fair value.

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 FINANCIAL ACCOUNTING AND REPORTING
Investment in Equity Securities

2. The fair value at the 2. The fair value at the

reclassification date reclassification date
becomes the new carrying becomes the new
amount. amortized cost carrying
3. The difference between the amount.
new carrying amount of the 3. The cumulative gain or
financial asset at loss previously
amortized cost and the recognized in OCI is
face value of the financial removed from equity
asset shall be amortized and adjusted against
using the effective interest the fair value at
method. reclassification date.

Impairment of Equity Investments Allocation of Cost of Equity Securities Acquired in

It is not necessary to assess financial
assets (equity and debt investments) measured at
fair value through profit or loss and equity
investments measured at fair value through other
comprehensive income for impairment.
Impairment of Debt Investments
An entity shall recognize a loss allowance
for expected credit losses on:
1. Debt investment measured at amortized
cost; and
2. Debt investment measured at FVOCI.
See lecture notes on Loans and
Receivables for related procedure.
Considerations in the Measurement of
Impairment
1. Probability weighted outcome – The
estimate should reflect the possibility that
a credit loss occurs and the possibility that
no credit loss occurs.
2. Time value of money – The expected credit
losses should be discounted.
3. Reasonable and supportable information
that is available without undue cost or
effort.
Acquisition Cost of Equity Securities Acquired in
an Exchange
Such cost shall be determined by
reference to the following in order of priority:
1. Fair value of asset given
2. Fair value of asset received
3. Carrying amount of asset given
Lump Sum
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.
Categories of Investments in Equity Securities
1. Trading securities or financial assets at
FVPL
2. Financial assets at FVOCI (formerly called
available for sale securities)
3. Investment in associate
4. Investment in subsidiary
5. Investment in unquoted equity
instruments
Unquoted Equity Instruments
These are measured at cost if the fair value
cannot be measured reliably.
Sale of Equity Securities of the Same Class
Acquired at Different Dates and at Different Costs
In that case, the entity shall determine the
cost of securities using either FIFO or average
cost approach.
Dividend
It is a distribution of profits by a
corporation to its shareholders.
Significant Dates Related to Dividend
Date of Declaration
This is the date on which the payment of
dividends is approved by the Board of Directors.
Journal entry: Dr. Dividends receivable; Cr.
Dividend income

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 FINANCIAL ACCOUNTING AND REPORTING
Date of Record
This is the date on which the stock and
transfer book of the corporation is closed for
registration. Only those stockholders registered
as of this date are entitled to receive dividends.
Journal entry: No entry required.
Date of Payment
This is the date on which the dividends
declared shall be paid.
Journal entry: Dr. Cash; Cr. Dividends
receivable
***
Shares Selling Dividend-On
These are those shares sold between the
date of declaration and the record date. This
means that when shares are sold between these
dates, they carry with them the right to receive
dividends.
Shares Selling Ex-Dividend
These are those shares sold between the
date of record and the date of payment. This
means that the shares can be sold, and still the
original shareholder has the right to receive the
dividends on payment date.
Recognition of Dividends as Income
These 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.
Journal Entry to Record Sale of Shares Ex-
Dividend
Dr. Cash (proceeds); Cr. Investment in
equity securities (carrying amount of shares sold),
Dividend income, Gain on sale of investment
(balancing figure)
Forms of Dividends
Cash Dividends
These are dividends paid to shareholders
in the form of cash. (See no. 553 for related journal
entry.)
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Investment in Equity Securities
Property Dividends
Also known as dividends in kind, these are
dividends in the form of property or noncash
assets. These are considered as income and
recorded at fair value.
Journal entry: Dr. Noncash assets; Cr.
Dividend income
Liquidating Dividends
These represent return of invested capital,
and therefore, are not income. The payment may
be in the form of cash or noncash assets.
Journal entry: Dr. Cash or other
appropriate account; Cr. Investment in equity
securities
Stock Dividends
Also known as bonus issue, these are
dividends in the form of the issuing entity’s own
shares. Such dividends are not reported as
income. Shares of another entity declared as
dividends are not stock dividends but property
dividends.
***
Wasting Asset Corporation
It is a corporation engaged in mining or
cutting timber or some such business, so that
dividends are in fact paid out of capital, the assets
being consumed in the regular course of
operations.
Rule on Payment of Liquidating Dividends
General rule: Liquidating dividends are
paid when the corporation is dissolved and
liquidated.
Exception: Wasting asset corporations are
allowed to pay liquidating dividends even before
dissolution and liquidation (journal entry: Dr.
Cash; Cr. Dividends income [normal dividend],
Investment in equity securities [liquidating
dividend]).
Kinds of Stock Dividends
Stock Dividends of the Same Kind
These are stock dividends which are of the
same class or series (e.g., ordinary shares,
preference shares, etc.) as those held already by
the shareholder (reporting entity). The receipt of
these shares is recorded only by means of a
memorandum entry on the part of the
shareholder. Stock dividends do not affect the
 FINANCIAL ACCOUNTING AND REPORTING
total cost of the investment but reduce the cost of
the investment per share.
Stock Dividends Different from Those Held
These are stock dividends which are of a
different class or series as those held already by
the shareholder. The original cost of the
investment is apportioned between the original
shares and the stock dividends (of different class
or series) on the basis of market value of each at
the date of receipt (journal entry: Dr. Investment in
preference shares; Cr. Investment in ordinary
shares).
***
Shares Received in Lieu of Cash Dividends
This is the case when cash dividends are
declared but shares are received in lieu of cash.
The following are to be used in recognizing the
receipt of such dividend as income (in order of
priority):
1. At fair value of shares received; or
2. Equal to the cash dividends that would
have been received (in the absence of fair
value).
Cash Received in Lieu of Stock Dividends
This is the case when stock dividends are
declared but cash is received in lieu of stock
dividends.
Approaches to the Recording of Cash Received in
Lieu of Stock Dividends
As If Approach
This approach is the one to be followed
under financial accounting. It asserts that the
stock dividends are assumed to be received and
subsequently sold at the cash received. Therefore,
a gain or loss may be recognized.
Journal entries:
1. Cash received > Investment carrying
amount allocated to assumed stock
dividends – Dr. Cash; Cr. Investment in
equity securities; Gain on investment
(balancing figure)
2. Cash received < Investment carrying
amount allocated to assumed stock
dividends – Dr. Cash, Loss on investment
(balancing figure); Cr. Investment in equity
securities
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Investment in Equity Securities
BIR Approach
Under the ruling of the BIR, all cash
received, whether originally designated as cash
dividend or stock dividend, is recognized as
income.
***
Share Split
It is a change in the number of shares
outstanding without capitalizing retained
earnings or changing the amount of a
corporation’s legal capital.
Types of Share Splits
Split Up
It is a transaction whereby the outstanding
shares are called in and replaced by a larger
number, accompanied by a reduction in the par or
stated value of each share. Only a memorandum
entry is made to record the receipt of the shares
by virtue of share split.
Split Down
It is the reverse of the split up. The
outstanding shares are called in and replaced by
a smaller number, accompanied by an increase in
the par or stated value. Only a memorandum entry
is made to record the receipt of the shares by
virtue of share split.
***
Special Assessments
These are additional capital contribution
of the shareholders (i.e., additional investment
without the increase in the number of shares
owned). These are recorded as additional cost of
the investment on the part of the shareholders.
Journal entry: Dr. Investment in equity
securities; Cr. Cash
Redemption of Shares
It is a transaction where the shareholder
sells a portion or all of its shares (usually
preference shares) back to the issuing
corporation in accordance with the terms
provided in the share certificate (i.e., at a defined
date after issuance). Such transaction is recorded
in the same manner as the sale of shares.
Journal entry: Dr. Cash (proceeds); Cr.
Investment in preference shares, Gain on
investment (balancing figure) (Dr. Loss on
 FINANCIAL ACCOUNTING AND REPORTING
investment if the cash received is less than the
carrying amount of the shares redeemed)
Stock Right or Rights Issue
Also called as preemptive 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. As a general rule, a
shareholder receives one right for every share
owned.
Accounting Treatments for Stock Rights
Accounted for Separately.
The stock rights as a form of equity
instrument is measured initially at fair value and
classified as current asset.
Not Accounted for Separately
The stock rights are recognized as
embedded derivative of the host contract
“investment in equity instrument.”
Significant Dates Related to Stock Rights
Date of Declaration
It is the date on which the issuance of
stock rights is approved by the Board of Directors.
Date of Record
It is the date on which the stock and
transfer book of the entity will be closed for
registration and only those shareholders
registered as of this date are entitled to receive
stock rights.
Expiration Date
It is the date up to which the stock rights
shall be exercised.
***
Shares Selling Right-On
These refer to shares sold between the
date of declaration and date of record of stock
rights. This means that the share cannot be sold
without also selling the right or vice versa.
Shares Selling Ex-Right
These refer to shares sold after the date of
record of stock rights. This means that the share
can now be sold separately from the right or vice
versa.
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Investment in Equity Securities
Theoretical or Parity Value of Stock Right
It is the assumed fair value of the right that
is derived from the market value of the share.
Formulas:
a. Shares selling right on: Value of one right
= Market value of share right on minus
subscription price / Number of rights to
purchase one share plus 1
b. Shares selling ex-right: Value of one right
= Market value of share ex-right minus
subscription price / Number of rights to
purchase one share
Journal Entries Related to Stock Rights
Accounted for Separately
a. Original investment in shares – Dr.
Investment in equity securities; Cr. Cash
b. Receipt of stock rights – Dr. Stock rights;
Cr. Investment in equity securities
c. Exercise of stock rights – Dr. Investment in
equity securities; Cr. Cash, Stock rights
d. Sale of stock rights at a gain – Dr. Cash;
Cr. Stock rights, Gain on sale of stock
rights (balancing figure)
e. Expiration of stock rights – Dr. Loss on
stock rights; Cr. Stock rights
Journal Entries Related to Stock Rights Not
Accounted for Separately
a. Original investment in shares – Dr.
Investment in equity securities; Cr. Cash
b. Receipt of stock rights – Memorandum
entry
c. Exercise of stock rights – Dr. Investment in
equity securities; Cr. Cash
d. Sale of stock rights – Dr. Cash; Cr.
Investment in equity securities
e. Expiration of stock rights – Memorandum
entry