The different accounting treatment for Stock/ Share Rights

There are two schools of thought on the accounting treatment for Stock/Share Right:
1. Share rights are accounted for separately and 2. Share rights are not accounted for
separately.

With regards to the first accounting treatment, share rights as a form of equity
instrument shall be measured initially at fair value under the Application Guidance B5.4.14 of
PFRS 9, which states that ‘all investments in equity instruments and contracts on those
instruments must be measured at fair value.’ In other words, a portion of the carrying amount
of the original investment in equity shares is allocated to the share rights at an amount equal
to the fair value of the share rights at the time of acquisition. The reason for such an
allocation is that share rights are independent of the original shares from which they are
derived. When share rights are issued, the investor is now the owner related share rights of
two financial assets, namely the original shares and the share rights are normally classified
as current assets if the rights are accounted for separately.

On the other hand, under the second accounting treatment where share rights are
not accounted for separately, share rights are recognized as embedded derivative but not a
"stand-alone" derivative. An embedded derivative is a "component of a hybrid or combined
contract (host contract) with the effect that some of the cash flows of the combined contract
vary in a way similar to a stand-alone derivative". PFRS 9, paragraph 4.3.3, provides that an
embedded derivative shall be separated from the host contract and accounted for separately
under certain conditions. Paragraph 4.3.3 further provides that if the host contract is within
the scope of PFRŜ 9, the classification requirements of PFRS 9 are applied to the combined
host contract in its entirety.

This simply means that if the host contract is a financial asset, the embedded
derivative is not separated. Moreover, if the host contract is measured at fair value through
profit or loss, the embedded derivative is not separated. Accordingly, the share right as an
embedded derivative is not accounted for separately because the host contract "investment
in equity instrument" is a financial asset.

In conclusion, the Financial Reporting Standards Council and the IASB have not yet
said anything about which approach should be followed. Thus, the issue on the subject
remains unsettled.

REFERENCE:

Valix, C., Peralta, J., & Valix, C.A. (2020). Intermediate Accounting: Volume 1. 2017 C.M.
Recto Avenue, Manila. GIC Enterprises & Co., Inc.