Equity Investment

SELF-PACED LEARNING MODULE
COLLEGE DEPARTMENT
MODULE 15
Subject:
INTERMEDIATE ACCOUNTING 1 (AE15-IA1)
AISAT COLLEGE – DASMARIÑAS, INC.
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INFORMATION SHEET PR-15.1.1

Unit Intermediate Accounting 1
“EQUITY INVESTMENTS
Module
(DIVIDENDS, SHARE SPLIT AND SHARE RIGHT)”
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |2
Acquisition of equity investments
The Application Guidance of PFRS 9 provides that when a financial asset is recognized initially, 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:
a. Fair value of asset given

b. Fair value of asset received
c. Carrying amount of asset given
Lump sum acquisition
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,
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.
The remainder of the single cost is then allocated to the other security with no known market value
SUBJECT TEACHER: APPROVED FOR

15th IMPLEMENTATION:
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FINAL MS. MARY JOY F. LABAJO
E 15 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
Module
Investment categories
Investment 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 instruments.
Trading equity securities and financial assets at fair value through other comprehensive income
are already discussed exhaustively in Chapter 15.
Investment in unquoted equity instruments
Under the Application Guidance B5.4.14 of PFRS 9, all investments in equity instruments shall
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 shares
PFRS 9, paragraph 3.2.12, provides that on derecognition of a 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 shares are of the same class acquired on different dates at different costs, a
problem will arise as to the determination of cost of shares sold when only a portion is
subsequently sold.
In such a case, the entity shall determine the cost of the shares sold using either the FIFO or
average cost approach.

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When are dividends considered earned?
a. Date of declaration - This is the date on which the payment of dividends is approved by
the Board of Directors.
b. Date of record - This is the date on which the stock and transfer book of the corporation
is closed for registration.
Only those shareholders registered as of this date are entitled to receive dividends.
c. Date of payment — This is the date on which the dividends declared shall be paid.
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 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”
which means that the shares can be sold, and still the original shareholder has the right to
receive the dividends on payment date.

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Example of a formal dividend declaration
“The Board of Directors at their meeting on November 15, 2020, declared an annual dividend on
ordinary share of P5, 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
A question arises as when to recognize the dividends on the part of the shareholders, whether
on the date of declaration, November 15, 2020 or date of record, January 15, 2021 or 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.
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.
Only the remainder of the sale price should be used as basis for determining gain or loss on the
sale of the investment.

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AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 10

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Accounting for share rights

PFRS 9 does not address this accounting issue categorically. But unquestionably, a share right is
a form of a financial asset.
In this regard, there is a divergence of opinion among academicians and theoreticians.
There are two schools of thought on the matter, namely:
1. Share rights are accounted for separately.

2. Share rights not accounted for separately.
Accounted for separately
Under the Application Guidance B5.4.14 of PFRS 9, all investments in equity instruments and
contracts on those instruments must be measured at fair value.
Undoubtedly, share rights are a form of equity instrument and therefore shall be measured
initially 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 right 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 of two financial assets, namely the
original shares and the related share rights.
Share rights are normally classified as current assets if the rights are accounted for separately.

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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 PFRS 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.
Approach to be followed
Admittedly, this subject matter is not a well-settled issue. In fact, PFRS 9, paragraph 4.3.4,
states that this standard does not address whether an embedded derivative shall be presented
separately in the statement of financial position.
The authors strongly believe that the second approach not accounted for separately stands on
solid and authoritative ground.
However, stay tuned and let us wait and see what the Financial Reporting Standards Council
and the IASB will say on this accounting issue.

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Example of a formal announcement of share right
“The Board of Directors in their meeting on December 15, 2020, approved to issue share rights
to the shareholders of record on January 15, 2021, entitling the shareholders to acquire on
share at P100 par for five shares held, the right to expire on March 31, 2021.”
Date of declaration is the date on which the issuance of share right is approved by the Board of
Directors. In the example, the date of declaration is December 15, 2020.
Date of record 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 the record date are entitled to receive
share rights
In the example, the date of record is January 15, 2021. It is very important to note that the date
of record is also the date of issuing the share warrants.
Expiration date is the date up to which the share rights shall be exercised. After such date, the
share rights would be worthless in the example, the expiry date is March 31,2021
Between the date of declaration and date of record
During this period the shares are considered to be selling right-on. This means that the share
and the right are inseparable and are treated as one,
In other words, the share cannot be sold without also selling the right or vice versa.
No accounting problem is encountered in this case because the share rights are not yet
received by the shareholder.
Accordingly, in the event of subsequent sale prior to the record date, the difference between
the same price and the carrying amount of the investment is simply considered as gain or loss
on sale of investment.

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References:
Intermediate Accounting – 2020 Edition Volume 1

Author: Conrado T. Valix; Jose F. Peralta; Christian Aris M. Valix

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Equity Investment

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SELF-PACED LEARNING MODULE

INTERMEDIATE ACCOUNTING 1 (AE15-IA1)

AISAT COLLEGE – DASMARIÑAS, INC.

INFORMATION SHEET PR-15.1.1

Acquisition of equity investments

a. Fair value of asset given

Lump sum acquisition

SUBJECT TEACHER: APPROVED FOR

a. trading securities or financial assets at fair value through profit or loss.

Investment in unquoted equity instruments

Sale of equity shares

SUBJECT TEACHER: APPROVED FOR

When are dividends considered earned?

SUBJECT TEACHER: APPROVED FOR

Example of a formal dividend declaration

Date of declaration November 15, 2020

When to recognize dividends as income

Accordingly, the dividends shall be recognized as revenue on the date of declaration.

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

Accounting for share rights

In this regard, there is a divergence of opinion among academicians and theoreticians.

There are two schools of thought on the matter, namely:

1. Share rights are accounted for separately.

Accounted for separately

SUBJECT TEACHER: APPROVED FOR

Not accounted for separately

An embedded derivative is a “component of a hybrid or combined contract (host contract) with

SUBJECT TEACHER: APPROVED FOR

Example of a formal announcement of share right

Between the date of declaration and date of record

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

Intermediate Accounting – 2020 Edition Volume 1

SUBJECT TEACHER: APPROVED FOR

SUBJECT TEACHER: APPROVED FOR

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