Page 1 of | FAR Handouts No.14 REAL EXCELLENCE MES MENT IMG. ABITAGO, CPA INVESTMENT IN EQUITY SECURITIES KARIM G. ABITAGO, CPA DEFINITION AND BASIC CONCEPTS investment in equity securities are investments represented by contracts that evidence residual interest in a corporation. Equity securities DO NOT include redeemable preference shares, treasury shares and convertible debt. To summarize the accounting for investment in equity securities, please see the table below. Type of Governing iE ae Ownership Classification Seen Accounting - Investment in Fair Value Method Less than 20% | Equity Securities HENS of Cost Method Ordinary Shares Tvestment in 20% - 50% ereee PAS 28 Equity Method ; investment in i More than 50% Seeley PFRS3 Acquisition Method Preference Regardless of Investment in aaa Fair Value Method Shares Ownership Equity Securities or Cost Method CLASSIFICATION, MEASUREMENT AND PRESENTATION ‘According to PFRS 9, investment in equity securities are classified into: (1) Financial Assets at Fair Value through Proft or Loss: (2) Financial assets held for trading or popularly known as “trading securities’ (6) Financial assets that are irrevocably designated on intial recognition as at fair value through profit or loss. (c) _ Allother investments in quoted eauity instruments. ‘Appendix A of PFRS 9 provides thet a financial assetiis held for trading when: (2) _ {tis acquired principally for the purpose of selling or repurchasing itn the near term, (6) On inital recognition, its part of a portfolio of identified financial assets that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking (©) It is @ derivative, except for a derivative that is @ financial guarantee contract or a designated and an effective hedging instrument (2) Financial Assets at Fair Value through Other Comprehensive Income At initial recognition, PFRS 9, provides that an entity may make an irrevocable election to present in other comprehensive income subsequent changes in fair value of an investment in equity instrument that is not held for wading The summary on the accounting treatment on the two classifications as well as their FS presentation are as follows: : Initial ‘Subsequent Presentation of | FS eee Measurement | Measurement | Changes inFV | Presentation FVBL | FatValie [~~ FairValue | ProftorLoss | Curent Asset Fair Vaive Plus Other Quoted Shares (FV Mose) | gyocy | “Transacton” | FairValue | Comprehensive | Novcorent és Costs Income. | T Either Current | Unquoted Shares (Cost Model) Cost Cost NIA or Non-current | Asset TRANSACTIONS SUBSEQUENT TO ACQUISITION SALE OF INVESTMENT Sale of investment in equity securities result to derecognition of the investment account. The term "derecognition” means that an entity shall remove an asset or liability from its statement of financial position. PFRS 9 provides that an entity shall derecognize a financial asset when either one of the following criteria is met (4) The contractual rights to the cash flows of the financial asset have expired (2) The financial asset has been transferred and the transfer qualifies for derecognition based on the extent of transfer of risks and rewards of ownership. REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience a REAL EXCELLENCE ONLINE CPA REVIEW 0661 © support@reoePage 2 of 6 | FAR Handouts No.14 REAL EXCELLENCE KARIM G. ABITAGO, CPA INVESTMENT IN EQUITY SECURITIES FAQ: The gain or loss on disposal. Tne 9 EVEL Tnesinent 9 FVOCI aa eee Pe TT Oa ee | CREED dividends if dividend- XX fo its fair value with gain or loss recognized in dividends if dividend- 7 Bee ee ato ns ns ans feaeane Reslzed gan orloss chy | AY UrEalzed can arose shalbetarsteredio | pained gan ores mat) NOTE: Under PAS 39, the old standard, all computations above are the same except for FVOCI investments. Under PAS 39, the realized gain or loss of FVOCI investments is computed as net selling price less original cost. Any unrealized gain or loss shall be reclassified to proft or loss, ACCOUNTING FOR DIVIDENDS Three dates are important in accounting for dividends, namely (1) Date of declaration is the date on which the payment of dividends is approved by the board of directors (2) _ Date of record is the date on which the stock and transfer book is closed for registration. Only those shareholders registered as of this date are entitled to receive dividends (8) Date of payment is the date on which the dividends declared shall be paid. Dividends shall be recognized as revenue when ‘the shareholder's right to receive payment is established”. In other words, the dividends shall be recognized as revenue on the date of declaration. Type of Dividends = Dividend income? Cash dividends Z Property dividends ¥v | ‘same cass__| x Memorandum entry only | ‘Allocate original cost using FV. Accordingly, the Share dividends stock dividends of different kind reduce the total cost Dividends out different class | | of the original investment because a new investment of earnings ‘account is set up for the stock dividends received. _| ‘As if cash to be received is invested to obtain Share received in lieu of cash__| v | additional shares. The income is based on (1) FV of shares received. (2) Original cash dividend As if shares are sold since there where cash received. Cash received in lieu of shares. | x Dividends out of capital ACCOUNTING FOR SHARE SPLITS ‘A share split up is a transaction whereby the outstanding shares are called in.and repleced by a larger number, accompanied by 2 reduction in the par or stated value of each share. Only a memorandum entry is made to record the receipt of new shares by virtue of share split. Liquidating dividends x ACCOUNTING FOR SPECIAL ASSESSMENT Special assessment is a decision by the board of directors requiring the investors to make additional contributions or investments when the corporation is under financial difficulty Special assessments are accounted for by DEBITING the INVESTMENT account and CREDITING CASH. ACCOUNTING FOR STOCK RIGHTS ‘A stock right or preemptive right is @ legal right granted to shareholders to subscribe for new shares issued by & corporation at a specified price during @ definite period. A stock right is inherent in every share. A shareholder receives ‘one right for one share owned ‘Accounting for stock rights could be any of the following (1) Stock rights are accounted for separately ‘The stock rights are accounted for as a separate financial instrument (DERIVATIVE @ FVPL) and to do that, stock rights shall be measured, There are two approaches in measuring stock rights (a) _ Residual Approach FV of shares (right-on) es FV of shares (ex-righ!) (69) ‘Theoretical value assigned to stock rights x REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www reocpareview.oh REAL EXCELLENCE ONLINE CPA REVIEW © (074) 665.6774 @ 0016 840 0661 © suppori@reccpareviewph MAY 2021 CPA REVIEW SEASONPage 3 of | FAR Handouts No.14 REAL EXCELLENCE KARIM G. ABITAGO, CPA INVESTMENT IN EQUITY SECURITIES (b) Direct Approach When the share is selling right-on: ‘Market value of share right-on minus subscription price Number of rights to purchase one share plus 7 = Value of one right ‘When share is selling ex-right Market value of share right-on minus subscription price. Number of rights to purchase one share = Value of one right (2) Stock rights are not ace for separate! ‘Stock rights may be recognized as embedded derivative but not a "stand-alone" derivative. 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. RECLASSIFICATIONS At initial recognition, an entity may make an irrevocable election to present in OCI. Thus, transfer into and out of investments at FVPL is not allowed IMPAIRMENT AND REVERSAL OF IMPAIRMENT For financial assets measured at fair value (whether FVPL or FVOCI), all gains and losses are either presented in profit or loss or in other comprehensive income depending on whether the election to present gains and losses on equity investments in other comprehensive income is taken or not Therefore, it is not necessary to assess financial assets measured at fair value for impairment. ‘Subsequent increase in fair value (reversal of impairment) shall be recognized in profit or loss or other comprehensive income depending on the classification of the investment (FVPL or FVOCI). REO CPA REVIEW PHILIPPINES: Effectiveness. Efficiency. Convenience ‘www reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 6856774 @ 09168400661 © sunpor@reacpareviewoh — MAY 2021 CPA REVIEW SEASON tPage 4 of 6 | FAR Handouts No.14 REAL EXCELLENCE KARIM G. ABITAGO, CPA INVESTMENT IN EQUITY SECURITIES DISCUSSION EXERCISES STRAIGHT PROBLEMS 1. On February 1, 2019 MERCURY CORP. a listed company, deciared a cash dividend per share amounting to P1.20 per share, to be distributed on March 30, 2019 and the date of record of which is on February 20, 2018. (On February 10, 2019 DRUGS INC. bought 10% of the 200,000 outstanding shares of MERCURY CORP. for P7.20 per share, The related transaction cost of the purchase is P7.00 per share. ‘The market price of MOGUL sheres on December 31, 2019 is P10 and cost to sell of the shares is P0.50. REQUIREMENTS: (1) Assuming the shares are held for trading, what is the balance of investment in equity securities on December 31, 2019 and the net amount to be presented in profit or loss in 2019? (2) Assuming the shares ate NOT held for trading, what is the balance of investment in equity securities on December 31, 2019 and the net amount to be presented in profit or loss in 20192 2. During 2019 VENUS CORP. purchased equity securities and designated as fair value to other comprehensive income. At December 31, 2019, the balance in the fair value adjustment account was a credit amount of P100,000 ‘and unrealized loss of P70,000 net of deferred tax asset of P30,000. There were no security transactions during 2020. Pertinent data on December 31, 2020 are: Securities Historical Cost Market K 600,000 500,000 G 800,000 900,000 A 600,000 800,000 Total 2,000,000 2,200,000, If securities are to be sold aggregately, the company will have to incur P50,000 transaction cost. REQUIREMENTS: (1) What amount of cumulative unrealized gain should the company report in its shareholders equity on December 31, 2020? (2) What amount is to be presented as unrealized gain on the Statement of Comprehensive Income for the year 20207 3, On January 1, 2019, EARTH INC. purchased 10,000 shares of the 100,000 outstanding shares of SUN INC. at P30 plus brokers! commission of PS per share. The investment is'NOT held for trading. During 2019 and 2020, the following transactions transpired in relation to the investment account, 03/10/2019 ‘SUN declared and paid P0.20 per share dividend. 06/30/2019 EARTH received 1,000 shares in lieu of cash dividend of P10 per share. On this date, SUN's shares are traded in the market P20 per share. 09/20/2019 The investee company declared a share spit of 2 for 1 share. 42/31/2019 ‘The market price of SUN stock is P15 per share. 02/14/2020 EARTH received P40,000 cash in lieu of the 10% stock dividends declared previously by SUN. (06/30/2020 ‘SUN deciared a 5% stock dividend. 10/01/2020 The investee declared a stock dividend of 2 preferred share for every 10 ordinary investee share held by its investor. The market price of the investee company’s ordinary and preferred share on that date is P20 and P10, respectively. 42/31/2020 SUN's shares have a market price of P12 per share. REQUIREMENTS: (1) What is the, net amount presented in the statement of comprehensive income for the years 2019 and 2020: (2) What is the balance of the investment account on December 31, 2019 and December 31, 20207 4, MARS COMPANY owned 10% of the 100,000 shares of VENUS CORP. with total cost of P7,600,000. The share is ‘quoted right-on at 125. VENUS issued rights to subscribe to its stock for every 1 share owned entiting the shareholders to subscribe for 1 share in exchange for 4 rights at P100, REQUIREMENT. What is the cost of the new investment assuming the stock rights are accounted for separately and not accounted for separately? 5. On March 1, 2019 JUPITER INC. a listed company, declared a cash dividend per share amounting to P1.50 per share, to be distributed on April 1, 2019 and the date of record of which is on March 16, 2019 ‘On March 10, 2019 SATURN CORP. bought 10% of tne 50,000 outstanding shares of JUPITER INC. for P7.50 per share, The related transaction cost of the purchase is P1.00 per share. ‘On June 30, 2020, SATURN sold one haif of the shares held for P10 per share. On March 10, 2020, JUPITER Geclared a 10% share dividend. The Company also declared a cash dividend of P0.30 per share on October 1, 2020. The market price of JUPITER shares on December 31, 2019 and December 31, 2020 is P9.00 and P8.20 per share, The cost to sell of the shares on both dates is P0.50. “ REQUIREMENT. What is the net amount to be presented in profit or loss assuming the shares are (1) held for trading (3) not held for trading? REO CPA REVIEW PHILIPPINES. Effectiveness. Efficiency. Convenience ‘www. reocpareview.ph ( REAL EXCELLENCE ONLINE CPA REVIEW © (074 6658774 @ 0916 8400081 © suppon@reocpareview ph MAY 2021 CPA REVIEW SEASON.Page 5 of 6 | FAR Handouts No.14 REAL KARIM, ABITAGO, CPA EXCELLENCE INVESTMENT IN EQUITY SECURITIES ‘MULTIPLE CHOICE (THEORIES: ‘Which of the following is accounted for under PFRS 92 |. Investment in preference shares wheré the ownership is 80% of the outstanding shares. II. Investment in ordinary shares where the ownership is 15% of the outstanding shares, II Investment in unquoted ordinary shares where the ownership is 10% of the outstanding shares. A. and tl D. 1 land tit Bandi E. Answer not given Clana! 2 fn entity aoquires shares of stocks of another entity The shares are listed. The investment management strategy of the entiy is to hold financial assets and sell them to realize fair value gains, Which of the following statement ie correct? ‘A. The entity may classify the investment at subsequently measured at FVOCI B. The entity shall classify the investment at subsequently measured at FVOCI. C. The entity may classify the investment at subsequently measured at FVPL. D. The entity shall classify the investment at subsequently measured at FVPL 3. __ In relation to investment in equity securities at fair value through other comprehensive income, which of the below Statements is (are) incorrect? |. They are held to be sold in a short period of time: |. Any unrealized gains and losses for the year are reported in the profit or lass and the cumulative balances are reported in the equity section of the statement of financial position A only ©. Both land il B. lonly D. Neither | nor 4 |.__ Inaccordance with PFRS 9, investment in stocks designated for trading purposes should be measured a fair value and any commissions, taxes and other fees are expensed as incurred. |, Investments in held for trading securities may be classified as current or non-current. A False, true C. False, false B. True, false D. True, true 5: _[h accordance with PERS 9, fnancial instruments, which ofthe following statements is (are) correct? {Reclassification adjustments are presented in retained eamings for unrealized gain or losses of investments through profit or loss. |__Reclassifications from FVPL to FVOCI and vice versa is prohibited. A. lonly ©. Both andi B. llonly D. Neither I nor 8 Gt Inc: acquired an investment and propery classified it as investment in equly secures at fai value through Pee rose creation f° certain transactions and other cost, which ofthe below lassifeatons Ic (ac) ner ooo 11, Sh3te split declaration ofthe investee does not affect the total cost of the investmnany A tandil D. Illend Ii B. tlandiil E Answer not given © tand tit 7. Which of the following is classified as dividend income? (1) Dividends in kind (2) Cash dividends in lieu of stock dividends (3) Stock dividends received where different ype of shares are received (4) Stock dividends in lieu of cash dividends A fand4 C. 3and4 B. 2and3 DO tand3 8 Wich of the following statements is incorrect in relation to investments in equity securities? 5. Share assessment shall be debited to the investment account sen credited to cash. Share assessment has None from the choices, Cash is debited and dividend income is credited No formal entry is made but only a memorandum Anew investment account is debited and aividend income is credited ic D. 8. When stock dividends of different class are received A B C D.__Anew investment accounts debited and the original hvestrrent a ount is credited REO CPA. REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience a iew.ph REAL EXCELLENCE ONLINE CPA REVIEW © 074) 6056775 @ 0918 840 0861 @ suoport@reccpareview.ch May 2001 (OPA REVIEW SEASONEXCELLENCE ONLINE 40. Which of the following is correct regarding share splits? St. Share spit-ups do not affect the total cost of investment but decreases the cost per share. $2: Share splits whether up or down is presented in proft or loss. A Stonly C. Both statements B S2ony D. None from the statements. -~ END OF HANDOUTS —Page 1 of 6 | FAR Handouts No.15 REAL INVESTMENT IN ASSOCIATES EXCELLENCE KARIM G. ABITAGO, CPA INVESTMENT IN ASSOCIATES KARIM G. ABITAGO, CPA BASIC CONCEPTS Associate - An entity, including an unincorporated entity such as a partnership, over which the investor has significant influence. Significant influence. - 's the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies. Control - 's the power to govern the financial and operating policies of an entity so as* to obtain benefits from its activities. When significant influence acquired? * Quantitative threshold - Ifthe investor holds, directly or indirectly through subsidiaries, 20% or more of the voting Homer SF the investee, it is presumed that the investor has signfcant influence, unless it can be cleary demonstrated that this is not the case. * Qualitative threshold - PAS 28, paragraph 6, provides that the existence of significant influence by an investor is Usually e such as evidenced in one or more of the following ways: (2) Representation in the board of directors (b) Participation in policy making process (C) Material transactions between the investor and the investee (a) _ Interchange of managerial personnel (e) __ Provision of essential technical information MEASUREMENT ime Share on Associates FV of Net Assets ~ Goodwill, NOT accounted for separately Gost = Share on Associates FV of Net Assets — Gain on bargain purchase, included as ‘additional investment income in the year investment was made MOTE: jhe above scenarios are a result after considering the under or over valuation of assets and liabilities. These Under and over valuation of assets are amorized subsequently ‘SUBSEQUENT MEASUREMENT investeront ay catate further, please see below T-account template on computing, the subsequent measurement of investment in associate account Investment in Associate Beg. Balance xx Share in Dividends x Investment Income (P/L)* x Share in Investee's OCL (OCL) xx Share in Investee's OCI (OCI) xx Impairment Loss (PIL) xx End Balance xx “Investment Income Amortization of Over-valuation of Assets — xx Share in PIL™ 0x Amortization of Under-valuation of liabilities xx Amortization of Under-valuation of Assets xx ‘Amortization of Over-valuation of liabilities xx Gain on Bargain Purchase _xx T Investment income xx (1 Share in proft or loss is affected by the following (@) Unrealized and reaized prof rom effect of intercompany transactions (to be discussed later) icele di aV aunar mons Bua Uo eo Meese AUR COLE Noto Ta tot yt CAC LLL tr tee aucPage 2 of 6| FAR Handouts No.15 REAL KARIM G. ABITAGO, CPA EXCELLENCE INVESTMENT IN ASSOCIATES (0) Dividends of the investee's outstanding preference shares. The share in profit or loss is to be reduced by one year preferred dividends If cumulative preferred shares — whether declared or not __Ifnon-cumulative preferred shares — when declared ONLY. NOTE: In computing the Impairment loss of investment in associate, follow the guidelines laid down by PAS 36, Impairment of Assets. INVESTEE WITH HEAVY LOSSES PAS 28 provides that if an investor's share of losses of an associate equals or exceeds the INVESTOR'S INTEREST in the associate, the investor DISCONTINUES recognizing its share of further losses. The investment is reported at NIL OR ZERO VALUE. Interest in the associate includes the following: (1) Investment in associate account; (2) Investment in preferred shares of associate; (3) UNSECURED LONG-TERM receivables. The loss is charged to the above accounts according to their sequence (the reverse order of liquidity) ‘Any UNRECOGNIZED LOSSES are to be disclosed in the notes to financial statements. If the associate subsequently reports income, the investor resumes including its share of such income after its share of the income equals the share of losses not recognized CHANGES IN PERCENTAGE OWNERS! INVESTEMENT IN ASSOCIATE ACHIEVED IN STAGES (STEP-ACQUISITION) ‘An investor may acquire an ownership interest in an investee on a certain date but the investee may not be classified as an associate until a later date, This happens when significant influence was obtained through series of purchases of ‘ownership percentage in the investee. For example, an investor holds @ 5% interest in an investee on January 1, 2019. The investor acquires additional 15% interest in the same investee on January 1, 2020 enabling the investor to exercise significant influence over the investee. The transition from investment in financial asset at fair value (no significant influence) to investment in associate (with significant influence) shall be accounted for under any of the following methods: (2) Fair value approach (Based from PFRS 3) ~ The initial cost of the investment shall be the sum of the CURRENT FAIR VALUE of the original investment and the cost of the new investment. (b) Cost approach (U.S. GAAP) ‘Without catch-up adjustment (PROSPECTIVE) ~ The initial cost of the investment shall be the sum of the original cost of the original investment and the cost of the new investment With catch-up adjustment (RETROSPECTIVE) ~ As if equity method had been used from the date of original investment had been acquired. The difference between investment income that should have been recognized tunder the equity method and the investment income recognized under the fair value method shall be retrospectively adjusted to retained earnings. DEEMED SALE OR DILUTION This happens when the company's interest in associate decreases because of the issuance of the associate of additional shares to other parties with the company not participating on such new issuance. Net selling price (deemed share from the increase in the associates net assets as a result of the issuance of shares) (Proceeds from issuance x % of interest, after ciution) we Carrying amount of the investment sold (Carrying amount x % decrease in investment/ % of original investment) (0) Dilution gain or (loss) before recycling of OCU(OCL) 21%) Recycling of OCU(OCL) robo Dilution gain or (loss) ex) CESSATION This happens when shares are disposed to the extent that the investor losses significant influence over the investee. PAS 28 provides that an investor shall discontinue the use of the equity method from the date that it ceases to have significant influence over an associate. Consequently, the investor shall account for the investment as financial asset at fair through profit or loss, or financial ‘asset at fair value through other comprehensive income or nonmarketable investment. INTERCOMPANY TRANSACTIONS ‘These are sales of goods and services between the investor and investee. Intercompany transactions can be: (2) Upstream transaction - are sales of assets from an associate to the investor. (b) Downstream transaction - are sales from the investor to the associate. ‘The investor's shere in the associate's profits and losses resulting from these transactions is eliminated REO CPA REVIEW PHILIPPINES ___ Effectiveness. Efficiency. Convenience www.teocpareview_ph REAL EXCELLENCE ONLINE CPA REVIEW @ (074) 665.6774 @ 0916 840.0661 © suvpor@reocpareviewph MAY 2021 CPA REVIEW SEASONPage 3 of 6 | FAR Handouts No.1 REAL KARIM G. ABITAGO, CPA EXCELLENCE investMen in assoclates ‘Share in profit or (loss) of investee 200) Laas uneslzad pt fam fetsompanyraneactons &} Add: realized profit from intercompany transactions x Adjusted share in profit or loss of investee x00) PRESENTATION AND REPORTING Investment in associate is presented in the statement of financial position under the NON-CURRENT ASSETS section. According to PAS 28, the financial statements to be used for equity method are the MOST RECENT financial statements available. (ONE LINE CONSOLIDATION) When the reporting dates of the investor and the investee are different, the associate shall prepare for the use of the investor financial statements as of the same date as the financial statements of the investor unless it is impracticable to do so, In any case, the difference between the reporting date of the associate and that of the investor shall be no more than three months. If an associate uses accounting policies other than those of the investor, adjustments shall be made to conform the ‘associate's accounting policies to those of the investor. REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience waww.feocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW. © (074) 6656774 @ 0916 840.0561 @ support@reocoareviewph MAY 2021 CPA REVIEW. SEASONPage 4 of 6 | FAR Handouts No.15 REAL KARIM G. ABITAGO, CPA EXCELLENCE INVESTMENT IN ASSOCIATES DISCUSSION EXERCISES ‘STRAIGHT PROBLEMS 1, On Januery 1, 2019, EINSTEIN CORP. acquired 25,000 ordinary shares out of the 100,000 outstanding ordinary shares of ALBERT INC. for P320,000. On that date, the equity of ALBERT is as follows: Share capital (PS par value) 500,000 Share premium 200,000 Retained earnings 300,000 Total Shareholder's Equity 1,000,000 Itwas determined that the following investee asset's carrying amounts differ from their fair values on that date: Assets Carrying Amount Fair Value Remaining life Building 200,000 300,000 10 years, Inventories 100,000 150,000 NAT Computer software 150,000 100,000 5 years “all inventories were sold during the year During 2019, ALBERT reported the following in its statement of comprehensive income Profit or loss 250,000 Revaluation surplus 100,000, Unrealized loss on FVOCI investments 50,000 In addition, ALBERT declared and paid P50,000 cash dividends during the year. REQUIREMENTS (@) How much is the goodwill from the acquisition? (b) What is the balance of the investment account on December 31, 20197 (c) Redo (a) and (b) assuming the 20,000 shares acquired by EINSTEIN are newly issued shares and the 100,000 outstanding shares and shareholders’ equity balance are before issuance. 2. ALVAREZ CORP. purchased 20% of the 100,000 outstanding capital stock of KINP Co. On July 1, 2019 for 300,000, The book value of net asset on that date (which is equal to its fair value) amounted to P1,000,000, Net income reported! January 1 — June 30 180,000 July 1 December 31 160,000 Ordinary cash dividend declared! January 1 ~ June 30 40,000 July 1 December 34 30,000 Itwas also known that the investee has a 10% preferred share capital of P200,000. REQUIREMENT: How much is the investment in associate balance as of December 31, 2019 if the preference shares are cumulative and non-cumulative? 3. On January 1, 2019, AMPERE CORP. purchased 30% of the outstanding common stock of ANDRE INC. for 500,000 at that time, the book value and fair value ofthe associate's net asset is P1,000,000. On December 31, 2019, the investor has the following accounts with the associate in addition on its investment before recognition of any share in the profit or loss of the investee: Investment in preference shares 150,000 Loans receivable — long term & secured 80,000 Loans receivable — long term & unsecured 50,000 The above balances did not move until 2022, In relation to the profit or loss of the investee, the following are available: Year Profit (Loss) 2019 500,000 2020 (2,000,000) 2021 (1,000,000) 2022 600,000 REQUIREMENT: Determine the balance of the following at each year-end: (2) Investment in associates (c) Loans receivable — long term & unsecured (b) Investment in preference shares 4, On January 2, 2019, ARCHIMEDES CORP. acquired a 30% interest in ANAXIMANDER INC.’s 500,000 outstanding shares at a cost of 2,500,000. ARCHIMEDES CORP. has significant influence over ANAXIMANDER INC. The associate has net assets of P5,000,000 at the date of acquisition, which have a fair value of P6,000,000. During the year ended December 31, 2019, ANAXIMANDER INC. reported a post-tax profit of P500,000 and paid dividend of 100,000. ANAXIMANDER INC. also recognized foreign transiation losses of P50,000 in other comprehensive income REQUIREMENTS: (Answer the below questions independently) (2) Assuming on January 2, 2020, ANAXIMANDER INC. issued 100,000 newly issued shares for P20 per share but ARCHIMEDES did not acquire any of those shares. What is the amount to be presented in profit or loss (of 2020 and what is the balance of the investment account after dilution? REO CPA REVIEW PHILIPPINES. Effectiveness. Efficiency. Convenience www feocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW @ (074) 6056774 @ 0916640 0061 @ support@recopareviewnh MAY 2021 CPA REVIEW SEASONPage 5 of 6 | FAR Handouts No.15 REAL KARIM G. ABITAGO, CPA EXCELLENCE INVESTMENT IN ASSOCIATES (b) On January 1, 2020, ARCHIMEDES CORP sold 100,000 shares of ANAXIMANDER at the current market value of at P25 per share. What is the amount to be presented in profit or loss of 2020 and what Is the balance of the investment account after cessation of significant influence? 5. On January 2, 2019, ARISTOTLE INC. purchased 10% of the 100,000 outstanding ordinary shares of AVOGRADO. CORP. for P500,000 when the market value of AVOGRADO's net assets was P5,000,000. ARISTOTLE INC. Classified this investment as investment at fair value to profit or loss. In 2019, AVOGRADO reported a net income of P300,000 and paid cash dividend of P100,000. As of December 31, 2019, AVOGRADO's ordinary shares are selling at P8O per share. On January 2, 2020, ARISTOTLE purchased another 15,000 shares of AVOGRADO for 900,000. ARISTOTLE immediately reclassified its investment to investment in associate REQUIREMENT: What should be the initial carrying value of the investment in associate account at the date of transfer assuming the company uses? (2) Cost method with catch-up adjustment {b) Cost method without catch-up adjustment (©) Fai value method 8 GRAHAM BELL CORP. acquired 40% interest in an associate, ALEXANDER INC., for P5,000,000 on January 1, 2019. At the acquisition date, there were no differences between fair value and carrying amount of identifiable assets and liabilities ALEXANDER reported the following net income and dividend for 2019 and 2020: 2019 2020 Net income 2,000,000 3,000,000 Dividend paid 800,000 1,000,000 The following transactions occurred between GRAHAM BELL and ALEXANDER. * On January 1, 2019, ALEXANDER sold an equipment costing P500,000 to GRAHAM BELL for 800,000. GRAHAM BELL applied a 10% straight line depreciation * On July 1, 2020, ALEXANDER sold a delivery truck for P200,000 to GRAHAM BELL. The carrying amount of the truck is P500,000 at the time of sale. The remaining life of the truck is 5 years and GRAHAM BELL used the straight line depreciation. + On December 1, 2020, ALEXANDER sold an inventory to GRAHAM BELL for P2,800,000 * The inventory had a cost of P2,000,000 and was still on hand on December 31, 2020. REQUIREMENT: (a) What is the investor's share in the profit ofthe associate for the year 2019 and 2020? (b) What 's the carrying amount of the investment in associate on December 31, 2019 and December 31, 2020? MULTIPLE CHOICE (THEORIES) 1, Significant influence is defines as the power to participate in the financial and operating policy decisions of the tnvestee but not control or joint control over those policies. In relation to significant influence, which ofthe folowing statements is correct? Sti {the investor holds, directly or indirectly through subsidiaries, 25% or more of the voting power of the investee, its presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case $2: Significant influence can be obtained even if the voting power acquired by the investor is less than 20% S3°__ In terms of voting power, potential voting rights such as share warrants, share options and convertible debt and equity securities currently exercisable must be considered A Stonly © StandS3 B. S2and$3 D. Stands2 2, The excess of the cost of the investment over the investor's share ofthe net fair value of the associate's net assets is ‘A. Not accounted for separately. & _Agoodwill and presented in the non-current asset section ofthe statement of financial postion. C. Included in the determination ofthe investor's share of the associate's proft or loss inthe perfod in which the investment is acquired D. Credited to retained earings directly, 3. Which of the following decreases both the profit or loss and investment in associate account of the investor? (1) Dividends received from the investee. (2) Share in the other comprehensive loss of the investee. (3) Share in the net loss of the investee (2) Amortization of fir value adjustment of inventories when its fair value is greater than its carrying amount A 4and2 © tand4 B 2and3 BD 3and4 REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.reocpareview.ph -REAL EXCELLENCE ONLINE CPA REVIEW. 074) 6656774 @ 0916 e400601 © supvot@reccpareviewph May 2021 ‘CPA REVIEW SEASONPage 6 of 6 | FAR Handouts No.1 REAL EXCELLENCE INVESTMENT IW ASSOCIATES 4. On January 1 of the current year, an entity purchased 10% of another entity's ordinary shares. The entity purchased additional shares bringing the ownership Up to 40% of the investee's ordinary shares outstanding on August 1 of the current year. During October of the current year, the investee declared and paid a cash dividend on all of the ‘outstanding ordinary shares. How much income from the investment should be reported for the year? ‘A. 40% of investee's income for the current year 8. Amount equal to dividends received from the investee C. 40% of investee's income from August 1 to December 31 only D. 10% of investee's Income from January 1 to July 31, plus 40% of investee's income from August 1 to December 31 5. _ When the investee has non-cumulative preference shares, the investor's share in the investee’s profit or loss shall be reduced by one year preferred dividends A Always ©. When declared only B. Whether deciared or not D. When retained earings is deficit 6. Which of the following statements is incorrect concerning the equity method? ‘A. The investment in associate is initially recorded at cost B. Dividends received from the associate are accounted for as income. C. The investor's share of the profit or loss of the investee is recognized in the investor's proft or loss. D. The investment in associate is increased or decreased by the investor's share of the profit or loss of the investee after the date of acquisition 7. St: PAS 28 provides thatif an investor's share of losses of an associate equals or exceeds the INVESTOR'S INTEREST in the associate, the investor DISCONTINUES recognizing its share of further losses. The investment is reported at NIL OR ZERO VALUE. ‘S2: If the associate subsequently reports income, the investor resumes including its share of such income after its share of the income equals the share of losses not recognized. A. True, false C. False, false B. False, true D. True, true 8 tthe beginning of the current year, an investor acquired 30% of the ordinary shares of another entity. In the current year, the investee has net earings which exceeded dividends paid. The investor mistakenly recorded these transactions using the cost method instead of the equity method of accounting, What effect would this have on investment account, net earings and retained earings, respectively? A. Overstate, overstate, overstate C.' Understate, overstate, understate B Overstate, understate, understate D. —_Understate, understate, understate $. _Aninvestor shall discontinue the use of the equity method when ‘A The associate operates under severe long-term restrictions. B. The investor ceases to have control over the associate. C. The business activities of the investor and associate are dissimilar. D, The investor ceases to have significant influence over the associate, 10. St: _The difference between the reporting date of the associate and that of the investor shall be no more than six months, 2: If an associate uses accounting policies other than those of the investor, adjustments shall be made to conform the associate's accounting policies to those of the investor. A. True false C. False, false B. False, true D. True, true -- END OF HANDOUTS —- REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www. reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW. © (074) 6656774 @ 0916 8400861 © sunpsri@reocpareviewoh MAY 2021 CPA REVIEW SEASONPage 1 of 4 | FAR Handouts No.16 REAL e EXCELLENCE ree ee ARG. ABHTAGO. COA INVESTMENT IN DEBT SECURITIES KARIM G. ABITAGO, CPA BASIC CONCEPTS, Investment in debt secunties is basically investment in bonds, Abond is a formal unconditional promise made under seal to pay a specified sum of money at a determinable future date and to make periodic interest payments at a stated rate until the principal sum is paid, In simple language, a bond is a contract of debt whereby one party called the issuer borrows fund from another party called the investor. Thus, a bond is a debt security because the bondholder is a creditor and the issuer is a debtor. A bond is evidenced by a certificate and the contractual agreement between the issuer and investor is contained in another document known as “bond indenture” ‘TYPES OF BONDS: TERM BONDS - ‘Term bonds are those bonds that mature on a single date, SERIAL BONDS - Serial bonds are those which have a series of maturity dates or those bonds which are payable in installments, CALLABLE BONDS : Callabe bonds are those which may be called in or redeemed by the issuer prior to the date of maturity. Usually, the call price or redemption price is at a premium or more than the face value of the bonds, The difference between the redemption price and the carrying amount of the bonds on the date of redemption -is Tecognized in profit or loss. CONVERTIBLE BONDS - Convertible bonds are those which give the bondholders the right to ‘exchange their bonds for share capital of the issuing entity at any time prior to maturity REGISTERED BONDS - Registered bonds require the registration of the name of the bbondholder on the books of the corporation. Consequently, when the bondholder sells a bond, the old bond certificate is surrendered and a new bond certificate is issued to the buyer. Interest is paid Periodically to the bondholder of record COUPON BONDS: - The name of the bondholder is not registered. Accordingly, interest Is paid periodically to the bearer of the bond or the person submitting a detachable interest coupon, COLLATERAL TRUSTBONDS Collateral trust bonds are bonds secured by investments in stocks and bonds: CLASSIFICATION, MEASUREMENT AND PRESENTATION Under PFRS ©, the classification of a debt security depends on the BUSINESS MODEL used by the entity end the classifications are as follows: (@) INVESTMENT AT FAIR VALUE THROUGH PROFIT OR LOSS (TRADING SECURITIES) ~ The business mode! has an objective of HOLDING the securities for SHORT-TERM PROFITS. (>) INVESTMENT AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (AVAILABLE FOR SALE INVESTMENTS) - The business model of the company has an objective of HOLDING the debt security investment primarily to COLLECT CONTRACTUAL CASH FLOWS but also has an objective of HOLDING the debt security for SALE to take advantage of business opportunities (@)_ INVESTMENT AT AMORTIZED COST (HELD TO MATURITY INVESTMENTS) - The business model of the ‘company has an objective of HOLDING debt security investments primarily to COLLECT CONTRACTUAL CASH FLOWS and cash flows are in the form of principal and interest with fixed maturity date ‘The summary on the accounting treatment on the two classifications as well as their FS presentation are as follows: 5 Interest Ini Subsequent | Presentation of | subject to Balance Classification | easuroment | Measurement | Changes nFV | Amortestion? | lneomes | "Shae ased on Nominal ‘Current FVPL Fair Value Fair Value Profit or Loss No heirs atican Fair Value Plus Other FVOGI Transaction Fair Value Comprehensive Yes noon alee Costs Income Fair Value Plus e Effective Non-currents FAC Tereeeey | Fair Value NIA Yes Interest hacek ee ae ted REAL EXCELLENCE ONLINE CPA REVIEW R= Reta eee eePage 2 of 4| FAR Handouts No.16 REAL e EXCELLENCE invesrMENT I DEBT secon DISPOSAL OF INVESTMENT: Investments @ FVPL Investments @ Amorized Cost Investments @ FVOGI Net proceeds xx| Net proceeds »x| Net proceeds oo Less: Carrying Less: Amortized nox) | bess: Amortized amount foo Cost bea Cost Realized gain or Realized gain or . Realized gain or met x09) not ex) ig x00) NOTES: (1) Net proceeds shall exclude accrued interest. If the bonds are sold between interest dates, the selling price includes accrued interest unless otherwise stated in the problem. (2) For FVOCI investments, partial disposal will not result to the reclassification of the investment to investment at amortized cost: In other words, the tainting provision under PAS 3¢ is now excluded in PFRS 9. (3) For FVOCI investments, upon disposal, the related cumulative unrealized gain or loss shall be reclassified to retained earnings (4) All realized gain or loss are presented in profit or loss RECLASSIFICATION PFRS 9 provides that an entity shall reclassify financial assets only when it changes its business model for managing the financial assets. Where reclassification occurs, PFRS 9, provides that an entity shall apply the reclassification prospectively from the reclassification date. The entity shall not restate any previously recognized gains, losses and interest. “Reclassification date” is the first day of the reporting period following the change in business model that results in an entity reclassifying financial asset. Transfers from investments at FVPL or FVOCI to investment at amortized cost (and vice versa) are allowed. The fair value on the date of transfer shall be the invest ment's deemed cost. For transfer to investments at amortized cost, the prevailing effective interest rate on the date of transfer shall also become the deemed effective rate, The difference between the current fair value and carrying value before transfer is recognized in profit or loss. IMPAIRMENT AND REVERSAL OF IMPAIRMENT For financial assets measured at fair value through profit or loss (FVPL), the decreases in fair value, presented in Profit or loss, are already considered as impairment. Thus, impairment is nor necessary. For FVOCI investments, the computation of impairment is as follows: Recoverable emount (Fair value @ balance sheet date) ¥« Amortized cost (od Impairment loss (Profit or Loss) Xx For financial assets at amortized cost, the computation of impairment is as follows: Recoverable amount (PV of FCF at original effective interest rate) xx Carrying amount (amortized cost) (oa Impairment loss (Profit or Loss) x The computation of impairment loss on investment at amortized cost is actually the same with the computation of impairment of loans and receivables. {mn relation to reversal of previous impairment, it only applies to FVOCI investments and investments at amortized cost (FAC). Fvocl Fac Fair value @ balance sheet date xh Unrealized ‘Amartized cost had there been no impairment es Gain (OC) a x Amortized cost (latest) rx Reversal of Impairment (P/L) ra x REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience wwww.teocparevi REAL EXCELLENCE ONLINE CPA REVIEW © (074) 665 6774 @ 0016840 0061 © sunsort@reocpareview ph MAY 2021 CPA REVIEW SEASONPage 3 of 4| FAR Handouts No.16 REAL KARIM G. ABITAGO, CPA EXCELLENCE INVESTMENT IN DEBT SECURITIES DISCUSSION EXERCISES STRAIGHT PROBLEMS 1. OnApiil 1, 2019, HYDROGEN CORP. acquired 12% bonds with a face amount of P2,000,000. The bonds are dated January 1, 2019 and will mature on December 31, 2020. The bonds were acquired at P2,179,945, including the accrued interest. The bonds were acquired to yield at 10%. On December 31, 2019, the market value of the bonds is P2,570,000 and estimated cost to sell is P70,000 REQUIREMENTS. (1) What is the initial measurement of the bonds? (2) What is the carrying amount of the investment on December 31, 2019? (3) What is the unrealized gain or loss to be presented in profit or loss during 2018? (4) What is the interest income for 2019? Under the following assumptions: (2) The investment is classified as investment to profit or loss (b) The investment is classified as investment to other comprehensive income. (©) The investments classified as investment at amortized cost 2. On January 1, 2019, OXYGEN INC. purchased 10% P1,000,000 bonds at the market rate of interest of 12%. The related bond issue cost incurred by OXYGEN amounted to P50,000, The bonds will mature 4 years after REQUIREMENT: What is the purchase price of the bonds under the following scenarios? (a) The bonds acquired are term bonds. (b) The bonds acquired are serial bonds. (c) The bonds acquired are term bonds, assuming acquired on April 1, 2018 (@) The bonds are term bonds and pays interest semi-annually 3. On January 1, 2019, HELIUM CORP. invested in a 4-year 10% bond with a face value of P6,000,000 in which interest is to be paid every December 31. The bonds has an effective interest rate of 9% and was acquired for 6,194,383. HELIUM has a portfolio of commercial loans that it holds to sell in the short-term. On December 31 2019, the investment has a fair value of 6,229,862 which is based on the prevailing market rate of 8.5%. REQUIREMENTS: (2) Assume that during 2019, there was a change in the business model and cash flow characteristics but they decided to make a reclassification on January 1, 2020 to investment at fair value to other comprehensive income. On December 31, 2020, the debt investment has a fair value of P6,213,982 which is based on the prevailing rate of 8%. What amount should the debt investment be reported on December 31, 20207 (b) _Inrelation to the original information, assume that the investment were reclassified at amortized cost, at what amount should the investment in debt security be valued on December 31, 20207 () Assume that on the acquisition date, the security was designated as investment at amortized cost, but the investment at amortized cost valuation was reclassified on January 1, 2020 as investment at fair value to Profit or loss, at what amount of gain or loss should the company recognized on the date of transfer? 4 On January 1, 2019, NITROGEN INC. invested in a 4-year 10% bond with a face value of P3,000,000 in which interest is to be paid every December 31. The bonds has an effective interest rate of 8% and was acquired for 3,198,728. On December 31, 2020, the fair value of the bonds is P3,200,000. On October 1, 2021, the investment |was sold at P3,150,000 REQUIREMENT. What is the net amount to be presented in 2021 statement of profit or loss if the investment was Classified as? (2) The investment is classified as investment to profit or loss. (b) The investment is classified as investment to other comprehensive income (©) The investments classified as investment at amortized cost, 5. On December 31, 2014, CARBON INC. invested in the 5-year bonds of DIOXIDE CORP. The bonds have a face value of P3,000,000 with 8% interest payable per year. CARBON paid P2,772,552 to acquire the instruments at the prevailing market rate of 10%. The debt security was classified as investment at amortized cost During 2016, DIOXIDE CORP’s business deteriorated due to political instability and faltering global economy, After reviewing all available evidence at December 31, 2016 CARBON determined that it was probable that DIOXIDE will still be able to pay the annual interest on the original loan but a reduced principal of P2,500,000 at maturity. As a result, CARBON decided that the investment in bonds was impaired and that a loss should be recorded immediately. On December 31, 2017, DIOXIDE's financial condition improved and informed CARBON to pay back P2,900,000 ‘on maturity instead of the reduced amount of P2,500,000 in December 31, 2016. REQUIREMENTS: (2) What amount of impairment loss should CARBON recognize on its debt instruments on December 31, 2016? (b) What amount of impairment recovery should CARBON report on its 2017 statement of profit or loss? REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.re0cpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 6656774 @ 0916 840 0661 © suoport@reocpareviewph — MAY 2021 CPA REVIEW SEASON.Page 4 of 4 | FAR Handouts No.18 REAL EXCELLENCE INVESTMENTIN DEST SECURITIES MULTIPLE CHOICE (Th 1, Unrealized holding gains and losses which are recognize in profit or loss are from debt securities classified as A Amortized cost C. Held for trading B. FVOc! D. Designated and held for trading 2. Ifthe investment is measured at amortized cost, the transaction costs are ‘A. Amortized to profit or loss using the effective interest method B. Recognized in profit or loss when the asset is derecognized or becomes impaired C. Recognized in equity when the asset is derecognized or becomes impaired D. _Expensed immediately on acquisition date. 3. Bond investments held for collection are reported at A Fairvalue B. Amortized cost C. Net realizable value D. The lower of amortized cost and fair value 4, If the business model of the company is to hold the investment in debt securities for the purpose of collecting contractual cash flows, the investment may be classified as which of the following? FV @ Profit or Loss. FV @ocl @Amortized Cost A Yes No No B. No Yes Yes cS Yes No Yes D. Yes Yes Yes 5. How is the premium or discount on bonds purchased as a "trading" investment reported in financial statements? ‘A. As expense or revenue in the period the bonds are purchased 8, As an integral part of the cost of the asset acquired until such time as the investment is sold C. Asan integral part of the cost of the asset acquired and amortized over the remaining life ofthe bond issue. D. Asan integral part ofthe cost of the asset acquired and amortized over the period the 6. _ FVPL and FVOCI investments are initially measured at fair value. If the bonds are purchased between interest payment dates, fair value excludes accrued interest. Transaction costs of FVPL investments is not capitalized but rather expensed outright A Tre, false C. False, false B False, true D. True, true 7. Amortization of bond premium affects which of the following? Interest income Carrying Value A Yes Yes 8 No Yes c No No D. Yes No 8. _ Regarding disposal of investment in debt securities, which of the following statements is incorrect? St: The tainting provision for FVOCI investments was already deleted under PERS 9 $2: All realized (disposal) gain or loss are presented in profit or loss, except for FVOC! investment, itis presented in oc, A Stonly C. Both statements B S2only D None from the statements 8. _ In relation to reclassification of investment of debt securities, which of the following statements is incorrect? A PERS @ provides that an entty shall reclassify financial assets ONLY when it changes its business model for ‘managing the financial assets 8. The entity shall NOT restate any previously recognized gains, losses and interest. C. _Alltypes of transfers are allowed under PFRS 9 provided there is a change in business model. D. he difference between the current fair value and carrying value before transfer is recognized in proft or loss because of the transfer. E. _ None from the statements 10. St: _ Impairment losses and reversal of impairment losses are not applicable for FVPL investments. S2: Reversal of impairment losses for FVOC! investments and investments at amortized cost are presented in Profit or loss, A. True, false C. False, false B. False, tue D. Tne, true END OF HANDOUTS — REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www reoopareview ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 665.6774 @ 0916 840 0861 © suoport@reocpareview.oh MAY 2021 CPA REVIEW SEASONPage 1 of 7 | FAR Handouts No.17 REAL INVESTMENT PROPERTIES EXCELLENCE Veni naraco Cn INVESTMENT PROPERTIES KARIM G. ABITAGO, CPA DEFINITION AND BASIC CONCEPTS Investment property is defined as property (land or building or part of a building or both) held by an owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both NOTE: ONLY land and/or building can be classified as investment property. ‘Owner-occupied property - is property held by an owner or by the lessee under a finance lease for use in the production or supply of goods or services, or for administrative purposes. Detailed comparison of investment property and owner-occupied property: INVESTMENT PROPERTY ‘OWNER OCCUPIED PROPERTY + Hela for use in the production or supply of * Held to earn rentals or for capital aoa goods or services or for admnstatve purposes. > Generales cash ows INDEPENDENTLY + Generates cash flows IN CONJUCTION wi from the other assets held by an ent oiher assets held by an ent + nludes ONLY land and bulding Seat eareeeron eran at lard &Aecounted for under PAS 40 2 Accounted Tor under PAS 16 Examples of investment property ‘+ Land held for long-term capital appreciation, + Land held for a currently undetermined use. For example, if an entity has not determined that it will use the land either as owner-occupied property ot for short-term sale in the ordinary course of business, the land is considered to be held for capital appreciation and therefore investment property. * Building owned by the entity, or held by the entity under a finance lease, and leased out under one or more operating leases * Building that is vacant but is held to be leased out under one or more operating leases. + __ Property that is being constructed or developed for future use as investment propery. Examples of owner-occupied property © Owner-occupied property or property held for use in the production or supply of goods or services or for administrative purposes. + Property held for future use as owner-occupied property. * Property held for future development and subsequent use as owner-occupied property. + Property occupied by employees, whether or not the employees pay rent at market rate. + Owner-occupied property awaiting disposal * Property held for sale in the ordinary course of business or in the process of construction or development for such sale. + Property being constructed or developed on behalf of third partes. * Property that is leased to another entity under a finance lease. OTHER CLASSIFIC) SSUES. (A) PROPERTY PARTLY INVESTMENT PROPERTY AND PARTLY OWNER-OCCUPIED PROPERTY Ceriain properties may include a portion that is held to earn rentals or for appreciation and another portion that is held for manufacturing or administrative purposes, * If these portions could be sold or leased out separately, an entity shall account the portions separately as investment property and owner-occupied property. * Ifthe portions could not be sold separately, the property is investment property if only an insignificant portion is held for manufacturing or administrative purposes. (8) ANCILLIARY SERVICES ‘+ When ancillary services are provided by the entity to the occupants of the property and these services are a relatively insignificant component of the arrangement, the property is treated as investment property. * When ancillary services provided are a more significant component of the arrangement, the property is treated as owner-occupied property. (C) INTRACOMPANY RENTALS © From the perspective of the individual entity that owns it - investment property fiaele a Waar aa) Effectiveness. Efficiency. Convenience meee te tet a Cot ComeyREAL Page 2 of 7 | FAR Handouts No.17 EXCELLENCE KARIM G. ABITAGO, CPA INVESTMENT PROPERTIES From the perspective of the group as a whole and for purposes of consolidated financial statements - owner- ‘occupied property RECOGNITION Investment property shall be recognized as an asset when and only when: (@) Its probable that the future economic benefits that are associated with the investment property will low to the entity, () The cost of the investment property can be measured reliably. MEASUREMENT INITIAL MEASUREMENT ‘An investment property shall be measured initially at its COST including TRANSACTION COSTS and DIRECTLY ATTRIBUTABLE COSTS which includes the following (@) Professional and legal fees (b) Transfer taxes and employee benefits Excluded from cost of investment property are the following (2) Start up costs, unless they are necessary to bring the property to its working condition. (b) Initial operating losses incurred before the investment property achieves the planned level of occupancy. (6) Abnormal amounts of wasted material, labor or other resources incurred in constructing or developing the property ‘Acquisition costs of an investment property vary depending on the means of classification: ‘MEANS OF ACQUISITION ‘COST (Cash Basis | Invoice Price ‘On Account Basis Invoiee Price less Cash Discount fi Deferred Settlement Basis z Cash Price Equivalent apenas Direct materials, Direct Faber end Overhead pus Borrowing Tower amount between: Properties Held under Finance Lease (2) Fair value of the property (b) Present value of minimum lease payments ‘With Commercial Substance: (@) Fair value of asset given + cash paidireceived (b) Fair value of asset received (c) Carrying amount of asset given 2 cash paidireceived Without Commercial Substance: (a) Carrying amount of asset given + cash paid/received Exchange ‘SUBSEQUENT MEASUREMENT ‘An entity shall choose either of the following models as its accounting policy and shall apply that policy to all ofits investment property: FV MODEL COST MODEL a @ Feir Value (wio deducting cost to | Cost less accumulated depreciation Eero steel (SEE), sell Jess accumulated impairment losses ‘Statement of Comprehensive Unrealized gain on changes in fair Depreciation and impairment losses income Yalue (profit or oss) Significance of Fair Value For measurement and disclosure For disclosure oni NOTES. (1) When 2 property interest held by a lessee under an operating lease is classified as an investment property, the fait value model ONLY shall be applied, (2) Inability to determine fair value There is a rebuttable presumption that an enti ity can reliably determine the fair value of an investment property on a continuing basis. However, in exceptional cases, when an entity first acquires an investment property, first becomes investment property after a change in use, the fair value of the investment property is not reliably determinable on a continuing basis, Under such exceptional cases, PAS 40 mandates th: Cost model until the disposal of the investment proper Moreover, under such exceptional cases only, zer0. or when an existing property iat the entity shall measure such investment ty. the residual value of the investment property shall be assumed to be Property using the PAS 40 further states that an entity that uses the fair value model shall continue to measure its other investment property at fair value, notwithstanding the fact that one investment property is carried using the cost model due to exceptional cases. REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience _wew.reocpareview ph REAL EXCELLENCE ONLINE CPA REVIEW. © (074) 685.6774 @ 0016 40.0061 © suppot@reocoareviewoh — MAY 2021 CPA REVIEW SEASONFr FEAL ence ee ‘Model to fair value model is ALLOWED. Any resulting gain or loss shall be presented in profit or loss, TRANSFERS by: (b) Commencement of development with a view to sale - transfer from investment property to inventory. (©) End of owner occupation - transfer from owner-occupied property to investment property. (@) Commencement of an operating lease to another entity - transfer from inventory to investment property. Measurement of transfer to and from investment property Under Cost Model Made at carrying amount} 7 - First charged to Impairment loss, excess} is revaluation surplus From IP to OP. (New CA is FV) Gain or loss - P/L| To IP from [Measurement o Transfers Under Fair Value Model (Made at fair value) = Tea Revaluation surplus, excess is impairment Inventory (Gain or loss - profit or loss) PRESENTATION AND DISCLOSURE Investment properties are presented within the NON-CURRENT ASSETS section of the statement of financial position The general disclosures are: 1. Whether the entity uses the cost model or fair value model of measuring investment property 2. The amount of rental income for the period along with the related expense. 3. Restrictions on the investment property either through rentals or sale proceeds. 4. Contractual obligations to purchase or construct investment property. ‘When the fair value model is used, the disclosures are: 4. Detailed reconciliation, showing all movements, between carrying amount of investment property at the beginning and end of the period 2, The method of determining the fair value of investment property and whether the valuation is carried out by an independent qualified valuer. 3. Net gains or losses from fair value adjustments. 4. Whether significant fixtures, such as lift and office furniture, within an investment property, have been separately recognized) ‘When the cost model is used, the disclosures are’ 1. The depreciation method or rate and useti life, 2, Detailed reconciliation of the gross cost of investment property and the related accumulated depreciation showing all movements during the year. 3. Fair value of the investment property where possible. If it is not possible, such fact shall be explained. REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW © (074) 6656774 @ 0916 2400661 © sunpori@reocpareviewch AY 2021 CPA REVIEW SEASON.Page 4 of 7 | FAR Handouts No.17 R EAL KARIM G. ABITAGO, CPA EXCELLENCE INVESTMENT PROPERTIES DISCUSSION EXERCISES STRAIGHT PROBLEMS 4. PIKACHU CORP. and its subsidiaries own the following properties as of December 31, 2019: Land held for long-term cepital appreciation 150,000, Constructed building to be used as office building 200,000 Equipment leased out under operating lease 400,000 Building constructed in behalf of RAICHU CORP. 250,000 Land held for undetermined future use 300,000 Equipment leased out under operating lease 60,000 Building occupied by its employee paying a market rent 400,000 Vacant building but held to be leased out under operating lease 450,000 Building under construction to be rented out under operating lease 350,000 Office building awaiting disposal 50,000 40-storey building (frst 6 floors are rented out under operating lease other floors used as office space) 500,000 Building leased out under operating lease 250,000 Building that is leased to another entity under a finance lease 150,000 Land rented out to PICHU CORP. (a subsidiary) 200,000 Equipment rented out to SNORLAX CORP. (a subsidiary) 150,000 Land held for sale in the ordinary course of business 350,000 Building rented out to FEEBAS INC. (an associate) 200,000 Other information: (@) The portions of the building could be rented out separately. {b) The company provides significant ancillary services to its tenants. (¢) _Intracompany leases made to related parties (subsidiaries and associates) were all classified as operating leases. REQUIREMENTS: (a) What is the total investment property that should be reported in the consolidated statement of financial position of PIKACHU CORP. and its subsidiaries? (b) What is the total investment property that should be reported in the separate statement of financial position of the PIKACHU CORP.? 2. — SQUIRTLE INC. has the following investment properties’ transactions during 2019: * On January 1, 2019, SQUIRTLE INC. acquired a building at P300,000, excluding VAT of P36,000, Legal fees and other professional fees in relation to the purchase transaction amounted to P50,000. The acquired building is to be rented out under an operating lease scheme and the day-to-day servicing cost of the asset for 1 year amounted to P14,000. * On March 1, 2019, the company started to construct 2 15-storey building to be partly rented out to third Parties (10 floors) and partly for administrative purposes (5 floors). Both portions can be sold separately. The {otal cost incurred is as follows: ‘Materials, labor and overhead 300,000 Operating Losses and start-up costs 15,000 ‘Abnormal Losses of materials during construction 12,000 Interest expense directly related to construction 16,000 Normal amounts of losses 30,000 * On July 4, 2019, SQUIRTLE purchased a land for capital appreciation on instalment basis of P5O0,000. It was agreed that SQUIRTLE will provide a 30% down payment and a non-interest bearing note for the remaining balance, the maturity of which is after years. The prevailing market rate of interest for similar instrument is 10%. SQUIRTLE incurred transaction costs of P'1,000. * Aland was acquired through finance lease on October 1, 2019 and to be rented out under various operating leases, The fair value of the land is P650,000 and the present value of minimum lease payments is 600,000. * On December 1, 2019, SQUIRTLE entered into an exchange transaction with TURTWIG CORP. The exchange involved the lands of the companies. The following information was available in relation to the exchange transaction: Fair Value Carrying Amount SQUIRTLE 400,000 350,000 TURTWIG 450,000 500,000 SQUIRTLE paid additional cash to compensate difference in fair velue of the lands. The exchange has ‘commercial substance REQUIREMENT: How much is the total cost of investment properties at intial recognition? 3. Qn January 1, 2018, CHARMANDER CORP. acquired a building classified as investment property amounting to 3,000,000. At that date, the building had a useful lfe of 10 years. On December 31, 2019, the fair value of the building was P2,400,000 and the building was sold on June 30, 2020 at P2,200,000. REQUIREMENTS: Under cost model and fair value model (1) What is the carrying amount of the investment property at the end of 20197 What is the net amount presented in profi or loss for the year 2019 and 2020? REO CPA REVIEW PHILIPPINES” Effectiveness. Efficiency. 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