CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING] FAR-003LN (22-23)

INVESTMENT IN EQUITY SECURITIES

Investments – assets kept by the company for the purpose of
 Accumulating wealth through distributions such as interest, royalties, dividends and
rentals
 Capital appreciation
 Additional benefits to the company
 For meeting business requirements
 For protection

Categories of Investments
1. Equity Securities – represents a share in company’s ownership
2. Debt Securities – a security the represents a creditor relationship
 Has maturity value
 Interest payments on a periodic basis based on rate established in the instrument
 Date of maturity

Classification of Equity Securities CLASSIFICATION: NCA

Ownership Ownership Shares

Classification Purpose
Percentage Ordinary Preference
FVPL Less than 20% For trading / /
FVOCI Less than 20% Non-trading / /
Investment in Associate 20%-50% Significant Influence / x
or Joint Venture
Investment in Subsidiary More than 50% Control / x
voting rights
bakit hindi pwede
magacquire sa control of Investment in Equity Securities at Fair Value
another company (for
ordinary shares lang)

Trading FVPL

Equity Securities
fair value other
FVOCI comprehensive income
Non-Trading
Day 1
(Irrevocable Choice fair value over
FVPL
profit/loss

Important Principles:
FVPL FVOCI
Initial Measurement Fair Value Cost*
Treatment of transaction cost
Expensed Capitalized
incurred in the acquisition
Subsequent Measurement Fair Value at Year-end
Reporting Changes in Fair
Profit/Loss Other Comprehensive Income
Value
changes in FV - sa OCI lang ilalagay
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 CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

Financial Statement
Current Asset Non-Current Asset
Classification
Impairment Consideration N/A

Unrealized Gain/Losses on Equity Securities at FV

Fair value at year-end > Carrying Amount = Unrealized Gain
Fair value at year-end < Carrying Amount = Unrealized Loss

Realized Gain/Losses on Equity Securities at FV

Selling Price > Carrying Amount = Realized Gain
Selling Price < Carrying Amount = Realized Loss

Disposition of gain(loss) on sale

FVPL Profit or loss
FVOCI OCI -> Retained Earnings

 Transaction cost incurred on the sale of equity securities at FVPL are netted against the
resulting gain or loss on sale
 Transaction cost incurred on the sale of equity securities at FVOCI are reported in profit
or loss on sale

Transaction Subsequent to Initial Recognition

 Dividends – dividends shall be recognized as income on the date of declaration
 Date of declaration – the date on which the Board of Directors approves payment
of dividends cash sa umpisa - pwede magbago sa dulo (shares or anything)
 Date of record – the date on which the stock and transfer book of the corporation
is closed for registration memorandum
 Date of settlement – the date on which the declared dividends are paid out

a. Dividends-On Period - the market price of the shares during this period includes
the accrued dividends.
 Purchase or Selling Price = Market price per share – Dividends per share
b. Ex-Dividends Period – the market price of the shares during this period
excludes the accrued dividends.
 Purchase or Selling Price = Market price per share

Types of Dividends

o Cash Dividends – these are recognized in profit or loss whether the shares held
are classified as FVPL or FVOCI
o Property Dividends – dividends in the form of non-cash assets (dividends in
kind). These are recognized in profit or loss whether the shares held are
classified as FVPL or FVOCI. dineclare kung saan naginvest ng shareholders (cash or property)
o Share Dividends – are not recognized as income, whether they are of the same
class or not.
 Share dividends of the same class – recorded by means of a
memorandum. Only the number of shares is affected by the share
dividends. The carrying amount of the shares held is same before and
after the share dividends

date of declaration: DATE OF RECORD: NO ENTRY

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DATE OF SETTLEMENT
DIVIDEND INCOME CASH
DIVIDEND RECEIVABLE
 CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

 Share dividends of different class – the investments carrying value is

divided between the initial shares and the share dividends based on their
market price at the time of receipt of the share dividends. Recorded by
debiting the new investment account and crediting the original investment
account.

Special Cases of Dividends:

 Shares in lieu of cash dividends
Hierarchy of Valuation
 Fair value of shares received
 Cash dividends that would have been received if the fair value of
shares received is not determinable
 Cash received in lieu of shares dividends – accounted for “as if sold”.
In other words, the share dividends are considered to be collected and
then sold for the cash received

o Script Dividends – dividends in the form or promissory note (deferred cash

dividends).
o Liquidating Dividends – dividends out of capital.
 They represent return of investment
 They are not considered income; thus, they are credited to the investment
income
 Normally paid when the corporation is dissolved or liquidated

 Share splits – occurs when a company decides to raise its share count by dividing its
existing shares into new ones. Only memorandum entry is made to record the split.
o Split-up = increase in number of shares; decrease in par/stated value per share
o Split-down = decrease in number of shares; increase in par/sated value per share

 Special assessment fees – these are additional capital contributions on the part of the
shareholders. These are capitalized as part of the cost of investment

 Redemption of shares
Redemption price > Acquisition cost = Gain on Investment
Redemption price < Acquisition cost = Loss on Investment
Journal Entry:
Cash xx
Loss on Investment xx
Investment in shares xx
Gain on Investments xx

 Share rights – granted to existing shareholders to subscribed for new shares before
such shares are offered for sale to the public
 Entitles an investor to subscribed for new share at less than the prevailing market
price
 It gives the shareholders the chance to preserve their ownership interest
 Only memorandum entry is made
 A shareholder that receives share rights has three possible options:
a. Exercise the rights
Entry:
Investments in Shares (at fair value) xx

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Cash xx
Investment income xx

b. Sell the rights

Entry:
Cash xx
Investment income xx

c. Allow the rights to lapse (memorandum entry)

Investment in Associates
Associate – an entity which the investor has significant influence

Significant Influence
 Power to participate in the financial and operating policy decisions of the investee but
not in control or joint control of those policies
 If an entity holds, directly and indirectly 20% or more voting power of the investee, it is
presumed that the entity has significant influence, unless it can be early demonstrated
that this is not the case
 When assessing whether an entity has significant influence, the existence of potential
voting rights that are currently exercisable or convertible, including potential voting rights
held by other entities are considered.
 Existence of significant influence is usually evidenced in one or more of the following
ways
 Representation on the Board of Directors or equivalent governing body of
the investee
 Participation in policy-making processes, including participation in
decisions about dividends or other distributions
 Material transactions between the entity and its investee
 Interchange of managerial personnel
 Provision of essential technical information

Equity Method of accounting for Investment in Associates

 Investment in associate account shall be initially recognized at cost
Cost = Fair Value plus transaction cost
 Investor’s portion of investee’s profit (and other comprehensive income) increases the
carrying amount, whereas, the investor’s portion of the investee’s loss (and other
comprehensive loss) decreases it

Journal Entry:
Investee reported profit Investee reported loss
Investment in Associate xx Loss on Investment xx
Investment income xx Investment in Associate xx
Share in Investee’s OCI Share in investee’s OCL
Investment in Associate xx Share in OCL xx
Share in OCI xx Investment in Associate xx

Investment income/loss = Investee’s profit/loss x Ownership Interest %

Share in OCI/OCL = Investee’s OCI/OCL x Ownership Interest %

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 The carrying amount of the investment is reduced by distributions or dividends received

from the investee

Journal Entry
Cash (other appropriate account) xx
Investment in associate xx

Summary:
Investment in Associate
Acquisition Cost xx xx Dividends received or receivable
Adjusted share in the profit Adjusted share in the loss of the
of the investee xx xx investee
Share in the increase in OCI Share in the decrease in OCI
of the investee xx xx of the investee
Share in the decrease in OCL Share in the increase in OCL
of the investee xx xx of the investee
xx Impairment Loss on Investment
End, Balance xx

Discontinuance of the Use of Equity Method

An entity shall discontinue the use of equity method from the date when its investment ceases
to be an associate. If the retained interest in the former associate is a financial asset, the
retained interest must be measured at fair value.

Proceeds from the sale of investment xx

Add: Fair value of the retained investment xx
Total xx
Less: Carrying value of the investment (xx)
Gain (loss) to be recognized in profit/loss xx

Alternative:
Proceeds from the sale of investment xx
Less: Carrying value of the investment sold (xx)
Gain (loss) on disposal – profit/loss xx

Fair value of the retained investment xx

Less: Carrying value of the retained investment (xx)
Gain (loss) on reclassification – profit/loss xx

 Purchase Differential – arises when there is difference between the cost of the
investment and the investor’s share of the net fair value of the investee’s identifiable
assets and liabilities.
o Cost of Investment > Net FV of the investee’s identifiable assets and liabilities
 Goodwill
 Not separately recognized
 Included in the carrying amount of the investment
 Not amortized but subject to annual impairment assessment

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 CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

o Cost of Investment > Net FV of the investee’s identifiable assets and liabilities
 Gain on Acquisition
 Included as income in the determination of the entity’s share of the
associate or joint ventures profit or loss in the period in which the
investment is acquired

Acquisition Cost xx
Less: Share in the FV of associate’s identifiable net assets
Share in the carrying value of associate’s identifiable net assets xx
(CVINA x ownership %)
Add: Share in the undervaluation of associate’s assets xx
(Amount x ownership %)
Less: Share in the overvaluation of associate’s assets (xx) (xx)
(Amount x ownership %)
Goodwill (Gain on Acquisition) xx

 Investor’s share of the associate’s profit or loss shall be based on the associate’s
profit or loss after adjustments for particular expense items such as cost of goods
sold, depreciation, and amortization as these items shall be based on their FVs
of the related accounts as of the acquisition date.

Share in the associate’s reported profit (loss) xx(xx)

Less: Amortization of undervaluation of asset (xx)
Add: Amortization of overvaluation of asset xx
Add: Gain on acquisition (only in the year of acquisition) xx
Less: Impairment loss on goodwill (xx)
Adjusted share in the associate’s profit or loss xx(xx)

Amortization of purchase differentials:

Item Manner of amortization
Inventory When sold
Land When disposed/sold
Over its remaining useful life from the date of
Depreciable Assets
acquisition unless disposed/sold

 Intercorporate Sales

Downstream Sales Upstream sales

Transaction Sales of assets from the Sales of assets from an
investor to the associate associate to the investor
Unrealized gain or loss Eliminate in full Eliminate in the investor’s share
Realized gain or loss Recognize in full Recognized the investor’s share

Elimination of unrealized Recognition of realized profit or

profit or loss loss
Inventory Upon disposal or sale to outside
Land parties
In the year of intercompany
Every year through depreciation or
sale
Depreciable Assets upon disposal or sale of outside
parties

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General Formula:
Share in the reported net income xx
Less: Unrealized profit on downstream sale (100%) (xx)
Add: Unrealized loss on downstream sale (100%) xx
Add: Realized profit on downstream sale (100%) xx
Less: Realized loss on downstream sale (100%) (xx)
Less: Unrealized profit on upstream sale (Investor’s share) (xx)
Add: Unrealized loss on upstream sale (Investor’s share) xx
Add: Realized profit on upstream sale (Investor’s share) xx
Less: Realized loss on upstream sale (Investor’s share) (xx)
Investment income (or equity in the earnings of the associate) xx

 Associate with heavy losses – if an entity’s share of losses of an associate equals or

exceeds its interest in the associate, the entity discontinues recognizing its share of
further losses. If an associate subsequently reports profits, the investor resumes
recognizing its share in of those profits only after its share of profits equals the share of
losses not recognized.

Formula:
Carrying amount of the investment in associate xx
Add: Investment in associate’s preference share xx
Add: Unsecured long-term receivables, loans and advances xx
Total interest in associate xx

 Impairment of investment – impairment loss shall be recognized when the carrying

amount of investment in associate exceeds its recoverable amount
o Recoverable amount of an asset is the higher amount between the asset’s fair
value less the cost of disposal or its value in use.

Value in use could either be:

 Present value of the future cash flows expected to be generated by the
associate, including the cash flows from operations of the associate and
proceeds on the ultimate disposal of the investment
 Present value of the estimated future cash flows expected to arise from
dividend distributions and from the ultimate disposal of the investment

Recoverable amount shall be assessed for each associate, unless the associate
does not generate cash inflows from continuing use that are largely independent
of those from other assets of the entity

 Step Acquisition – refers to ownership achieved in stages. Investor shall remeasure the
previously held securities at fair value
General Rule: Any changes in FV are reported in profit or loss
Exemption: If previously held securities are accounted as FVOCI, any unrealized
gains or losses at the date the investee becomes an associate is
reclassified to retained earnings.

Cost of additional interest acquired xx

Add: FV of previously held securities xx
Initial measurement of Investment in Associate xx

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 Associate with preference shares

 When an associate has outstanding cumulative preference shares, the investor
shall determine its share of profits or losses after deducting the dividends on those
preference shares, whether declared or not
 When an associate has outstanding non-cumulative preference shares, the
investor shall determine its share of profits or losses after deducting the dividends on
preference shares, only when declared.

Net income (loss) attributable to ordinary shareholders xx(xx)

Multiplied: Investor’s ownership percentage xx%
Share in profit (loss) xx

Net income (loss) of the associate xx

Less: Dividends on preference shares* (xx)
Net income (loss) attributable to ordinary shareholders xx

*Dividends on cumulative PS = Total par value of PS x Annual dividend rate

Dividends on non-cumulative PS = Actual dividends declared

Note: Redeemable preference shares are accounted for as liability. Any declared
dividends on redeemable preference shares are recognized as finance cost (or interest
expense). The dividends on redeemable preference shares shall no longer be deducted
in computing the net income of the associate for the current period

 Accounting for investments less than 20%

 If an entity holds less than 20% of the voting power of the investee, it is
presumed that the entity does not have significant influence, unless such
influence can be clearly demonstrated

Methods:
o Fair Value Method – Applicable to FVPL and FVOCI
o Cost Method – Applicable to investments in unquoted equity securities

 Deemed disposal of associate

o Investor loses significant influence

 Gain (loss) on partial disposal is recognized in profit or loss
 Equity method is discontinued
 Reclassify the total share in OCI of associate to profit or loss or retained
earnings
 The requirements of PFRS 9 will be applied

o Investor did not lose significant influence

 Gain (loss) on partial disposal is recognized in profit or loss
 Equity method is still applied
 Reclassify the total share in OCI of associate to profit or loss or retained
earnings in proportion to the decrease in ownership
 The requirements of PAS 28 will be applied

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Reporting of Gain or Loss on Remeasurement/Reclassification

 The securities shall be transferred at FV at the date of reclassification

Reclassification
Reporting of gain or loss
From To
FVPL Investment in associate Profit or loss
FVOCI Investment in associate OCI -> Retained Earnings
Investment in associate FVPL/FVOCI Profit or loss

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