INVESTMENTS

I. SUMMARY
Investment
● These are assets held by an entity for the accretion of wealth through distribution such as
interest, royalties, dividends, and rentals, for capital appreciation, or other benefits to the
investing entity such as those obtained through trading relationships.

A. Equity Investments: Dividends, share split, and share right

Acquisition of Equity Investments
● This 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.
Acquisition by Exchange
● If the equity securities are acquired in exchange, the acquisition cost is determined by
reference to the following in the order of priority:

a) Fair value of the asset given

b) The fair value of the asset received
c) Carrying amount of assets 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 based on 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.

Investment in unquoted equity instruments

● 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
● It provides that on the 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. In such a case, the entity shall
determine the cost of the shares sold using either the FIFO or average cost approach.
Share split
● Reconstruction of capital, affecting a change in the number of shares. Share split does not
affect the total cost of investment.
Split up or down
● Only thru memorandum entry to record receipt.
Special Assessment
● Additional capital contribution on the part of the shareholder.
Redemption of shares
● On the side of the shareholder, the redemption share is recorded in the same manner as
the sale of shares.
● It is treated as the sale price.
Share right or stock right
● It is a legal right granted to shareholders to subscribe for new shares issued by a
corporation at a specified price during a definite time. It may also be labeled as an IAS
term or a right issue.
Share warrants
● It is evidenced by instruments or certificates. Valuable because the price when shares are
sold is generally below than prevailing market price.

B. Investment in Associate: Basic Principle

Investment in associate
● It refers to an entity where the investor has a significant effect but does not have complete
regulation like a parent and a subsidiary relationship. Generally, the investor has a
significant impact when it has another entity’s 20% to 50% of shares.
● Accounting for investment in associates is conducted using the equity method. In the
equity method, a 100% consolidation is not used. Instead, the proportion of shares owned
by the investor is shown as an investment in accounting. Investment in associates is
typical for companies to utilize the investment to take a lesser stake in another company.

C. Investment in Associate: Other Accounting Issues

Upstream Transactions
● A transaction that occurs when an investee (associate) sells assets to the investor
Downstream transactions
● A transaction that occurs when the investor sells assets to an investee (associate)
Adjustment of Investee’s Operations
● The associate shall prepare for the use of the financial statement considering the same
date as the financial statement of the investor only if the reporting period between the
investor and investee differs. The difference between the reporting dates shall not be
more than three months.
Gains and losses
● Resulting from the upstream and downstream transactions between an investor and
associate are recognized in the entity’s financial statements only to the extent of unrelated
investors’ interests in the associate.
Accounting Issue
● Elimination of unrealized profit in downstream transactions PAS 28, does not provide a
clear explanation about the accounting issue.
Computation of investor’s shares
● It is believed to be the same whether upstream or downstream and it points out that the
measurement of an investor’s share, unrealized profit must be eliminated.

Measurement of Significant Influence After Loss

On the date of the loss of significant influence;
● Any retained investment in associate of the investor shall be measured at fair value.
● The difference between the carrying amount of retained investment and the fair value of
retained investment shall be included in profit or loss.
● Likewise, the difference between the carrying amount of investment sold and net
proceeds from the disposal of part of the investment shall be included in profit or loss.

Accounting for Investment Less than 20%

a. Fair Value Method
Applicable to financial assets measured at fair value through profit or loss and fair value
through other comprehensive income

b. Cost Method
Applicable to nonmarketable equity investment or unquoted investment

Investor and associate

 They are independent of each other.
Investor
 They do not have a share in the profit or loss of the associate.

Dividends
 Received by an investor from an associate is accounted as dividend income.

II. PROBLEM
III. SOLUTION

Equity Investments: Dividends, share split, and share right

ILLUSTRATION
A shareholder acquired 30,000 shares costing P4,500,000.
Subsequently, the shareholder received share rights to subscribe for new shares at P350 per share
for every five rights held.
The market value of the share is P410 per share. The right has no known market value.
In the absence of the market value of the share right, the theoretical or parity value is determined
to approximate the fair value of the right at the time of acquisition.
If the market value of the share of P410 is right-on, the theoretical value of right is computed as
follows.
410−350 60
Value of one right ¿ ¿ =10 per ¿
5+1 6

Allocation of Cost

Cost of the original investment P4,500,000

The theoretical value of share rights (30,000 x 10) (300,000)
The remaining cost of the original investment P4,200,000

410−350 60
Value of one right ¿ ¿ ¿ P 12 per ¿
5 5
The cost of P4,500,000 is allocated as follows:
Cost of the original investment P4,500,000
The theoretical value of share rights (30,000 x 12) (360,000)
The remaining cost of the original investment P4,140,000
Investment in Associate: Basic Principle

Basic Example
Suppose CRN Corp. has purchased 20% shares of MNB Co. That means CRN Corp. has
significant influence over MNB Co. Therefore, MNB Co. can be treated as an associate of CRN
Corp. The value of 20% shares is 700,000. So, while making a purchase, below will be an
accounting transaction for CRN Corp.

Initial Dr Cr
Investment in Associates (Asset) 700,000
Cash 700,000
After 7 months, MNB Co. declares $30,000 dividends to its shareholders. That means CRN
Corp. will receive 20% of dividends or $6,000. Below will be accounting entries for the same.
After Dividends Dr Cr
Cash 6,000
Investment in Associates 6,000

MNB Co. also declares a net income of 70,000. Accordingly, CRN Corp. will debit 20% of
70,000 in its "Investment in Associates" account while crediting the same amount as "Investment
Revenue" in its income statement.

Accounting for Net Income Dr Cr

Investment in Associates 14,000
Investment Revenue 14,000
The ending balance of CRN Corp. “Investment in Associates” account increased to 708,000
Initial Dr Cr
Investment in Associates (Asset) 700,000
Cash 700,000
After Dividends
Cash 6,000
Investment in Associates 6,000
Accounting for Net Income
Investment in Associates 14,000
Investment Revenue 14,000
Final Investment in Associates Account 708,000

Investment in Associate: Other Accounting Issues

ILLUSTRATION 1 (DOWNSTREAM)

Smiley Corporation (investor) acquired 20% outstanding ordinary shares of Orange Corporation.
During the year, Smiley Corporation sold an equipment with a carrying amount of 6 500 000 for
4 800 000. The equipment has a remaining useful life of 4 years. Both Smiley and Orange uses
straight line method. The investee reported net income of 10 000 000 for 2020.

Net income for 2020 10 000 000

Unrealized profit on sale of equipment (1 700 000)
Realized profit on sale of equipment
(1 700 000/ 4 years) 425 000
Adjusted net income 8 725 000
Investor’s share (8 725 000 × 20%) 1 745 000

Notes: Since the equipment is not sold to unrelated parties, the profit for the sale of an
equipment is unrealized. The unrealized profit must also be eliminated as prescribed in PAS 28,
hence it is deducted. During the year, the asset is depreciated over its 4-year useful life, therefore
one-fourth of the profit on the sale of the equipment is realized and the remaining will be
realized after the 4-yearperiod.

ILLUSTRATION 2 (UPSTREAM)
On January 1, 2019, Cat Company acquired 30% interest in an associate, Dog Company for
P9 500 000 enabling to exercise the significant influence. All the identifiable assets and liabilities
were recorded at fair value. During the year, Dog Company reported the following income and
dividend:
2019 2020
Net Income 6 000 000 9 000 000
Dividends Paid 700 000 1 000 000

On December 31, 2019, Dog Company sold inventory to Cat Company costing 750 000 for
850,000. The inventory remained unsold by the investor in 2020.

Net Income for 2019: 6 000 000

Unrealized profit on the sale of inventory (100 000)
Adjusted net income 5 900 000
Share in adjusted net income (30%×5 900 000) 1 770 000

Notes: Since the inventory remains unsold by the investor, profit is unrealized. Thus, the profit is
realized if the inventory is sold.
IV. MOST IMPORTANT PART OF THE LESSON
The significant information of the topic about the investment is it can be defined as the
payment made to acquire the securities of other entities, with the objective of earning a return. As
an illustration, investments are bonds, common stock, and preferred stock. It may also involve
the purchase of other assets, such as a property from which rental payments can be generated.
Considering that this consist of three sub categories such as the equity investment, investment in
associate about basic principle and other accounting issues. Primarily, the definition of "Equity
Investment" means that investee company pays a cash dividend, the value of its net assets
decreases. As it utilized the equity method, the investor company receiving the dividend records
an increase to its cash balance but, meanwhile, reports a decrease in the carrying value of its
investment. Secondary, the meaning of basic principle in "Investment Associate" where it can be
defined as the details regarding the purchase of the equity shares of one entity by another entity.
A case of one entity investing in another entity through the acquisition of share capital. Lastly,
the other accounting issues in "Investment in Associate" which means as the other terminologies
that discusses the issues of an entity.