INVESTMENT IN EQUITY SECURITIES

(LECTURE NOTES)

1. Introduction
a. Investment in equity securities means the acquisition of shares of stock for the
purpose of earning dividends, or controlling another entity
b. Equity securities represent ownership of shares which may also represent rights
and options to acquire ownership shares. Owners of equity securities are known
as shareholders or stockholders.
c. The share is evidenced by an instrument called Share Certificate.
2. Acquisition of Equity Securities
a. PFRS 9 provides that when financial asset is recognized initially, it shall be
measured at fair value plus transaction costs that are directly attributable to the
acquisition. (The fair value is usually the transaction price or the fair value of the
consideration given.
b. Transaction costs that are directly attributable to the acquisition of the financial
asset shall be capitalized as cost of financial asset. However, directly attributable
costs to the acquisition of financial asset held for trading or at fair value through
profit or loss shall be expensed immediately.
c. If the equity securities are acquired in an exchange:
a. The acquisition cost is based on fair value of the asset given;
b. It may be appropriate also to consider the fair value of the securities
received it is more clearly evident;
c. In the absence of fair value, however, the cost or carrying amount of the
asset given is the basis of recording.
d. If two or more equity securities are acquired at a single cost or lump sum:
a. The single cost is allocated to the fair value of the securities acquired;
b. 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 and the
remainder of the single cost to the other security with no known market
value.
3. Investment Categories
a. Trading securities of financial assets at fair value through profit or loss
b. Financial assets at fair value through other comprehensive income
c. Investment in Associate
d. Investment in Subsidiary
e. Investment in unquoted equity instruments
4. Investment in Unquoted Equity Instruments or “Nonmarketable” Equity Instruments
a. PAS 39 provides that equity instruments that do not have quoted market price in
an active market and whose fair value cannot be reliably measured shall be
measured at cost.
b. This means that subsequent changes in market value are not recognized.
c. However, if there is an objective evidence that an impairment loss has been
incurred on such investment, the impairment loss is measured as the difference
between the carrying amount of the investment and the present value of
estimated future cash flows discounted at the current rate.
d. Once an impairment loss is recognized, it shall not be reversed. The adjusted fair
value of the investment becomes the new cost basis.

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5. Sale of Equity Securities
a. PFRS 9 provides that on de-recognition of a financial asset, the difference
between the consideration received and the carrying amount of the financial
asset shall be recognized in profit or loss.
b. When equity securities are the same class acquired on different dates at different
costs is sold, the entity shall determine the cost of the securities sold using either
the FIFO or average cost approach.
6. When to Recognize dividends as Income
a. Dividends shall be recognized as revenue when the shareholders’ right to receive
payment is established – meaning at the date of declaration.
7. Three important dates in accounting for cash dividends:
a. Date of Declaration
b. Date of Record
c. Date of Payment
8. Type of Dividends
a. Cash dividends – are dividends payable in cash, and considered as income

b. Property dividends or Dividends in kind – are dividends in the form of property or

noncash assets, and considered as income and recorded as fair value.

c. Liquidating dividends – represent return of invested capital, and therefore are not
income. The payment may be in the form of cash or noncash assets. Normally,
liquidating dividends are paid when the corporation is dissolved and liquidated.
However, in the case of Wasting Asset Corporation or mining entity, liquidating
dividends may be paid before dissolution and liquidation. This is not considered as
income. Entry:
Cash or other appropriate amount xxx
Investment in equity securities xxx
 When dividends are received from a wasting asset corporation, the
dividends are designated as partly income and partly return of capital.
Entry:
Cash xxx
Dividend income xxx
Investment in equity securities xxx

d. Stock dividends or “Bonus Issue” – Stock dividends are in the form of issuing
entity’s own shares. Shares of another entity declared as dividends are not stock
dividends but property dividends. Stock dividends are not income.
 Accounting for Stock Dividends
o To be recorded only by Memo entry on the part of the shareholder
o Stock dividends do not affect the total cost of the investment but
reduce the cost of investment per share.
 Stock dividends different from those held

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 o The original cost of the investment is apportioned between the
original shares and the stock dividends on the basis of market value
of each at the date of receipt. Illustrate.

Shares received in lieu of cash dividends

o Shares received in lieu of cash dividends are income at fair value of
the shares received. The reason is that such shares are in effect
property dividends.
o In the absence of fair value of the shares received, the income is
equal to the cash dividends that would have been received.

Cash received in lieu of stock dividends

o In this case, the “as if” approach is followed. This means that the
stock dividends are assumed to be received and subsequently sold at
the cash received. Therefore, a gain or loss may be recognized.
o Under the BIR ruling, all cash received, whether originally designated
as cash dividend or stock dividend, is income on the part of the
shareholder. However, the “as if” approach is theoretically sound and
should be followed for accounting purposes.

e. Share split – the restructuring of capital by effecting a change in the number of

shares without capitalizing retained earnings or changing the amount of its legal
capital. Share split may be split up or split down.
a. Split up is a transaction whereby the outstanding shares are called in and
replaced by a larger number, accompanied by a reduction in the part or
stated value of each share (example 5-for-1).
b. Split down is the reverse of the split up.
c. Only a Memo entry is made to record the receipt of new shares by virtue of
share split.
f. Special Assessment – are additional capital contribution of the shareholders. On
the part of the shareholders, special assessment are recorded as additional cost of
investment, and on the part of the entity as share premium.
g. Redemption of Share – Shares, particularly preference shares, may be called in for
redemption (at the option of the shareholder) and cancelation by the entity
issuing them. Gain is to be recognized when the shares are redeemed.
h. Stock Right
 When a corporation issues additional or new shares, shareholders of record
are given the legal right to subscribe for the same before the new shares
are offered for sale to the public. The purpose of which is to give the
shareholders the chance to preserve their equity interest in the
corporation. The ownership of stock rights is evidenced by a certificate
called share warrants.
 Such legal right is called stock right or preemptive right or right of
redemption. In IAS stock right is called right issue.
 A stock right is inherent in every share. A shareholder receives one right for
every share owned. Thus, if a stockholder owns 1,000 shares, he will receive
1,000 stock rights.

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  Stock rights are valuable to the shareholder because the price at which the
new shares are sold is generally below the prevailing market price.
i. Accounting for Stock Rights – Stock rights is financial asset.
a. Stock rights are accounted for separately
1. Under PFRS 9, a financial asset is recognized initially at fair value plus
transaction costs directly attributable to the acquisition of the
financial asset. Since stock rights, therefore, being a financial asset
should be measured at fair value.
2. This means that the portion of the carrying amount of the original
investment in equity securities is allocated to the stock rights at an
amount equal to the fair value of the stock rights at the time of
acquisition.
3. The reason for the allocation of cost is that stock rights are
independent of the original shares from which they are derived.
Hence, when stock rights are issued, the investor is now the owner of
two financial assets; namely, the original shares and the related stock
rights.
4. Stock rights are normally classified in the Balance Sheet as current
assets.
b. Stock rights are not accounted for separately.
1. Stock rights are recognized as embedded derivative but not as a
“stand-alone” derivative.
2. Under PFRS 9, if the host contract is a financial asset, the embedded
derivative is not separated