Chapter 10 Introduction to Investments

Objectives
1 Identify financial assets and financial liabilities.
2 Identify the classifications of financial assets under PFRS 9.
3 Understand the initial recognition and initial measurement requirements for financial assets.
4 Understand the fair value concept.
5 Understand how to account if transaction price is different from fair value.

PFRS 9, Financial Instruments - the accounting standard that accounts for investments classified as financ

FINANCIAL INSTRUMENT any contract that gives rise to a financial asset of one entity and a finan

1 FINANCIAL ASSET
Cash
An equity instrument of another entity
A contractual right:
To receive cash or another financial asset from another entity
To exchange financial assets or financial liabilities with another en
A contract that will or may be settled in the entity's own equity instrumen
A non-derivative for which the entity is or may be obliged to receiv
A derivative that will or may be settled other than by the exchange

2 FINANCIAL LIABILITY
A contractual obligation
To deliver cash or another financial asset to another entity
To exchange financial assets or financial liabilities with another en
A contract that will or may be settled in the entity s own equity instrume
A non-derivative for which the entity in is or may be obliged to deli
A derivative that will or may be settled other than by the exchange

Accounts that are not classified as financial instruments

1 Inventories
2 Prepaid expenses
3 Physical assets - PPE, investment properties and intangible assets
4 Unearned income, warranty liability and other provisions
5 Tax items
6 Constructive obligations

Broad classifications of financial assets:

1 Investments in debt securities Financial liabilities of another entity
Loans/notes receivable, investments in bonds/redeem
Interest-bearing
 2 Investments in equity securities Equity of another entity
Investments in common/preference shares

3 Derivatives derive their value from changes in the specified under

Classifications under PFRS 9

1 Fair value through profit or loss (FVTPL)

2 Fair value through other comprehensive income (FVTOCI)

3 Amortized cost

* Equity securities cannot be classified at amortized cost

* Debt securities cannot be irrevocably designated at FVTOCI, but need to meet certain conditi

Financial Assets

Investment in Investment in
Equity Debt Securities Deriv
Securities

FVTPL FVTPL F

FVTOCI FVTOCI (by

(irrevocable meeting certain
designation conditions only)
only)

Amortized cost
 Amortized cost

Basis for classification of financial assets

1 Entity's business model for managing the financial assets
2 Contractual cash flow characteristics of the financial assets

When to recognize financial assets?

When the entity becomes party to the contractual provisions of the instrument

Initial measurement of financial assets

FAIR VALUE price that would be received to sell an asset or paid to transfer a li
usually equal to the amount of the transaction price paid in obtaini
not necessarily equal to the par value of equity securities or the fa

TRANSACTION COSTS Incremental costs that are directly attributable to the acquisition, is
An incremental cost is one that would not have been incurred if the
Include fees and commission paid to agents, advisers, brokers an
Do not include debt premiums or discounts, financing costs or inte

When the transaction price is not equal to the fair value

ments for financial assets.

stments classified as financial instruments

et of one entity and a financial liability or equity instrument of another entity.

MEDIUM OF EXCHANGE

set from another entity

al liabilities with another entity under conditions that are potentially favorable to the entity
ntity's own equity instruments and is
or may be obliged to receive a variable number of the entity's own equity instruments
other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own

et to another entity
al liabilities with another entity under conditions that are potentially unfavorable to the entity
ntity s own equity instruments and is
s or may be obliged to deliver a variable number of the entity's own equity instruments
other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own

giving refunds to dissatisfied customers

vestments in bonds/redeemable preference shares

eference shares

nges in the specified underlying - interest rate, commodity price, foreign exchange rate

by default (for both debt and equity securities)

by irrevocable designation on initial recognition (for both debt and equity securities)

by meeting certain conditions (for debt securities only)

by irrevocable designation on initial recognition (for equity securities only)

by meeting certain conditions (for debt securities only)

eed to meet certain conditions

al Assets

ment in Derivatives
ecurities

FVTPL FVTPL (by

default)

VTOCI (by
eting certain
ditions only)

mortized cost
mortized cost

instrument

asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
saction price paid in obtaining the financial asset
f equity securities or the face amount of debt securities

utable to the acquisition, issue, or disposal of a financial asset or financial liability

ot have been incurred if the entity had not acquired, issued, or disposed of the financial instrument
gents, advisers, brokers and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and d
unts, financing costs or internal administrative or holding costs
xed number of the entity's own equity instruments

xed number of the entity’s own equity instruments

 at the measurement date

al instrument
nges, and transfer taxes and duties
As of December 31, 2023, ENIGMA Company reported the following account balances:

Accounts payable 800,000.00

Accounts receivable 1,400,000.00
Advances from customers (nonrefundable) 300,000.00
Advances to suppliers (nonrefundable) 200,000.00
Furniture and fixtures 500,000.00
Deferred tax liabilities 450,000.00
Prepaid insurance 150,000.00
Building 4,000,000.00
Land 3,000,000.00
Loan receivable 2,000,000.00
Investment in equity securities 1,800,000.00
Investment in debt securities 1,200,000.00
Notes receivable 900,000.00
Equipment 1,600,000.00
Inventories 1,500,000.00
Deferred tax assets 900,000.00
Derivative liabilities 240,000.00
Notes payable 600,000.00
Bonds payable 2,500,000.00
Loans payable 1,000,000.00
Estimated warranty liability 350,000.00
Supplies 120,000.00
Investment properties 2,400,000.00
Intangible assets 2,100,000.00
ng account balances:

FINANCIAL ASSETS NONFINANCIAL ASSETS FINANCIAL LIABILITIES

800,000.00
1,400,000.00

200,000.00
500,000.00

150,000.00
4,000,000.00
3,000,000.00
2,000,000.00
1,800,000.00
1,200,000.00
900,000.00
1,600,000.00
1,500,000.00
900,000.00

600,000.00
2,500,000.00
1,000,000.00

120,000.00
2,400,000.00
2,100,000.00
7,300,000.00 16,470,000.00 4,900,000.00
NONFINANCIAL LIABILITIES

300,000.00

450,000.00

240,000.00

350,000.00

1,340,000.00
Chapter 11 Investment in Equity Shares

Objectives
1 Understand the difference between equity and debt securities.
2 Understand the different classifications of investment in equity securities unde
3 Understand the accounting for investments inequity securities classified as FV
4 Understand the difference between profit or loss and OCI.
5 Understand the cost of the investment as substitute to fair value.

Equity Vs. Debt Securities Substance over form

Classification of equity securities under PFRS 9

FVTPL Accounting Vs. FVTOCI Accounting
Cumulative balance of net unrealized gain or loss - OCI

Profit or loss Vs. Other Comprehensive Income

Total
Comprehensive = Profit or Loss +
Income
n equity securities under PFRS 9.
curities classified as FVTPL and FVTOCI.

fair value.
 Other
Comprehensive
Income
 At the beginning of 2023, IVAN Company acquired 200,000 ordinary shares a
the shares have the following fair values ang corresponding estimated transac

Date Fair Value per Share

December 31, 2023 5.75
December 31, 2024 6.35

The investment was actually sold on January 10, 2025 for P6.55/share with th

Required: Determine the journal entries from 2023 to 2025 under each of the following inde

The investment is accounted for at FVTPL

The investment is accounted for at FVTOCI

FTVTPL
1/1/2023 Financial assets at FVTPL 1,000,000.00
Transaction costs (expense) - P/L 9,000.00
Cash

12/31/2023 Financial assets at FVTPL 150,000.00

Unrealized gain - P/L

12/31/2024 Financial assets at FVTPL 120,000.00

Unrealized gain - P/L

1/10/2025 Cash 1,310,000.00

Financial assets at FVTPL
Gain on sale - P/L

Transaction costs (expense) - P/L 12,000.00

Cash
 200,000 ordinary shares a another entity at P5/share (equal to its fair value). Transaction costs amo
sponding estimated transaction costs that will be incurred assuming the shares are to be sold on eac

Transaction Costs
10,000.00
11,500.00

025 for P6.55/share with the Company incurring P12,000 transaction costs.

nder each of the following independent assumptions:

FVTOCI
Financial assets at FVTOCI
Cash
1,009,000.00

Financial assets at FVTOCI

150,000.00 Unrealized gain - OCI

Financial assets at FVTOCI

120,000.00 Unrealized gain - OCI

Cash
1,270,000.00 Financial assets at FVTOCI
40,000.00 Gain on sale - OCI

Gain on sale - OCI

12,000.00 Unrealized gain - OCI
Retained earnings

Transaction costs (expense) - P/L

Cash
fair value). Transaction costs amounted to P9,000. At the end of 2023 and 2024,
g the shares are to be sold on each reporting dates:

on costs.

1,009,000.00
1,009,000.00

141,000.00
141,000.00

120,000.00
120,000.00

1,310,000.00
1,270,000.00
40,000.00

40,000.00
261,000.00
301,000.00

12,000.00
12,000.00
RAINBOW Company had the following investments in equity securities transactions from the y

Date Transactions
1/1/2023 Acquired 400,000 ordinary shares of DDD Company for P8/share and incurred tra
6/15/2023 Acquired 200,000 preference shares of EEE Company at P12/share, which are to
3/12/2024 Acquired 100,000 ordinary shares of FFF Company at P7/share, to be accounted
9/10/2024 Acquired 300,000
Sold 150,000 preferences
ordinary shares ofshares of GGG Company
DDD Company at P9/ share, to be accou
for P9.75/share.
Transaction
4/5/2025 Sold 120,000costs incurredshares
preference amounted to P12,000.
of GGG Company for P8.40/share.
Transaction costs incurred amounted to P8,000.
5/8/2025 P8/share.
7/8/2025 Transaction costs incurred amounted to P10,000.

The Company also compiled the following fair value information as of the end of each year, fro

Equity Securities FV, 12/31/23

DDD Company 8.75
EEE Company 11.50
FFF Company 6.50
GGG Company 9.25

1/1/2023 Acquired 400,000 ordinary shares of DDD Company for P8/share and incurre

1/1/2023 Financial assets at FVTPL - DDD

Transaction costs (expenses) - P/L
Cash

6/15/2023 Acquired 200,000 preference shares of EEE Company at P12/share, which ar

6/15/2023 Financial assets at FVTOCI - EEE

Cash

12/31/2023 Financial assets at FVTPL - DDD

Unrealized gain - P/L

Unrealized loss - OCI

Financial assets at FVTOCI - EEE

3/12/2024 Financial assets at FVTOCI - FFF

Cash
9/10/2024 Acquired 300,000 preferences shares of GGG Company at P9/ share, to be a

9/10/2024 Financial assets at FVTPL - GGG

Cash
12/31/2024 Financial assets at FVTPL - DDD
Unrealized gain - P/L

Unrealized loss - OCI

Financial assets at FVTOCI - EEE

Financial assets at FVTOCI - FFF

Unrealized gain - OCI

Unrealized loss - P/L

Financial assets at FVTPL - GGG
Sold 150,000 ordinary shares of DDD Company for P9.75/share.
4/5/2025 Transaction costs incurred amounted to P12,000.

4/5/2025 Cash
Financial assets at FVTPL - DDD
Gain on sale - P/L

Transaction costs (expenses) - P/L

Cash
Sold 120,000 preference shares of GGG Company for P8.40/share.
5/8/2025 Transaction costs incurred amounted to P8,000.

5/8/2025 Cash
Loss on sale - P/L
Financial assets at FVTPL - GGG

Transaction costs (expenses) - P/L

Cash
P8/share.
7/8/2025 Transaction costs incurred amounted to P10,000.

7/8/2025 Cash
Gain on sale - OCI
Financial assets at FVTOCI - FFF

Unrealized gain - OCI

Gain on sale - OCI
Retained earnings

Transaction costs (expenses) - P/L

Cash

12/31/2025 Financial assets at FVTPL - DDD

Unrealized gain - P/L
Unrealized loss - OCI
Financial assets at FVTOCI - EEE

Financial assets at FVTOCI - FFF

Unrealized gain - OCI

Unrealized loss - P/L

Financial assets at FVTPL - GGG

ASSETS SECTION OF THE BALANCE SHEET

12/31/2023
Equity investments in:
DDD Company 3,500,000
GGG Company
Financial assets at FVTPL 3,500,000

Equity investments in:

EEE Company 2,300,000
FFF Company
2,300,000

FINANCIAL PERFORMANCE
2023
Income statement
Unrealized gains (losses) from:
DDD Company 300,000.00
GGG Company
Transaction costs (30,000.00)
Net gain (loss) on sale - P/L
Net amount in P/L 270,000.00

Other comprehensive income

Unrealized gains (losses) from:
EEE Company (120,000.00)
FFF Company
Gain (loss) on sale - OCI
Net amount in OCI (120,000.00)

Statement of comprehensive income

Total comprehensive income (loss) 150,000.00

SHAREHOLDER'S EQUITY SECTION OF BALANCE SHEET

12/31/2023
Financial asset at FVTOCI 2,300,000.00
Less: original cost (2,420,000.00)
Net cum. Unrealized losses (120,000.00)
 securities transactions from the years 2023 to 2025:

pany for P8/share and incurred transaction costs of P30,000. The shares are to be accounted for at FVTPL.
mpany at P12/share, which are to be accounted for at FVTOCI. Transaction costs incurred amounted to P20,000.
any at P7/share, to be accounted for at FVTOCI.
ompany at P9/ share, to be accounted for at FVTPL.
for P9.75/share.
0. for P8.40/share.
any

ion as of the end of each year, from 2023 to 2025:

FV, 12/31/24 FV, 12/31/25

9.50 10.20
10.90 9.80
7.75 8.45
8.65 8.15

mpany for P8/share and incurred transaction costs of P30,000. The shares are to be accounted for at FVTPL.

3,200,000.00 400,000.00 8.00

30,000.00
3,230,000.00

Company at P12/share, which are to be accounted for at FVTOCI. Transaction costs incurred amounted to P2

2,420,000.00 200,000.00 12.00

2,420,000.00

300,000.00 8.75-8.00 0.50

300,000.00

120,000.00 11.50-12 0.50

120,000.00

700,000.00 100,000.00 7.00

700,000.00
G Company at P9/ share, to be accounted for at FVTPL.

2,700,000.00 300,000.00 9.00

2,700,000.00
 300,000.00 9.50-8.75 0.75
300,000.00

120,000.00 10.90-11.50 0.60

120,000.00

75,000.00 7.75-7.00 0.75

75,000.00

105,000.00 9-8.65 0.35

105,000.00
ny for P9.75/share.
000.

1,462,500.00
1,425,000.00
37,500.00

12,000.00
12,000.00
pany for P8.40/share.
00.

1,008,000.00
30,000.00
1,038,000.00

8,000.00
8,000.00

600,000.00
18,750.00
581,250.00

56,250.00
18,750.00
75,000.00

10,000.00
10,000.00

175,000.00
175,000.00
 220,000.00
220,000.00

17,500.00
17,500.00

90,000.00
90,000.00

12/31/2024 12/31/2025

3,800,000.00 2,550,000.00 3,975,000.00 2,550,000.00

2,595,000.00 1,467,000.00 2,805,000.00
6,395,000 4,017,000

2,180,000.00 1,960,000.00
775,000.00 211,250.00
2,955,000 2,171,250

2024 2025

300,000.00 175,000.00
(105,000.00) (90,000.00)
(30,000.00)
7,500.00
195,000.00 62,500.00

(120,000.00) (220,000.00)
75,000.00 17,500.00
18,750.00
(45,000.00) (183,750.00)

150,000.00 (121,250.00)

ANCE SHEET
12/31/2024 12/31/2025
2,955,000.00 2,171,250.00
(3,120,000.00) (2,595,000.00)
(165,000.00) (423,750.00)
 be accounted for at FVTPL.
sts incurred amounted to P20,000.

FV, period end

s are to be accounted for at FVTPL.

12000000

ion costs incurred amounted to P20,000.

3,500,000.00 112500

2,300,000.00

1080000
3,800,000.00 112500

2,180,000.00

775,000.00

2,595,000.00 42,000.00

100,000.00 525000
Chapter 11A Dividends, Share splits and Share rights

Objectives:
To comprehend:
1 The different types of divideds and how to account for each type.
2 The accouting for share splits.
3 The accounting for share rights and share warrants.

DIVIDENDS Portion of the earnings of an entity

Returns on investment
Types
Cash dividends Cash is received from th
Property dividends Noncash asset is receiv
Liquidating dividends Normally received during
Own shares of the inves
Share dividends (also known as "bonus issue") Own shares of the inves
Shares of other entities

Dividends are voluntary and investors do not have unconditional right to rec

CASH DIVIDENDS always recognized in P/L

at the date of declaration

Underlying shares of stock

Ordinary/common shares Number of shares held x cash divid
Preference shares Total par value of shares held x pre
Effects of dividends in selling or purchasing investments
Ex-dividend date The date when the declared divide
One business day before the date

PROPERTY DIVIDENDS measured at fair value

LIQUIDATING DIVIDENDS return of investment

1 Recognize the amounts of liquidati
Ay unrecovered carrying amount is
 2 Any excess of the total liquidating d
dividend income, which is always r

SHARE DIVIDENDS
Same class Unrealized gain or loss is recognzi
and its fair value after the share div

total FV after share dividends > CA

total FV after share dividends < CA

Different class The share dividends received shall

SHARE SPLITS change in the number of shares he

do not affect the tota capital of the

SPLIT-UP
Effect in the no. of shares Increase
Effect in the par value Decrease

For example, a 2-for-1 shares split-up for 100,000 shares with P10 par value
On the other hand, a 2-for-1 shares split-down will result to 50,000 shares w

SHARE RIGHTS right of the investors to acquire add

lower than the additional shares' fa
 each type.

e earnings of an entity that was distributed to the shareholders

nvestment

ash is received from the investee. Most common and most attractive type of dividends.
oncash asset is received from the investee. Most uncommon and least attractive type of dividends.
ormally received during liquidation or from time to time if the investee is a wasting asset entity.
wn shares of the investee entity are received.
wn shares of the investee entity are received.
hares of other entities received as dividends from the investee are considered as property dividends

conditional right to receive them. The power to declare dividends rests on the investee entity's Board

gnized in P/L
f declaration

hares held x cash dividends per share

ue of shares held x preference shares dividend rate
en the declared dividend is not anymore attached to the related shares
s day before the date of record

fair value

he amounts of liquidating dividends received as reduction from the investment in equity securities ac
red carrying amount is recognized as loss
of the total liquidating dividends received over the carrying amount of the investment is recognized a
ome, which is always recognized in profit or loss

ain or loss is recognzied based on the difference between the carrying amount of the investment
alue after the share dividends

r share dividends > CA = Unrealized gain

r share dividends < CA = Unrealized loss

vidends received shall be measured at their fair values with corresponding unrealized gain

e number of shares held with corresponding proportional changes in the par value of the shares held
the tota capital of the investee entity

SPLIT-DOWN
Decrease
Increase

ares with P10 par value will result to 200,000 shares with P5 par value.
ult to 50,000 shares with P20 par value.

nvestors to acquire addiitonal shares that the investee will issue at an exercise price that could be
he additional shares' fair value
of dividends.
ractive type of dividends.
wasting asset entity.

red as property dividends.

the investee entity's Board of Directors.

ment in equity securities account
 nvestment is recognized as

mount of the investment

g unrealized gain

ar value of the shares held

cise price that could be

At the beginning of 2023, RONALD Company had the following investments in equit

a 200,000 ordinary shares of AAA Company with P10 par value and total carrying
b 120,000 preference shares of BBB Company with P50 par value and total carry

On May 1, 2023, AAA Company declared cash dividend of P2.00/share for shareho

On September 1, 2023, BBB Company declared the preference dividend for shareh

As of December 31, 2023, AAA Company's ordinary shares had P19.50/share fair v

Required: From the given information, determine the following:

1 Journal entries to be made for the year 2023.
2 Total amount to be recognized in profit or loss for the year 2023.

1 Journal entries to be made for the year 2023.

5/1/2023 Dividend receivable

Dividend income

6/1/2023 Memo entry only.

7/1/2023 Dividend income

Cash

9/1/2023 Dividend receivable

Dividend income

9/15/2023 Memo entry only.

9/30/2023 Dividend income

Cash

12/31/2023 Financial assets at FVTPL

Unrealized gain - P/L

Financial assets at FVTOCI

 Unrealized gain - FVTOCI

2 Dividend income 400,000.00

Dividend income 540,000.00
Unrealized gain - P/L 300,000.00
Net amount recognized in P/L 1,240,000.00

Unrealized gain - FVTOCI 360,000.00

wing investments in equity securities both accounted for at FVTPL:

ar value and total carrying amount of P3,600,000.

par value and total carrying amount of P9,000,000. Relevant preference dividend rate is 9%.

P2.00/share for shareholders on record on June 1, 2023. The dividends were eventually received o

ence dividend for shareholders on record on September 15, 2023. The dividends were eventually re

s had P19.50/share fair value, while BBB Company's ordinary shares had P78/share fair value.

year 2023.

400,000.00
400,000.00

400,000.00
400,000.00

540,000.00
540,000.00

540,000.00
540,000.00

300,000.00
300,000.00

360,000.00
360,000.00
end rate is 9%.

eventually received on July 1, 2023.

nds were eventually received on September 30, 2023.

/share fair value.

At the beginning of 2023, MIGHTY Company had the following investments with corres

Securities No. of shares

FVTPL Category
AAA 200,000.00
BBB 300,000.00

FVTOCI Category
CCC 100,000.00
DDD 400,000.00

During the year, the following transactions involving these shares have taken place:

On February 1, 2023, AAA Company declared P2.50/share cash dividends to its ordina
MIGHTY sold 50,000 of its AAA shares on February 25 for P10/share.

On March 15, 2023, DDD Company declared P1.40/share cash dividends to its ordinar
2023. MIGHTY sold 100,000 of its DDD shares on April 27, 2023 for P9.20/share.

On April 20, 2023, BBB Company instituted a 2-for-1 share split-up, decreasing the sha
MIGHTY uses the traditional method in recording share splits. MIGHTY sold 250,000 o

As of December 31, 2023, the shares had the following fair values:

AAA BBB CCC

11.50 7.80 16.60

Determine the journal entries in 2023.

2/1/2023 Dividend receivable

Dividend income

2/25/2023 Cash
Loss on sale - P/L
Financial asset at FVTPL (AAA)
Dividend receivable
 3/1/2023 Memo entry only.

3/15/2023 Dividend receivable

Dividend income

3/31/2023 Cash
Dividend receivable

4/15/2023 Memo entry only.

4/20/2023 Memo entry only.

4/27/2023 Cash
Gain on sale - OCI
Financial asset at FVTOCI (DDD)

5/15/2023 Cash
Dividend receivable

5/31/2023 Cash
Gain on sale - P/L
Financial asset at FVTPL (BBB)

12/31/2023 Financial asset at FVTPL (AAA)

Unrealized gain – P/L

Financial asset at FVTPL (BBB)

Unrealized gain – P/L

Unrealized loss - OCI

Financial asset at FVTOCI (CCC)

Financial asset at FVTOCI (DDD)

Unrealized gain – OCI
owing investments with corresponding original costs and carrying amounts:

Cost per share FV per share

9.00 8.00
12.00 13.50

20.00 18.00
5.00 7.50

e shares have taken place:

re cash dividends to its ordinary shareholders on record as of March 1, 2023, which will be paid on M
or P10/share.

e cash dividends to its ordinary shareholders on record as of April 15, which will be paid on May 15,
7, 2023 for P9.20/share.

re split-up, decreasing the shares' fair value to P7/share.

plits. MIGHTY sold 250,000 of BBB shares on May 31, 2023 for P7.50/ share.

air values:

DDD
8.80

500,000.00
500,000.00

500,000.00
25,000.00
400,000.00
125,000.00
 560,000.00
560,000.00

375,000.00
375,000.00

920,000.00
170,000.00
750,000.00

560,000.00
560,000.00

1,875,000.00
187,500.00
1,687,500.00

525,000.00
525,000.00

367,500.00
367,500.00

140,000.00
140,000.00

390,000.00
390,000.00
hich will be paid on March 31, 2023.

be paid on May 15,