Investment In Equity

Securities
Investment in Equity Securities

Investment in equity securities represent ownership shares

such as ordinary shares, preference shares and other share
capital.

The acquisition of the equity securities is for the purpose of

accruing income through dividends, increase in market
value or controlling another entity.

Equity securities may also represent the rights and options to acquire
ownership shares.
Investment Categories

 Trading Securities or financial assets at fair

value through profit or loss.

 Financial assets at fair value through other

comprehensive income

 Investment in Associate

 Investment in Subsidiary

 Investment in unquoted equity instruments.

Measurement of Equity Securities

Initial Recognition :

An entity shall measure it at fair value plus transaction

costs that are directly attributable to the acquisition.

Transaction costs directly attributable to the acquisition of

financial asset held for trading or financial asset at fair
value through profit or loss shall be expensed
immediately.
Acquisition by Exchange

Acquisition Cost is determined by reference

to the following in the order of priority:

1. Fair value of the asset given.

2. Fair value of the asset received.

3. Carrying amount of the asset given.

Acquisition by Exchange

On July 1, 2015, IMP Company exchanged a land

for 25,000 ordinary shares of ACE Company. On
this date, the carrying amount of the land was
P2,500,000 and the fair value was P3,000,000.

On July 1, 2015, the par value of ACE Company’s

share was P60 and the market value was P150.

Prepare journal entry.

Lump Sum Acquisition

 The single cost is allocated to the securities

acquired on the basis of their fair value.

 If only one security has a known market

value, an amount is allocated to the
security with a known market value.
Sale of Equity Securities
 On derecognition 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.

 When equity securities are of the same class

acquired on different dates at different costs, the
entity shall determine the cost of the securities
sold using either the FIFO or average cost
approach.
Dividends

Distribution of cash or stock to stockholders on a pro

rata (proportional) basis.

Types of Dividends:

1. Cash dividends. 3. Stock dividends.

2. Property dividends. 4. Liquidating

Dividends expressed: (1) as a percentage of the par or

stated value, or (2) as a peso amount per share.

Dividends earned are considered Income.

When are dividends considered earned?

Three dates:

Dividend-on

Ex-Dividend
Dividends

Cash Dividends
For a corporation to pay a cash dividend, it must have:

1. Retained earnings - Payment of cash dividends from

retained earnings is legal in all states.

2. Adequate cash.

3. A declaration of dividends by the Board of Directors.

Entries – Cash Dividends
Illustration: On Dec. 1, the directors of Media General declare a
P0.50 per share cash dividend on 100,000 shares of P10 par
value common stock. The dividend is payable on Jan. 20 to
shareholders of record on Dec. 22.

December 1 (Declaration Date)

Dividend Receivable 50,000
Dividend Income 50,000

December 22 (Date of Record) No entry

January 20 (Payment Date)

Cash 50,000
Dividends Receivable 50,000
Dividends

Property Dividends
Also called dividends in kind are dividends in the form of
property or noncash assets.

Property dividends are also considered as income and

recorded at fair value.

Entry:
Noncash Assets 50,000
Dividend Income 50,000
Dividends

Stock Dividends
Pro rata distribution of the corporation’s own stock.
Stock dividends are in the form of the issuing entity’s own
shares.

Stocks Dividends are not considered as INCOME.

Kinds of Stock Dividends

 Stock dividends which are the same as those held or

different from those held.
 Recorded only by means of a memorandum entry.
 Stock dividends do not affect the total cost of the investment but
reduce the cost of the investment per share.

 Stock dividends different from those held

 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.

Investment in Preference shares xx,xxx

Investment in Ordinary shares xxxxx
Shares received in lieu of cash dividends

 Shares received in lieu of cash dividends are income at fair

value of the shares received. This is in effect property
dividends.

 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

 “As if” Approach

Stock dividends are assumed to be received and

subsequently sold at the cash received. Therefore, a gain or
loss may be recognized.
Cash received in lieu of stock dividends

Example :

A shareholder owns 10,000 shares costing P1,100,000.

Subsequently, the shareholder receives P150,000 cash in lieu
of 1,000 shares originally declared as 10% stock dividends.
Dividends

Liquidating Dividends
 Liquidating dividends represent return of invested capital,
and therefore, are not income. Payment may be in the
form of cash or noncash assets.
 When dividends are received from wasting asset
corporation, the dividends are designated as partly income
and partly return of capital.
Entry:

Cash xx,xxx
Dividend Income xx,xxx
Investment in Equity Securities xx,xxx
Special Assessments

 Special assessments are additional capital contribution of

the shareholders.

 On the part of the shareholders, special assessments are

recorded as additional cost of the investment and on the
part of the entity as share premium.

Investment in Equity Securities xx,xxx

Cash xxxxx
Shares Split

 Restructuring capital by effecting a change in the number

of shares without capitalizing retained earnings or
changing the amount of its legal capital.

 SPLIT UP : a transaction whereby the outstanding shares

are called in and replaced by a larger number,
accompanied by reduction in the par or stated value of
each share.

 SPLIT DOWN : a transaction whereby the outstanding

shares are called in and replaced by smaller number,
accompanied by an increase in the par or stated value.
Stock Rights

 A stock right or preemptive right is a legal right granted to

shareholders to subscribe for new shares issued by a
corporation at a specified price during a definite period.

 The purpose of the stock right is to give the shareholders

the chance to preserve their equity interest in the
corporation.

 The ownership of the stock rights is evidenced by

instruments or certificates called share warrants.
Stock Rights Accounted for Separately

 Stock rights are a form of equity instrument and therefore

shall be measured initially at fair value.

 A 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.

 Stock rights are normally classified as current assets if

the rights are accounted for separately.
 Dates in a Stock Right Declaration

Example :
“The Board or Directors in their meeting on December 15,
2014 approved to issue stock rights to the shareholders of
record on January 15, 2015, entitling the shareholders to
acquire one share at P100 par for every five shares held, the
right to expire on March 31, 2015.”

Date of Declaration

Date of Record
Expiration Date
 Dates in a Stock Right Declaration

Date of Declaration

Date of Record

Selling Right - On
Expiration Date

Selling Ex-Right
Stock Rights Declaration

Entries :

Original Investment
Investment in Equity Securities xx,xxx
Cash xxxxx

Receipt of Stock Rights

- stock rights received are initially measured and
recorded at fair value.

Stock Rights xx,xxx

Investment in Equity Securities xxxxx
Exercise of Stock Rights
 When stock rights are exercised, the cost of the new investment
includes the subscription price and the cost of the stock rights
exercised.
Investment in Equity Securities xx,xxx
Cash xxxxx
Stock Rights xxxxx

 If the stock rights are not exercised but sold, the journal entry is:
Cash xx,xxx
Stock Rights xxxxx
Gain on Sale of Stock Rights xxxxx

 If stock rights are not exercised but expired, the journal entry to
record the expiration is:
Loss on Stock Rights xx,xxx
Stock Rights xx,xxx
 Theoretical or parity value of stock right

 The theoretical or parity value is the assumed fair value of the right
that is derived from the market value of the share.

When the share is selling right on

Market Value of share right - on
minus subscription price
= Value of one right
Number of rights to purchase
one share plus 1

When the share is selling ex-right

Market Value of share ex-right
minus subscription price
= Value of one right
Number of rights to purchase
one share
Stock Rights NOT Accounted for
Separately
 Stock rights are recognized as embedded derivative but
not a “stand-alone” derivative.

 The stock right as an embedded derivative is not

accounted for separately because the host contract
“investment in equity instrument” is a financial asset.
If Stock Rights Not Accounted for Separately
 To record the receipt of stock rights:

Memo entry

 Exercise of the stock rights:

Investment in Equity Securities xx,xxx
Cash xxxxx
- determined by multiplying # of shares acquired x purchase price

 If stock rights are sold:

- no gain or loss to be recognized
-credit investment account equal to cash sales price
Cash xx,xxx
Investment in equity securities xx,xxx