CHAPTER 4 – INVESTMENTS IN EQUITY Equity investment at FV through other

SECURITIES comprehensive income (OCI)

• for non-trading equity securities, investor

INTRODUCTION makes an irrevocable choice at the date
of initial recognition to measure this at
Investments in shares of stock of other OCI
entities is considered to provide the highest
returns to investors among all other types of Less than 20% - 50% More than
financial instruments. The yields consist of: 20% 50%

1. Dividends received from investee Investor has Investor Investor

company NO HAS HAS
2. Gains and loss from disposal significant influence CONTROL
3. Appreciation in value influence over the over the
over the investee investee
NATURE OF EQUITY SECURITIES investee company. company.
company. Parent-
Equity securities represent equity interest, subsidiary
represented by certificates of share capital or relationship
potential share capital, in other corporate exists.
entities. Investments are assets not directly Consolidate
identified with the central revenue recognition FS, unless
falling under
activities of the enterprise, but are acquired
exemption in
for any of the following purposes:
PAS 27.
1. To earn a return on idle cash balance and Equity Investments Investment
generate income on short-term price investments in in
fluctuations; at fair value associates Subsidiaries
2. To establish long-term relationship with or joint
suppliers and customers; venture (use
3. To exercise significant influence or control equity
over another entity; method
unless
CLASSIFICATION OF EQUITY SECURITIES expected to
be disposed
1. Equity investment at FV through profit or within 12
loss (FVPL); months)
2. Equity investment at FV through other
comprehensive income (OCI); EQUITY INVESTMENTS AT FVPL
3. Investment in associate or investment in
joint venture; and Are measured at initial recognition and at
4. Investment in subsidiaries. FAIR VALUE at each reporting date.
Transaction costs are charged to expense.
Equity investment at FV through profit or loss
(FVPL) Drill: Assume that NSR Corp. purchased
2,000 shares at P100 par ordinary share
• for trading purposes; capital of PME Co. for P125 per share plus
• for non-trading equity securities, investor 1% broker’s commission. At year-end PME
shall make an irrevocable choice at the shares are quoted at P132.
date of initial recognition. If option is not
exercised, this shall be designated at Date Journal Debit Credit
Entry
FVPL.
1/1/21 Equity 250,00
Investments 0
– FVPL
 Broker’s 2,500 252,50 Gain on
Commissio 0 Equity
n Investments
Cash - OCI
1/31/2 Equity 14,000
1 Investments
– FVPL 14,000 At the date of sale, the investment accounts is
adjusted to FV, presumably the selling price.
Unrealized The cumulative balance of unrealized gain or
Gain on loss in equity shall remain in equity and is not
Equity subsequently reversed in profit or loss, or
Investments may transfer it within equity. Upon sale of the
PME shares at P270,000, entry of sale is,
Upon sale of the PME shares at P270,000,
Dat Journal Entry Debit Credit
entry of sale is,
e
Date Journal Entry Debit Credit XXX Equity 6,000
XXX Cash 270,00 Investments –
Equity 0 264,00 FVPL 6,000
Investments – 0 Unrealized
FVPL Gain on
Gain on 6,000 Equity
sale of Investments
Equity - OCI
Investments XXX Cash 270,00
Equity 0
Investments 270,00
EQUITY INVESTMENTS AT FV TROUGH - FVPL 0
OCI XXX Unrealized 17,500
Gain on Equity
Are recorded upon acquisition at purchase Investments – 17,500
price (fair value plus directly attributable OCI
transaction costs). The change in FV is taken Retained
to other comprehensive income. Earnings

Drill: Assume that NSR Corp. purchased

2,000 shares at P100 par ordinary share SHARE SPLIT
capital of PME Co. for P125 per share plus
1% broker’s commission. At year-end PME • A reduction in the par or stated value of
shares are quoted at P132. share capital accompanied by a
proportionate increase in the number of
Date Journal Debit Credit shares outstanding.
Entry • Does not affect the equity of the
1/1/21 Equity 252,50 shareholder or investor.
Investments 0
• Records share split through a
at 252,50
FV through 0 memorandum entry:
OCI
Cash Memo: Y Company effected a 2:1 share split
1/31/2 Equity 11,500 on its ordinary shares. As a result, the entity
1 Investments now holds a total of 4,000 ordinary shares of
at 11,500 Y Company.
FV through
OCI DIVIDENDS

Unrealized

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Are corporate distributions to its shareholders P5) 0
proportionate to the number of shares held. It Equity
may be in the following forms: Investments 10,000
–
• Cash dividends FVPL
• Bonus issue or share/stock dividends Gain on
• Property dividends sale of
• Scrip dividends Equity
Investments
The distribution of dividends involves 3
significant dates: To record the purchase of shares by Ollie Co.
and the receipt of dividends,
(1) date of declaration (2) date of record (3)
date of payment. Date Journal Debit Credit
Entry
CASH DIVIDENDS 7/5/20 Equity 130,00
Investments 0
• Generally recognized as income when Dividend 5,000 120,00
received or receivable. receivable 0
• From the date of declaration through the Cash
date of record, the shares sell dividends- 8/15/2 Cash 5,000
on – market price of a share includes the 0 Dividend 5,000
dividend.
Receivable
• From the date of declaration but before
the date of record, a shareholder sells 2
types of financial assets:
(1) the investment in shares
(2) the dividend receivable LIQUIDATING DIVIDENDS

When dividends declared comes from the

Jan. 1, 2020 – Chris Co. acquired 1,000 balance of contributed capital accounts of the
shares of Jay Co. @ P120 / share. issuing corporation.
June 30, 2020 – Jay Co. declared P5 cash The receipt of such dividends is credited to
dividend, payable on August 15, 2020 to the investment account.
shareholders of record as of July 15, 2020.
Drill: Dec. 31, 2020 – Co. B paid P12 dividend
July 5, 2020 – Chris Co. sold all his shares for per share, P10 comes from current earnings
P135 per share to Ollie Co. while P2 comes from retained earnings. Entry
to record in Co. A books with 1,000 shares of
Note: July 5 is between June 30 and July 15,
Co. B acquired at P125.
the P135 is the selling price of each share
dividends-on. Date Journal Entry Debit Credit
7/5/20 Cash 12,000
SP P 130 – P 120 CV = P 10 gain on sale of
Dividend 10,000
each share Revenue 2,000
To record the sale of investment classified as Equity
Investments
FVPL by Chris Co.,
Note: The carrying value of the share is
Date Journal Debit Credit reduced to P123 (P125-P2).
Entry
7/5/2 Cash 135,00 SHARE DIVIDENDS
0 Dividend 0 5,000
Revenue
(1,000 x 120,00
• When dividends declared in the form of ANSWER PROBLEMS 4.1, 4.2, 4.3, 4.4 AND
shares in the same class held by 4.5
shareholders.
SHARE RIGHTS
• Does not affect the equity of the
shareholder or investor. Preemptive Right – shareholder’s right that
enables them to maintain their ownership
• Records share dividends through a interest in the corporation.
memorandum entry
Share warrant – a certificate that evidences a
Memo: Received 200 ordinary shares of Jay shareholder’s preemptive right
Co. representing 20% bonus issue or share
dividend on 1,000 shares previously held. • The number of share warrants distributed
is equal to the number of shares held by
• The carrying value per share after the
receipt of the share dividend will change the shareholder.
from the original acquisition cost of P120 • As stated in the share warrant is the
per share to P100 (P120,000 / 1,200 specified number of warrants required for
shares) per share. a shareholder to purchase a share of
Special Bonus Issue stock at a specified date.

• When dividends declared in the form of • An investor receives share rights without
another share capital, also called special any cost. The investor may either sell
bonus issue, is treated similar to property the rights, use the rights to purchase
dividends. additional shares, or merely allow the
rights to lapse.
• The shares received as bonus issue is
recognized at fair value with a credit to • Share rights are considered as securities
dividend income. held for trading and are measured at fair
value through profit or loss.
Date Journal Entry Debit Credit
XXX Equity XXX • At the date the rights are received, it
Investments XXX usually do not have a known fair value,
Dividend thus only a memo entry is made.
Revenue
Memo: Received 1,000 share rights from Jay
Co. for the purchase of 1 share for every 4
PROPERTY DIVIDENDS rights submitted at P130 per share.

• When dividends are distributable in the EXERCISE OF THE RIGHTS

form of the investee’s non-cash assets, Assume that on the date of the exercise of
rights, the shares sell at P160.
the investor records the asset received as
dividend revenue at the asset’s fair value. Date Journal Entry Debit Credit
• The non-asset received as dividend is XXX Equity 40,000
recognized at fair value with a credit to Investments
dividend income. (1,000/4 x 32,500
P160)
Date Journal Entry Debit Credit Cash 7,500
XXX Equity XXX (1,000/4 x
Investments XXX P130)
Dividend Investment
Revenue Income

On this date, the 1,000 rights used to buy the

250 shares were presumed to have a fair
value of P7,500. The fair value of each right,
was therefore P7.50 XXX Share Rights 10,000
(FVPL)
SELLING OF THE RIGHTS (1,000 x (P160 10,000
Assume that the rights are all sold when the - P140)/4
market price was P7.50 Investment
Date Journal Entry Debit Credit Income
XXX Cash 7,500
Investment 7,500 INVESTMENTS IN UNQUOTED EQUITY
Income
INSTRUMENTS
All investments in equity instruments
UNEXPIRED AND UNEXECISED SHARE must be measured in FV.
RIGHTS • If there is insufficient information to
Shall be recognized at fair value at the end of determine FV, cost represents the best
the reporting period by a credit to an income estimate of FV except,
account.
a) a significant change in performance of
investee (budgets & plans);
Date Journal Entry Debit Credit
b) changes in expectation that the
XXX Share Rights 7,500
investee’s technical product milestones
(FVPL) –
Jay Company 7,500 will be achieved;
Investment c) a significant change in the market for
Income
the investee’s equity or its products or
potential products;
SHARE RIGHTS - THEORETICAL FAIR d) a significant change in the global
VALUE OF SHARE RIGHTS economy or the economic environment
TFV = FV of shares ex-rights - the in which the investee operates;
subscription price
• If there is insufficient information to
Number of rights needed to buy one determine FV, cost represents the best
share estimate of FV except,

e) a significant change in the performance

To illustrate:
of comparable entities, or in the
Owns 1,000 ordinary shares at P140 per valuations implied by the overall
share. During 2020, investee issued stock market;
rights - entitled to purchase 1 share at P120
f) internal matters of the investee such as
for every 4 shares held. Rights expire on
fraud, commercial disputes, litigation,
Feb. 28, 2021. At year-end, rights remained
changes in management or strategy;
unexercised and market price of ordinary
share is P160 per share. g) evidence from external transactions in
•Date the investee’s equity, either by the
Journal Entry Debit Credit
investee (fresh issue of equity) or by
XXX Equity 20,000
transfers of equity instruments between
Investments
third parties.
(1,000 x (P160 20,000
- P140) • If cost does not represent FV, the investor
Unrealized has to estimate the FV using some
Gains measurement technique.
on Equity
Investment
INVESTMENTS IN EQUITY INSTRUMENTS
Financial Statement Presentation • If an investor holds directly or indirectly
20% or more of the voting power of the
• Financial assets measured at FV through investee, it is presumed that the investor
PL are classified as part of current assets. has significant influence, unless, it can be
• Financial assets measured at FV through clearly demonstrated that this is not the
OCI are classified as part of non-current case.
assets. • In the consolidated FS of the investor and
Impairment of Equity Investments in the FS of investor with no subsidiaries,
Measured at Fair Value an investment in associate or joint
venture shall be accounted for using
• Equity investments measured at fair value equity method.
are no longer tested for impairment. The
measurement to FV is sufficient to include • When the investor does not use equity
such impairment, if any. method due to the conditions below, it
shall account for the investment at FV
and shall apply IFRS 9.
INVESTMENTS IN ASSOCIATES & JOINT
VENTURES (IAS 28) a) The investor is a subsidiary of
another entity;
ASSOCIATE
b) The investor’s debt or equity
• An entity over which the investee has instruments are not traded in a public
significant influence (the power to capital market;
participate in the financial and operating
c) The entity did not file, nor is it in the
policy decisions of the investee but is not
process of filing its FS with the SEC
control or joint control of those policies).
or other regulatory org. for the
• Includes corporation, partnership or joint
purpose of issuing any class of
venture.
instruments in a public market; and
• Significant influence is evidence by the
following ways: d) The ultimate parent or any
intermediate parent of the entity
a) Representation on the board of produces consolidated FS for public
directors or equivalent; use that comply with IFRS.
b) Participation in policy-making EQUITY METHOD
processes (including dividend or other
distributions); • The investment is initially recognized at
c) Material transactions between investor purchase price plus transaction costs.
and investee; • The carrying amount of the investment is
d) Interchange of managerial personnel; increased or decreased to recognized the
or investor’s share of the profit or loss of the
e) Provision of essential technical investee after the date of acquisition.
information.
• The investor’s share of the profit or loss
of the investee is recognized in the
• An entity’s interest in an associate is investor’s profit or loss (in the statement
determined solely on the basis of exiting of comprehensive income).
ownership interests and does not reflect
the possible exercise or conversion of Date Journal Entry Debit Credit
potential voting rights (IAS 28 paragraphs XXX Investment in XXX
7&12). Associate
Share in XXX
profits of
Associate
 ✓ From revaluation of PPE;
• If the FV of the investee’s net assets > ✓ From for foreign exchange
their carrying value, the excess shall be translation differences;
amortized, as an adjustment to the ✓ From change in FV of financial
investment account and to the share in assets through OCI.
profit of the associate.
Date Journal Entry Debit Credit
XXX Investment in XXX
Associate
Other XXX
Comprehensive
Income
Date Journal Entry Debit Credit
XXX Share in profits XXX Example
of Associate
Investment XXX • Purchased 25,000 E Co. ordinary shares
in at P150 on Jan. 1, 2020 equivalent to
Associate 25% voting rights in E Co. The net assets
of E Co. on this date have CV of
P14,000,000 which equals FV except for
• Further excess of the cost of the
land’s FV in excess of P200,000;
investment and the investor’s share of the
building’s FV in excess of P400,000 and
FV in net identifiable assets of the
inventories undervalued by P20,000. The
associate is attributable to goodwill.
building has estimated useful life of 10
• Goodwill is not subject to amortization but years. The inventories on Jan. 1, 2020
tested for impairment. The investor shall had all been sold during the year. No
take up its proportionate share in indication of impairment in goodwill.
impairment loss same entry above. Receipt cash dividends of P10 per share
from E Co. Profit reported by E Co. is
• Goodwill is not separately recognized and P2,000,000 for the year 2020.
is carried in the investment balance.
Cost in Investment 3,750,000
• Distributions (dividends) received or Underlying equity in CV of E
receivable from an investee reduce the Co. net assets (3,500,000)
carrying amount of the investment. (25% x P14,000,000)
Excess of cost 250,000
Date Journal Entry Debit Credit
Attributable to Inventories (5,000)
XXX Cash or XXX
(25% x P20,000)
Dividend
Attributable to Land (50,000)
Receivable XXX (25% x 200,000)
Investment
Attributable to Building (100,000)
in
Associate (25% x P400,000)
Goodwill 95,000

• Changes in the investee’s shareholders’

• Entries including adjustment in income
equity that have not been recognized in
and carrying value of investment:
the investee’s profit or loss, those arising
the following are considered as Attributable to Inventories 5,000
adjustments to the carrying amount of the (25 x P20,000)
investment. These changes are Attributable to Land -
recognized in other comprehensive (25 x P200,000)
income section of the Statement of Attributable to Building 10,000
Comprehensive Income. (25 x P400,000)/10 yrs
TOTAL 15,000
 • Reclassification from Investment in
Associate to Investment at FV – any
DATE JOURNAL DEBIT CREDIT
difference between the FV of the retained
ENTRY
XXX Investment in 3,750,000 investment and its previous CV is gain or
Associate 3,750,00 loss reported in profit or loss.
Cash 0
XXX Cash 250,000 • Reclassification from Investment at FV to
(25,000 Investment in Associate – the FV of the
shares x 250,000 investment shall be updated in the
P10) accounting records and this FV at the
date of reclassification shall be
Investment in considered as the initial cost that is
Associate
transferred to the account Investment in
XXX Investment in 500,000
Associate Associate or Joint Venture.
(2,000,000 x
25%) 500,000 Date Journal Entry Debit Credit
Share in XXX Investment in XXX
Profit of Associate
Associate Equity XXX
XXX Share in 15,000 Investments at
Profit FV through
Associate 15,000 OCI/PL
Investment in
Associate • Reclassification shall be made
prospectively from the reclassification
date – the first day of the first reporting
OTHER ISSUES AFFECTING THE
period following the change in business
INVESTMENT IN ASSOCIATE
model.
• When the reporting dates of the investor
and the associate are different, the
associate or joint venture prepares, for
the use of the investor, FS as of the same
date as the FS of the investor, unless it is
impracticable to do so.

• Adjustments shall be made for the effects

of significant transactions or events that
occur between the date of the FS of
investor and that of the date of the
investee. Maximum difference for the two
entities’ reporting date is 3 months.

• If an associate or joint venture has

outstanding cumulative preference
shares, the profit shall be adjusted by
deducting the required current preference
dividends, whether declared or not.

• If an associate or joint venture has

outstanding non-cumulative preference
shares, the investor’s profit shall be
reduced by the amount preference
dividends declared during the period.