Learning Objectives

1. define investment in equity securities.

2. classify investment in equity securities in accordance with the international financial reporting
standard
3. measure investment at the date of initial recognition
4. formulate entries for transactions affecting investment in equity securities subsequent to
acquisition
5. measure investment in equity securities at the end of the reporting period an account for changes
in their carrying value.
6. Present investment in equity securities and resulting accounts and information in the financial
statement

Nature of equity securities

Equity securities represent equity interest, represented by certificates of share capital or potential share
capital, in other corporate entities. Share capital of other companies may be purchased by an entity for
several reasons, as follow:

1. As temporary placements excess cash and held primarily for sale in the near term to generate
income on short-term price fluctuations.
2. to obtain long term customer or supply or credit or relationship to secure certain operating or
financing agreements with these companies.
3. to exercise significant influence or even control over the operating policies of another company.

Less than 20% 20% - 50% more than 50%

it is presumed that the investor it is presumed that the investor has it is presumed that the investor has
does not have significant influence significant influence over the control over the investing company
over the investee company investee company
parent -subsidiary relationship
exists.

Consolidate the financial

statements, unless falling under
exemption in PSA /IAS 27
equity investment at fair value investment in associate or joint investment in subsidiaries
venture (use equity method unless
expected to be disposed within 12
months)
IFRS 9 IAS28 IFRS 10
Classification of Equity Investment

On equity classify its investment in equity securities under one of the following:
a. Equity investments at fair value through profit or loss.
b. equity investment at fair value through other comprehensive income.
c. investment in associate or investment in joint venture
d. investment in subsidiaries

Equity investments measured at fair value

equity investments at fair value through profit or loss are measured at initial recognition and at each
reporting date at fair value. Transactions cost at initial recognition do not form part of initial costs and are
charged to expense

Illustrative problem

assume that NSR Corporation purchase 2000 shares of Php 100 par share capital of PME company For
Php125 per share plus 1% brokers Commission. The share represents 2% equity in PME company. The
shares are white for-profit taking opportunity based on the changes in fair value and therefore this ignited
as financial asset at fair value through profit or loss period the entry to record acquisition in the books of
NSR Corporation is

Equity investment - FVPL 250,000

Brokers commission 2,500
Cash 252,500
Acquired equity investment

At reporting date, the investment shall be adjusted to fair value. Any change in fair value is taken as
income or loss in the profit or loss.

Assume that the PME company Shares were quoted at 132 pesos at year end. NSR Corporation will
provide the following entry to approximately break the investment to fair value.

Equity investments - FVPL 14,000

Unrealized Gains on Equity Investments - Profit Or Loss 14,000

Fair value (132 x 2,000) 264, 000

Purchase price to 150,000
Holding gain 14,000

The determination of the gain or loss on the subsequent sale of securities is based on the difference
between the net profit from the sale and carrying amount of the investment.

Equity investments at fair value through other comprehensive income

if the investor makes an election to designate the non-trading equity investment As for value through
other comprehensive income, the investment shall be recorded upon acquisition at purchase price
(presumably the fair value) plus directly attributable transaction costs.

Assuming that any NSR Corporation classified the securities as at fair value through other comprehensive
income, the entry to record acquisition is

Equity investment at FV through OCI 252, 500

Cash 252, 500

at the year end, assuming the fair value is 132 pesos per share, the entry is

Equity investment at FV through OCI 11,500

Unrealized gains and losses on equity investment – OCI 11,500

Fair value (132 x 2,000) 264,000

Initial costs 252,500
Holding gain 11,500

any change in for value of the investment during the period is taken to other comprehensive income in the
statement of comprehensive income. At the date of sale, the investment on shall be adjusted to fair value,
presumably the selling price, through other comprehensive income

Transactions subsequent to initial recognition

After acquisition, the equity investments are affected by the miscellaneous transactions, such as share
split, receipt, receipt of dividends and right issues.

Share Split

Stock split or share split is a reduction in the par or stated value of share capital accompanied by a
proportionate increase in the number of shareholder in the issuing corporation, not does it affect the
equity of a corporation’s total shareholder’s equity. No formal journal entry is necessary in the books of
the investor to account for the share split.

Dividends

Cash dividends are generally recognized as income when received or receivable.

Chris company owns 1000 ordinary shares of Jay company acquired at P 120 pretty sure. If Chris
received P5 cash dividend per ordinary share of Jay company, the entry is

Cash 5,000
Dividend revenue 5,000

If the dividends declared by investors are to be paid in the subsequent accounting period, are you an
adjustment is taken up by in the investor for the approval of the dividends by charging dividends
receivable and credit in dividend revenue. In the example above J declared a dividend on December 1,
2019 payable on January 31, 2020 to shareholders of record as of December 31, 2019, this company
would prepare the following entry:

On December 31, 2019

Dividends Receivable 5,000

Dividends Revenue 5,000

On January 31, 2020

Cash 5,000
Dividend Receivable 5,000

Liquidating dividends

in some instance, a portion of the dividend received by an investor maybe resulted from investors
earnings prior to acquisition of the share by the investor. These dividends are treated as return of the
investor’s cost of investment. There are also instances, when dividends declared from the balance of the
contributed capital account of the issuing Corporation. This type of dividend is called liquidating
dividends, in either case, the received by the investor of such dividends is not credited to an income
account but to the investment account.

Assume that the company a holds 1000 shares of P100 par ordinary share capital of Company B for P125
per share of January 1, 2019. On December 31, 2019, Company B paid dividend of P12 per share; P10
comes from current year earnings and P2 from the related earnings of Company B on January 1, 2019.
company A shall prepare this entry:

Cash 12,000
Dividend Revenue 10,000
Equity Investments 2000

Bonus Issue or Share Dividend

The investee company distributes, as dividends, shares in the same class held by shareholders. These
distributions are called share dividends or bonus issue. Distribution of bonus issue in the same class of
share capital increase the number of shares held by each shareholder, without any change in the total
shareholders equity balance or not asset of the distributing corporation. The equity of each shareholders
after the receipt of the bonus issue is also unchanged. Thus, an investor receiving bonus issue records the
transaction by making a memorandum entry video the transaction merely adjusts the carrying value per
share held by the investor.

A bonus issue in the form of another class of share, also termed as special bonus issue, is treated similar
to property dividends. The shed Seamus bonus issue is recognized at fair value with a credit to dividend
income.
Illustrative Problem

Chris company owns 1000 of Jay ordinary shares, which were designated as at fair value. After a year
after the acquisition, J company distributes dividends one share of its P100 par value preference share for
every ten of its ordinary shares. On the date of distribution, each ordinary share sells ex-dividend at P144
while each preference share sells at P160.

Chris company will therefore receive 100 preference shares of J company's dividend. The entry to record
a receipt of these share is

Equity Investments 16,000

Dividend Revenue 16,000

Property dividends

When dividends are distributable in the form of investees’ s non-cash assets, the investor free coins the
asset received as dividend revenue at asset’s fair value.

Illustrative Problem

Chris company owns 100 shares of Jay company acquired at P140 per share. The shares are measured at
fair value. One year after, Jay company distributes as dividend one ordinary share of Ollie company, for
every 10 ordinary shares of Jay, the Ollie company shares held by Jay Company as investment. Ollie
company ordinary share has fair value of P100 in cells at P120 at the time of distribution by Jay.

The entry in the books of Chris to record the receipt of dividends is

Equity Investments 12,000

Dividend Revenue 12,000

Share Right

Corporation issuing additional shares of stock to increase the capital shall first offer the share issue within
a prescribed period to the existing shareholders proportionate to their holdings. this shareholders’ right
enable them to maintain their ownership interest in the corporation is called preemptive rights. a
certificate called share warrant evidence is our shareholder's preemptive right. generally, the number of
shares warrants distributed is equal to the number of shares held by a shareholder. However, a specified
number of warrants may be necessary for a shareholder to purchase a share of stock at a specified price,
as stated in the share water

At that date the rights are received, the share rights usually do not have a known fair value; there's no
entries made to record the receipts other than memorandum entry. upon exercise of the rights, the new
shares acquired shall be measured at fair value of the shares. Logically, the excess of this fair value over
the exercise price is presumed to be the fair value of the stock rights exercised to buy the shares.
Illustrative Problem

ABC company owned 1,000 ordinary shares of XYZ company acquired at P140 per share. These the
shares were designated at fair value through profit or loss. Subsequently during the same year XYZ
company issued rights to its shareholders entitling the shareholders there of to purchase one ordinary
shares P100 par, at P130 per share for every 4 shares held. ABC used all the right to purchase shares of
XYZ. On the date of the rights, the shares sell at P160.

The following entries are made in the books of Chris Company:

Memo: Received 1,000 shares rights from XYZ Company for the purchase of one share for every four
rights submitted at P130 per share.

Exercise of the Rights:

Equity Investments 40,000

Cash 32,500
Investment Income 7,500
1,000/4 = 250 shr
250 x 160 = 40,000
250 x 130 = 32,500

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

Assume that instead of using the rights, ABC Company sold all the rights when the market price was
P7.50 per right. ABC share prepare the following entry:

Cash 7,500
Investment Income 7,500

Any unexpired and unexercised share rights shall be recognized at fair value at the end of the reporting
period by a credit to an income account. Therefore, if ABC Company had not yet exercised the rights
which had a fair value of P7.50 per right, ABC Company shall prepare the following entry:

Share Rights (FVPL) 7,500

Investment Income 7,500

Financial Statement Presentation

Financial assets measure at fair value through profit of loss are classified as part of the current asset,
while investments measured at fair value through other comprehensive income are generally classified as
non-current asset.
Investments in Associates

• Associate – an entity, including an unincorporated entity such as a partnership, over which the
investor has significant influence.

• Significant influence – the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control over those policies.

Significant influence

Significant influence is presumed to exist if the investor holds, directly or indirectly (e.g. through
subsidiaries), 20% or more of the voting power of the investee, unless it can be clearly demonstrated that
this is not the case.

For significant influence to exist, the investment should provide the investor voting rights. Thus,
investment in preference shares, regardless of the percentage of ownership, is not accounted for under
PAS 28 because preference shares do not give the investor voting rights.

Evidence of existence of significant influence by an investor

The following may provide evidence of significant influence even if the percentage of ownership interest
is less than 20%.
a) Representation on the board of directors or equivalent governing body of the investee;
b) Participation in policy-making processes, including participation in decisions about dividends or
other distributions;
c) Material transactions between the investor and the investee;
d) Interchange of managerial personnel; or
e) Provision of essential technical information.

Equity method

Investments in associates or joint ventures are accounted for using the equity method. Under this method,
the investment is initially recognized at cost and subsequently adjusted for the investor’s share in the
changes in the EQUITY of the investee.

Investment in associate Sh. In P/L of associate

beg. xx
Sh. in profit xx xx Sh. in loss Sh. in loss xx xx Sh. in profit
Sh. in (Cr.) OCI xx xx Sh. in (Dr.) OCI
xx Sh. in dividends
Undervaluation of Undervaluation
xx asset of asset xx
xx end. xx
Illustrative Problem

In January 2020, Ortiz Company acquired 20% of the outstanding ordinary shares of Marasigan
Company for P8,000,000. This investment gave Ortiz the ability to exercise significant influence over
Marasigan. The carrying amount of the acquired shares was P6,000,000. The excess of cost over carrying
amount was attributed to a depreciable asset which was undervalued on Marasigan’s statement of
financial position and which ad a remaining useful life of ten years. For the year ended December 31,
2020, the investee reported net income of P1,800,000 and paid cash dividends of P400,000 and thereafter
issued 5% stock dividend. What is the carrying amount of the investment in associate on December 31,
2020?

Original cost 8,000,000

Share in net income (20% x 1,800,000) 360,000
Share in cash dividends (20% x 400,000) (80,000)
Amortization of excess of cost (2,000,000 / 10) (200,000)

Carrying amount of investment – December 31, 2020 8,080,000

Acquisition cost 8,000,000

Less: carrying amount of interest acquired 6,000,000

Excess of cost over carrying amount 2,000,000

The excess of cost over the carrying amount of the underlying equity acquired which is attributable to
undervaluation of a depreciable asset should be amortized over the remaining useful life of the depreciable
asset.

Such amortization is recorded by debiting investment income and crediting investment in associate.

Preference shares issued by an associate

If an associate has outstanding preference shares that are held by parties other than the investor, the
investor computes its share of profits or losses after making the following adjustments.

Preference share is cumulative Preference share is noncumulative Preference share is redeemable

 Deduct one-year dividend,  Deduct dividends only when  No dividend is deducted
whether declared or not declared before computing when computing share in
before computing share in share in associate’s profit or associate’s profit or loss.
associate’s profit or loss. loss.
Illustrative Problem:

ABC Co. own 20% of the XYZ Inc. ‘s ordinary shares. XYZ also has an outstanding cumulative 6%
preference shares of P2,000,000. None of these preference shares is held by ABC. Dividends are in the
arrears for 3 years. XYZ reported profit of P1,000,000 and declared on dividends.

a. How much is the share in the profit or loss of the associate?

Answer
Profit of XYZ P1,000,000
One-year dividend on the cumulative preference
shares whether declared or not (2M x 6%) 120,000
Adjusted profit of associate 880,0000
Multiply by: Ownership interest 20%
Share in profit of associate 176,000

b. What if XYZ declared dividends that pay all the dividends in arrears, how much is the share in
the profit or loss of the associate?

Answer: 176,000

Still, only one-year dividend is deducted. The arrears have already been considered by ABC in
computing its share in the associate profit or loss in the previous years.

c. What if the preference shares are non-cumulative, how much is the share in profit or loss of
associate?

Answer: (1M x 20%) = 200,000

No adjustment to profit is necessary because no dividends were declared. When preference shares ar
non-cumulative, adjustment is made only for the dividends declared.

d. What if the shares are redeemable preference shares and XYZ declared P150,000 cash dividends
on those shares, how much is the share in the profit or loss of the associate?

Answer: 200,000

No adjustment is necessary for the presence shares that are considered debt instruments. The
associate’s profit for the year of P1M necessary would have already been reduced by the dividends
declared (i.e. as interest expense)
Discontinuance of the Use of Equity Method

An investor starts to apply the equity method on the date it obtains significant influence and ceases to
apply the equity method on the date it loses significant influence.

On the loss of significant influence, the investor shall measure at fair value any investment the investor
retains in the former associate. The investor shall recognize in profit or loss any difference between:
• The fair value of any retained investment and any proceeds from disposing of the part interest in the
associate; and
• The carrying amount of the investment at the date when significant influence is lost.

Following the discontinuance of equity method, the retained interest shall be classified as follows:

Loss of significant influence due to Accounting treatment

 Decrease of ownership interest below 20%.  Financial asset at fair value under PFRS 9

 Increase of ownership above 50%  Investment in subsidiary under PFRS 3 and

PFRS 10

Illustrative Problem: Loss of significant influence

On January 1, 2020, ABC Co. acquired 30,000 ordinary shares of XYZ Inc., representing 30% interest,
for P3,000,000. On this date, XYZ Inc. representing 30% interest, for P3,000,000. On these date XYZ’s
net assets have a carrying amount of P8,000,000 and a fair value of P10,000,000. The difference is
attributable to an undervalued building with a remaining useful life of 10 years. XYZ use straight-line
method of depreciation.

In 2020, XYZ reported profit of P1,000,000 and paid cash dividend of P600,000. XYZ shares are selling
at P100 per share on December 31, 2020.

On July 1, 2021, ABC sold 60% of tis investment in XYZ shares at the prevailing market price of P120
per share. XYZ reported interim profit of P500,000 for the six months ended June 30, 2021.

On December 31, 2021, XYZ reported total profit of P1,200,000 for the year and declared P1,000,000
cash dividend. The shares are quoted at P135 per share at year-end.

2020
June 1 Investment in Associate 3,000,00
Cash 3,000,000

Dec. 31 Cash (600,000 x 30%) 180,000

Investment in Associate 120,000
Share in Profit Associate 300,000
To record the share in profit and receipt of cash dividends
2020
Dec. 31 Share in Profit of Associate 60,000
Investment in associate 60,000
Entry to adjust the share in profit for the depreciation of the undervaluation of
Building

Share in undervaluation of building [(10M – 8M) x 30%] 600,000

Divide by: Remaining life of building 10
Annual Adjustment to share in profit of associate 60,000

2021
Jul. 1 Investment in associate (500k x 30%) 150,000
Share in Profit of Associate 150,000
To record the share in the associate’s profit

Jul. 1 Share in Profit of Associate 30,000

Investment in Associate 30,000
To record the depreciation of undervaluation

Investment in Associate
Jan.1, 2020 3,000,000
Share in Profit 2020 300,0000 180,000 Cash Dividends 2020
60,000 Undervaluation 2020
Share in Profit 2021 150,000 30,000 Undervaluation 2021
3,180,000 July 1,2021

2021
Jul. 1 Cash (30,000 sh. X 60% 120) 2,160,000
Investment in Associate (3.18M x 60%) 1,908,000
Gain on sale of Investment 252,000
To record the sale

2021
Jul. 1 Equity investment – FVPL 1,440,000
Investment in Associate (3.18M x 40%) 1,272,000
Gain on reclassification 168,000
To reclassify the remaining shares

Dec. 31 Dividend Receivable (1M x 12) 120,000

Dividend Income 120,000
(30% previous interest x 40% unsold portion = 12%)

Dec. 31 Equity investment – FVPL 180,000

Unrealized Gain – P/L 180,000
Reclassification of cumulative OCI

If an investor loses significant influence over an associate, all amounts recognized in other comprehensive
income in relation to the associate shall be accounted on the same basis as would be required if the
associate had directly disposed of the related assets or liabilities.

Change to equity method - Gain of significant influence

Significant influence may be achieved from additional purchase of shares resulting to an increase in
ownership interest. Although, not specifically addressed in PAS 28, this type of acquisition may be
accounted for by reference to PFRS 3 Business Combinations particularly on the accounting for business
combination achieved in stages.

“In a business combination achieved in stages, the acquirer shall remeasure its previously held equity
interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in
profit or loss or other comprehensive income, as appropriate.” (PFRS 3.42)

Share in losses of associate

If an investor’s share of losses of an associate equal or exceeds its interest in the associate, the investor
discontinues recognizing its share of further losses.

Interest in the associate includes the following:

1. Investment in associate measured under equity method
2. Investment in preference shares of the associate
3. Unsecured long-term receivables or loans

Interest in the associate does not include the following:

1. Trade receivables and payables
2. Secured long-term receivables or loans

After the investor’s interest in the associate is reduced to zero, additional losses are provided for, and a
liability is recognized, only to the extent that the investor has incurred
a. Legal or constructive obligations or
b. Made payments on behalf of the associate.
• Any other losses are not recognized.

• If the associate subsequently reports profits, the investor resumes recognizing its share of those
profits only after its share of the profits equals the share of losses not recognized.

Video Reference
https://www.youtube.com/watch?v=MXl2KBRo2FQ
https://www.youtube.com/watch?v=yfed1ucHAjE
https://www.youtube.com/watch?v=8p1bjkzR7zE
https://www.youtube.com/watch?v=9WET0rMquL0
https://www.youtube.com/watch?v=XtumWi8YAXA
https://www.youtube.com/watch?v=XNGGx4ClowY