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    Investment in Equity Securities - IA1

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    dumpyforhim
    - Equity securities represent ownership interests in companies and include common stock, preferred stock, and stock options. - Equity securities are classified based on the purpose of the investment, such as whether they are held for trading purposes, to exercise influence over another company, or as subsidiaries. - Investments are initially recognized at fair value plus transaction costs and subsequently measured at fair value, with changes reported either through profit/loss or other comprehensive income depending on the classification.

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    Investment in Equity Securities - IA1

    Uploaded by

    dumpyforhim
    83 views17 pages
    - Equity securities represent ownership interests in companies and include common stock, preferred stock, and stock options. - Equity securities are classified based on the purpose of the investment, such as whether they are held for trading purposes, to exercise influence over another company, or as subsidiaries. - Investments are initially recognized at fair value plus transaction costs and subsequently measured at fair value, with changes reported either through profit/loss or other comprehensive income depending on the classification.

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    Investment in Equity Securities_IA1

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    - Equity securities represent ownership interests in companies and include common stock, preferred stock, and stock options. - Equity securities are classified based on the purpose of the investment, such as whether they are held for trading purposes, to exercise influence over another company, or as subsidiaries. - Investments are initially recognized at fair value plus transaction costs and subsequently measured at fair value, with changes reported either through profit/loss or other comprehensive income depending on the classification.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    83 views17 pages

    Investment in Equity Securities - IA1

    Uploaded by

    dumpyforhim
    - Equity securities represent ownership interests in companies and include common stock, preferred stock, and stock options. - Equity securities are classified based on the purpose of the investment, such as whether they are held for trading purposes, to exercise influence over another company, or as subsidiaries. - Investments are initially recognized at fair value plus transaction costs and subsequently measured at fair value, with changes reported either through profit/loss or other comprehensive income depending on the classification.

    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    of 17

    Investment in Equity

    Securities
    Investment
    - These are assets held by an entity for the accretion of wealth through distribution such as
    interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the
    investing entity such as those obtained through trading relationship.

    Nature and definition of Investment


    Investments are assets not directly identified with the central revenue producing activities of
    the enterprise, but are for any of the following purposes:

    • To earn a return on idle cash balance.


    • To establish long-term relationship with suppliers and customers.
    • To exercise significant influence or control over another entity.
    • To accumulate funds for future use.
    • For capital appreciation
    • For future protection
    Investment in Securities

    • Equity Securities – those that represent ownership in a company or rights to acquire


    ownership interests at an agreed-upon or determinable price, Equity securities
    include preference shares (preferred stock), ordinary shares (common stock), share
    warrants or stock rights, call options and put options.

    • Debt Securities – are instruments representing a creditor relationship with an


    enterprise. This includes government securities such as Philippines treasury bills and
    warrants, corporate bonds, convertible debt and commercial papers.
    Nature of Equity Securities

    Share capital (capital stock) of other companies may be purchased by an enterprise for
    a number of reasons, as follows:
    - As temporary placements of excess cash and held primarily for sale in the near term
    to generate income on short-term price fluctuations.
    - To obtain long-term customer or supplier or creditor relationship to secure certain
    operating or financing arrangements with these companies; or
    - To exercise significant influence or even control over the operating policies of
    another entity.
    Classification of Equity Investments

    • Equity investments at fair value through profit or loss (FVPL)


    • Equity investments at fair value through other comprehensive income (OCI)
    • Investment in Associate or Investment in Joint Venture
    • Investment in Subsidiaries
    Classification of Equity Investments

    • Equity investments at fair value through profit or loss (FVPL) – Share capital of another entity
    purchased by an investor for trading purposes.

    • Equity investments at fair value through other comprehensive income (OCI) – Share capital of another
    entity purchased by an investor other than for trading purposes. The investor shall make an
    irrevocable choice at the date of initial recognition (upon purchase) whether to measure the equity
    investments at fair value through other comprehensive income or fair value through profit or loss.

    • Investment in Associate – Equity securities which provide the holder the ability to participate (but not
    to control the financial and operating policy decisions of the investee company. If an investor jointly
    controls the operation of another entity through share capital ownership shall be classified as
    investment in joint venture.

    • Investment in Subsidiary – Equity securities that give the holder the power to govern the financial and
    operating policies of an entity so as to obtain benefits from its activities.
    Recognition Principle for Financial Asset
    Financial assets are recognized in the Statement of Financial Position when, and only
    when the entity becomes party to the contractual provisions of the instrument.

    Equity Investments measured at Fair Value


    1. Equity Investments at Fair Value through Profit or Loss – Initially measured at fair
    value and at each reporting date.
    Transaction costs at initial recognition do not form part of initial cost and are charged
    to expense.

    2. Equity Investments at Fair Value through Other Comprehensive Income – Initially


    measured at fair value at each reporting date plus the directly attributable transaction
    cost.
    EQUITY INVESTMENTS

    At Fair Value Through Other At Fair Value Through Profit or Loss


    Comprehensive Income

    (a) Securities held for trading


    Securities not held for trading for
    (b) Securities not held for trading for
    which the enterprise elects to
    which the enterprise did not
    Inclusion recognize change in fair value
    elect measurement at fair value
    through other comprehensive
    through other comprehensive
    income
    income

    Purchase price; transaction costs are


    Initial Recognition Purchase price plus transaction costs
    taken to profit or loss

    Measurement after initial


    Fair value Fair value
    recognition
    At Fair Value Through Other
    At Fair Value Through Profit or Loss
    Comprehensive Income

    (a) Unrealized gains and losses


    (b) Realized gains and losses, with
    Amount taken to other
    no recycling to profit or loss (but None
    comprehensive income
    may be transferred to Retained
    Earnings
    (a) Dividends that are considered
    Dividends that are considered return return on investments
    Amount taken to profit or loss
    on investments (b) Unrealized and realized gains and
    losses.
    Transactions subsequent to initial recognition:
    1. Share/Stock Split
    2. Dividends
    3. Stock Right

    The classification of the equity investments (whether at fair value through profit or loss or at fair value
    through other comprehensive income) does not affect the accounting for these subsequent
    transactions.
    Share/Stock split

    • Stock split or Share split is a decision by the company’s board of directors to increase the number of
    shares that are outstanding by issuing more shares to current shareholders.
    • Effects of the share/stock split:
    Number of shares : Increase
    Cost per share : Decrease
    Total Cost : No effect (The cost remains the same)

    For these reasons, no formal journal entry is necessary in the books of the investor to account for the
    share split. The investor records the receipt of the additional shares through a memorandum entry only
    indicating the change un the number of shares.
    Dividends
    - These are corporate distributions to its shareholders proportionate to the number of shares held by
    the shareholders.
    • Cash Dividends
    • Bonus or Issue Dividends
    • Property Dividends

    Three different dates relating to dividends:


    Date of Declaration: This is the date when the board of directors announces the distribution of
    dividends. Dividend income must be recognized on this date.
    Date of Record: This is the cut-off date that determines who among the stockholders are entitled to
    dividend per listing as of the record date. No journal entry is required on this date.
    Date of Payment: Is the date when dividend are distributed or paid to the shareholders.
    Dividends-on – The shares sell dividends – on, which means that the market price of a share includes the
    amount of the dividend.
    Ex-dividend – The shares sell ex-dividend, the market price does not include the amount of the dividend.
    A shareholder selling his securities after date of declaration but before the date of record, in effect, sells
    two types of financial assets: the investment in shares and the dividend receivable, which may not have
    been recorded. The buyer, on the other hand, acquires two types of financial assets: the investments in
    shares and the dividend receivable.
    Cash Dividend
    It is the payment of cash to shareholders in proportion to the number of shares owned. Cash dividend may
    be:
    a. Certain amount of peso per share.
    b. A certain percent of the par or stated value (e.g. 10% cash dividends = 10% par value of stated
    value.
    Bonus Issue or Share dividend

    a dividend paid in the form shares in the same class by shareholders. An investor receiving a bonus
    issue records the transaction by making a memorandum entry.
    A bonus issue in the form of another class of share capital, also termed as special bonus issue, is treated
    similar to property dividends. The shares received as bonus issue is recognized at fair value with a credit
    to dividend income.

    Effects of Bonus or Issue or Share Dividend


    Number of shares : Increase
    Cost per share : Decrease
    Total Cost : No effect (The cost remains the same)
    Property Dividend

    A dividend paid in the form of some asset other than cash


    Examples of Property Dividend:
    1) Noncurrent assets covered by PFRS 5 (e.g., property, plant and equipment, Intangibles and
    Investment in Associates)
    2) Assets other than those covered by PFRS 5 (e.g., current assets just like inventory, noncurrent
    assets covered by PFRS 9 like FVOCI)
    Accounting for Property Dividends: Property regardless of the types, should always be recorded at the
    fair value at the date of declaration.
    Stock Rights

    • A Stock right or preemptive right is a privilege giving current stockholders the first right to buy shares
    in a new offering, this maintaining their proportionate ownership interest.
    • The IFRS uses the term “right issue” for stock right. A shareholder is usually given on right for every
    share owned. The exercise price or price to purchase a share is generally below the prevailing market
    price of the stock.
    • Share warrant is an instrument or certificate evidencing ownership stock right.
    • Accounting for Stock rights: At the date the rights are received, the share rights usually do not have a
    known fair value; thus, no entry is made to record its receipt other than a memorandum entry. Upon
    exercise of the rights, the new shares acquired shall be measured at the fair value of the shares.
    Logically, the excess of this fair value over the fair value over the exercise price (subscription price for
    the share) is presumed to be the fair value of the stock rights exercised to buy the shares.
    Theoretical Fair value of Share Rights – In the absence of actual fair value of a share right, an enterprise
    may use the theoretical fair value (TV) to assign some value to the share rights. The share right’s
    theoretical fair value is computed as follows:

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