Chapter 16

EQUITY
INVESTMENTS
Acquisition of Equity Investment
• When a financial asset is recognized initially, an entity
shall measure it at fair value plus transaction costs that are
directly attributable to the acquisition.
• However, 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.
Lump Sum Acquisition
• If two or more equity securities are acquired at a single cost or
lump sum, 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 equal to its
market value.
• The remainder of the single cost is then allocated to the other
security with no known market value.
Cash Dividends
a) When the cash dividends are earned but not received:
Dividends receivable xx
Dividend income xx

b) When the cash dividends are subsequently received:

Cash xx
Dividends receivable xx
When are dividends considered earned?

a) Date of declaration – this is the date on which the payment of

dividends is approved by the Board of Directors.
b) Date of record – This is the date on which the stock and transfer
book of the corporation is closed for registration.
c) Date of payment – this is the date on which the dividends declared
shall be paid.
• Between the date of declaration and the record date, the
shares are selling “dividend-on”

• Between the date of record and the date of payment, the

shares are selling “ex-dividend”
Example of a formal dividend declaration

“The Board of Directors at their meeting on November 15, 2021, declared an

annual dividend on ordinary share of P5, a payable on January 30, 2022, to
shareholders of record at the close of business on January 15, 2022.”

Date of declaration November 15, 2021

Date of record January 15, 2022
Date of payment January 30, 2022
When to recognize dividends as income

• Dividends shall be recognized as revenue when the shareholder’s right to

receive payment is established.
• The reason is that when dividends are declared, the shareholder has already
acquired the right thereto so much so that if the shares are subsequently sold
the sales price normally includes the accrued dividends.
• When shares are sold “dividend-on” and the dividend accrued is specifically
included in the sale price, the portion of the sales price pertaining to the
accrued dividend should be credited to dividend income.
Illustration

A shareholder owns 1,000 shares costing P100,000. Subsequently,

the shareholder receives notice of dividend declaration of P5 per
share or P5,000.

Cash 150,000
Investment in shares 100,000
Dividend income 5,000
Gain on sale of investment 45,000
Property Dividends
• Property dividends or dividends in kind are dividends in
the form of property or non cash assets.

Noncash assets xx
Dividend income xx
• For example, X Company distributes its holding of 10,000 shares in
Y Company as property dividend. The shares of Y Company have a
market value of P100 per share.
• A shareholder receives 500 shares of Y Company as property
dividend from X Company.

Investment in shares (500x100) 50,000

Dividend income 50,000
• Another example of a property dividend is when an entity declares
P100 worth of merchandise for every one share.
• If a shareholder owns a 500 shares, the dividend in the form of
merchandise would be P50,000.

Merchandise inventory 50,000

Dividend income 50,000
Liquidating Dividends
• Liquidating dividends represent return of invested capital, and
therefore, are not income. The payment may be in the form of cash
or noncash assets.

Cash or other appropriate amount xx

Investment in shares xx
• In the case of wasting asset corporation or mining entity, liquidating
dividends maybe paid even before dissolution and liquidation.
• Accordingly, when dividends are received from a wasting asset
corporation, the dividends are designated as partly income and
partly return of capital.
• A shareholder receives a P100,000 dividend, designated as income,
P60,000 and liquidating, P40,000.

Cash 100,000
Dividend income 60,000
Investment in shares 40,000
Share Dividends or Stock Dividends
• Share dividends are in the form of the issuing entity’s own shares.
• The IAS term for share dividend is “bonus issue”
• Shares of another entity declared as dividends are not share
dividends but property dividends.
Kinds of share dividends
• Share dividends may be:
oSame as those held
oDifferent from those held
• Share dividends whether of the same class or different are
not income. The reason is that there are no additional
assets received by the entity.
Share dividends of same class
• Share dividends of the same class are recorded only by means of a
memorandum entry on the part of the shareholder.
“Received 2,000 shares representing 20% share dividend as 10,000
original shares held. Shares now held, 12,000 shares.”
• The original cost after the share dividend will now apply to greater
number of shares, original shares plus those received as share
dividends.
• A shareholder owns 10,000 shares costing P120 each or a total cost
of 1,200,000. Subsequently, the shareholder receives 20% share
dividend or 2,000 shares.

Shares Cost per share Total Cost

Original shares 10,000 120 1,200,000
Share dividends 2,000 – – .
12,000 100 1,200,000
Share dividends different from those held

• A shareholder may receive a share dividend which is

different from the original shares.
• The original cost of the investment is apportioned between
the original shares and the share dividends on the basis if
market value of each at the date of receipt.
• A shareholder owns 10,000 ordinary shares costing P800,000. Subsequently,
the shareholder receives a 10% share dividend in the form of preference
shares.
• The market value of ordinary share is P150, and the market value of preference
share is P100.

Market value Fraction Allocated cost

Ordinary shares
(10,000x150) 1,500,000 15/16 750,000
Preference shares
(1,000x100) 100,000 1/16 50,000
1,600,000 800,000
• The receipt of the preference shares as share dividend on
the ordinary share investment is recorded as follow:

Investment in preference shares 50,000

Investment in ordinary shares 50,000
Shares received in lieu of cash dividends

• It is generally accepted that shares received in lieu of cash

dividends are income at fair value of the shares received. The
reason is that such shares are in effect property dividends.
• For example, a shareholder owns 10,000 shares costing P1,000,000.
Subsequently the shareholder receives 1,000 shares in lieu of cash
dividend of P10 per share. The market value per share is P150.
• The receipt of the 1,000 shares is recorded as follows:

Investment in shares 150,000

Dividend income (1,000x150) 150,000

• If there is no market value, the journal entry is:

Investment in shares 100,000

Dividend income (10,000x10) 100,000
Cash received in lieu of shares dividends

• For example, a shareholder owns 10,000 shares costing P1,000,000.

Subsequently, the shareholder receives P150,000 cash in lieu of
1,000 shares originally declared as 10% share dividend.
• The as if approach is followed. This means that the share dividends
are assumed to be received and subsequently sold at the cash
received. Therefore, a gain or loss may be recognized.
As if approach
• The original cost of P1,100,000 applies now to 11,000 shares which is
the sum of the original 10,000 shares and the 1,000 shares assumed to
be received as share dividends. The cost per share would then be P100.

Cash 150,000
Investment in shares
(1,000shares x 100) 100,000
Gain on investment 50,000
BIR approach
• Under the ruling of the Bureau of Internal Revenue, all cash
received whether originally designated as cash dividend or share
dividend, is recognized as income.

Cash 150,000
Dividend income 150,000
Share split
• A corporation may restructure its capital by effecting a change in
the number of shares without capitalizing retained earnings or
changing the amount of its legal capital. This restructuring is
known as share split.
• Share split may be split up or split down.
• Split up is a transaction whereby the outstanding shares are called
in and replaced by a larger number, accompanied by a reduction in
the par or stated value of each share.
• Split down is a transaction whereby the outstanding shares are
called in and replaced by smaller number, accompanied by an
increase in the par or stated value.
• Only a memorandum entry is made to record the receipt of new
shares by virtue of share split.

A shareholder owns 10,000 shares costing P2,000,000. Subsequently,

the shareholder receives notice that share is split 2-for-1. The receipt
of new shares is recorded as follows:

“Received 20,000 new shares as a result of a 2-for-1 split of 10,000

original shares.”
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.
• For example, a shareholder owns 10,000 shares costing P500,000.
Subsequently, the directors pass a resolution to the effect that the shareholders
shall contribute P5 for each share held to the corporation.

Investment in shares (10,000x5) 50,000

Cash 50,000
Redemption of shares
• Shares, particularly preference shares, may be called in for redemption or cancelation by the
entity issuing them.

• For example, if a shareholder acquires 10,000 preference shares for P100 per share, the entry is:
Investment in preference share 1,000,000
Cash 1,000,000

• The entry to record the redemption is:

Cash (10,000shares x 110) 1,100,000
Investment in preference shares 1,000,000
Gain on investment 100,000
Share right or stock right
• A share right or preemptive right is a legal right granted to
shareholders to subscribe for new shares issued by a corporation at
a specific price during a definite period.
• A shareholder receives one right for every share owned.
• The ownership of share rights is evidenced by instruments or
certificates called share warrants.
Accounting for share rights
• There are two schools of thought on the matter, namely:

1. Share rights are accounted for separately.

2. Share rights are not accounted for separately.
Accounted for separately
• A portion of the carrying amount of the original investment in
equity shares is allocated to the share rights at an amount equal to
the fair value of the share rights at the time of acquisition.
• Share rights are normally classified as current assets if the rights are
accounted for separately.
Not accounted for separately
• An embedded derivative is a component of a hybrid or combined
contract (host contract) with the effect that some of the cash flow of the
combined contract vary in a way similar to a stand alone derivative.
• PFRS 9, paragraph 4.3.3, provides that an embedded derivative shall be
separated from the host contract and accounted for separately under
certain conditions.
• This simply means that if the host contract is a financial asset, the
embedded derivative is not separated.
Approach to be followed
• Admittedly, this subject matter is not well-settled issue. In fact,
PFRS 9, paragraph 4.3.4, states that this standard does not address
whether an embedded derivative shall be presented separately in the
statement of financial position.
Example of formal announcement of share rights

“The Board of Directors in their meeting on December 15, 2021

approved to issue share rights to the shareholders of record on January
15, 2022, entitling the shareholders to acquire one share at P100 par
for every five shares held, the right to expire on March 31, 2022.”

• Date of declaration – December 15, 2021

• Date of record – January 15, 2022
• Expiration date – March 31, 2022
Between the date of declaration and date of record

• During this period the shares are considered to be selling right-on.

This means that the share and the right is inseparable and are
treated as one.
• Accordingly, in the event of subsequent sale prior to the record
date, the difference between the sale price and the carrying amount
of the investment is simply considered as gain or loss on sale of
investment.
Illustration

• A shareholder owns 5,000 shares costing P500,000. Subsequently, the

shareholder receives notice of share rights to subscribe for 1,000 shares at the
par value of P100 per share.
• Prior to the issuance of share of warrants, the shareholder sells the investment
for P750,000.

Cash 750,000
Investment in shares 500,000
Gain on sale of investment 250,000
Between the date of record and expiration date

• On or after the date of record, the shares are said to be selling ex-
right. This means that the share can now be sold separate from the
right or vice versa.
Illustration

• A shareholder acquired 10,000 shares costing P1,800,000.

Subsequently the shareholder received 10,000 share rights to
subscribe for new shares at P100 per share for every five rights
held.
• Original investment
Investment in shares 1,800,000
Cash 1,800,000
• Receipt of share rights
Share rights 100,000
Investment in shares 100,000

• The fair value of share rights is 10,000 rights times P10 is P100,000
Exercise of share rights
• When the share rights are exercised, the cost of the new investment
includes the subscription price and the cost of the share rights exercised.
• The journal entry to record the acquisition of the new investment
through the exercise of share rights is:

Investment in shares 300,000

Cash 200,000
Share rights 100,000
Sale of share right
• The share rights are financial assets separate from the original
shares. Accordingly, the share rights can be sold independently
of the original investment.

Cash 150,000
Share rights 100,000
Gain on sale of share rights 50,000
Expiration of share rights
• Share rights can be exercised only up to a certain date after which the
rights become worthless.

Loss on share rights 100,000

Share rights 100,000

• Such loss is the evidence of the failure of the shareholder to preserve

the original equity interest in the entity.
Theoretical or parity value of share right
• The theoretical or parity value is the assumed fair value of the right that is derived from the market value
of the share.
Illustration

• A shareholder acquired 10,000 shares costing P2,500,000.

Subsequently, the shareholder received share rights to subscribe for
new shares at P150 per share for every five rights held.
• The market value of the share is P210 per share. The right has no
known value.
• When the market value of the share of P210 is right-on:
Value of one right = 210 – 150 = 60 = P10 per right
5+16
Allocation of cost
Cost of original investment 2,500,000
Theoretical value of share rights
(10,000 x P10) 100,000
Remaining cost of original investment 2,400,000

• When market value of the share of P210 is ex-right:

Value of one right = 210 – 150 = 60 = P12 per right
5 5
• The cost of P2,500,000 is allocated between the original investment
and share rights.

Cost of original investment 2,500,000

Theoretical value of share rights
(10,000 x P12) 120,000
Remaining cost of original investment 2,380,000
Journal Entries
a) To record the acquisition of the original investment:
Investment in shares 1,500,000
Cash 1,500,000
b) To record the receipt of the share rights:
Memo entry – received 10,000 share rights to subscribe for new shares at
P100 per share for every five rights held, or a total of 2,000 new shares.
c) To record the exercise of the share rights:
Investment in shares 200,000
Cash (2,000shares x 100) 200,000
• If the share rights are not exercised but sold, the sale is simply
recorded by debiting cash and crediting the original investment
account. No gain or loss is recognized from the sale.

Cash 150,000
Investment in shares 150,000

Any subsequent transactions affecting the shares shall be accounted

for using either the FIFO or average method.
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