Equity Investments

Equity Investments (Dividends,
Share Split and Share Right)

Prepared by: Jasmin G. Gura, CPA, MBA
Acquisition of equity instruments
 The Application Guidance of PFRS 9 provides that 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.
 The fair value is usually the transaction price, meaning, the fair
value of the consideration given.
Acquisition of equity instruments
 As a rule, transaction costs that are directly attributable to the

acquisition of the financial asset shall be capitalized as cost of the
financial asset.
 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.
Acquisition by exchange
If the equity securities are acquired in an exchange, the

acquisition cost is determined by reference to the following
in the order of priority:
a. Fair value of asset given
b. Fair value of asset received
c. Carrying amount of asset given
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.
Investor Cash (100K) Issuer
Co X PLDT ------- New projects
(issued new shares) (income)
(Shares of Stock)
Investment in PLDT Shares 100,000 Cash 100,000

Cash 100,000 Ordinary Shares 100,000
(ownership – 10%)
Types of Shares Voting (major decision) Dividend

ordinary yes variable
preference no fixed
Accounting for Equity Securities:
Ownership - less than 20% - regular investor - PFRS 9 (FVPL, FVOCI)

20% to 50% - significant influence – PAS 28 (Invst in associate) equity method
more than 50% - control (PFRS 3 and 10) (Invst in Subsidiary) Consolidation
Measurement
Initial Subsequent
FVPL - Held for trading

- FV by option FV MTM / FV - Profit and Loss
FVOCI – Mandatory
- election FV + TC MTM / FV – OCI
Upon derecognition/sale:
Mandatory- Unrealized gain/loss – P&L
Election - RE
Investment Categories
Investment in equity securities are accounted for as one of the

following categories:
a. Trading securities or financial assets at fair value through profit or
loss
b. Financial assets at fair value through other comprehensive income
c. Investment in associate
d. Investment in subsidiary
e. Investment in unquoted equity instruments
Investment unquoted equity instruments
Under the Application Guidance B5.4.14 of PFRS 9, all investment in

equity instruments shall be measured at fair value.
However, investments in unquoted equity instruments are measured at

cost if the fair value cannot measured reliably.
Sale of equity shares
PFRS 9 Paragraph 3.2.12, provides that on derecognition of a financial

asset measured at fair value through profit or loss, the difference
between the consideration received and the carrying amount of the
financial asset shall e recognized in profit or loss.
When equity shares are of the same class acquired on different dates
at different costs, a problem will arise as to the determination of cost of
shares sold when only a portion in subsequently sold.
In such a case, the entity shall determine the cost of the shares sold
using either the FIFO or average cost approach.
Cash Dividends
If the equity securities are measured at fair value through profit or loss,
or at fair value through other comprehensive income or at cost,
dividends earned are considered as income.
a. When the cash dividends are earned but not received:
Dividends receivable xx
Dividends income xx
b. When the cash dividends are subsequently received:

Cash xx
Dividends receivable xx
Note: The cash dividends do not affect the investment account.

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.
Only those shareholders registered as of this date are entitled to
receive dividends.
c. Date of payment – This is the date on which the dividends declared

shall be paid.
When are dividends considered earned?
Between the date of declaration and the record date, the shares are
selling “dividend on”.
This means that when shares are sold after the date of declaration but
prior to record date, they carry with them the right to receive dividends.
Between the date of record and the date of payment, the shares are
selling “ex-dividend” which means that the shares can be sold, and
still the original shareholder has the right to receive the dividends on
payment date
March 1 (dividend on) March 15 (ex-dividend) March 30
Date of Declaration Date of Record Date of Payment
Purch price includes dividends Purch Price excludes dividends
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.
If prior to record date, the shareholder sells the investment for P150,000 which
includes the dividend of P5,000, the journal entry to record the sale is:
Cash 150,000
Investment in shares 100,000
Dividend income 5,000
Gain on sales of investments 45,000
Property Dividend
Property Dividends or Dividends in kind are dividends in the form of

property or non cash assets.
Property dividends are also considered as income and recorded at fair
value.
Noncash assets xxx
Dividend Income xxx
Property Dividend
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.
The property dividend is recorded as follows:

Investment in shares (500 x100) 50,000
Dividend Income 50,000
Liquidating Dividend
Liquidating dividends represent return of invested capital, and

therefore, are not income. The payment may be in the form of cash or
noncash assets.
The liquidating dividend is recognized as follows:

Cash or other appropriate amount xxx
Investment in shares xxx
Normally, liquidating dividends are paid when the corporation is

dissolved and liquidated.
However, 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. That portion representing a liquidating dividend
should be credited to the investment account.
Example: A shareholder receives P100,000 dividend, designated as income

P60,000 and liquidating P40,000.
Journal Entry:
Cash 100,000
Dividend Income 60,000
Investment in shares 40,000
When liquidating dividends exceed the cost of investment, the difference is

credited to gain on investment.
On the other hand, when liquidation is completed and the carrying amount of
the investment is not fully recovered, the balance is written off as a loss.
Share Dividend or Stock Dividends
Share dividends are in the form of the issuing entity’s own shares. The
IAS term for share dividend as “bonus issue”.
Shares of another entity declared as dividends are not share dividends

but property dividends.
Cost P11,000 P11,000

# of shares 1,000 1,100 (1,000x1.1)
Cost / share P11 P10
Memo Entry only. Shares do not affect the total cost of the investment
but reduce the cost of the investment per share.
Kinds of share dividends
Share dividends may be the same as those held or different from those
held.
Share dividends whether of the same class or different are not income.
The reason is that there is no distribution of the assets of the entity.
The assets of the entity are the same before and after the issuance of
the share dividends.
The shareholder receives additional shares but still has the same
proportionate equity interest in the entity. The shareholder may have
more shares but at reduced market value.
Share Split
Stock Split ex. 2 for 1
a. Split Up
b. Split Down
Up Down
Cost P11,000 P11,000 P11,000
# of Shares 1,000 2,000 500
Cost / Share P11 P 5.5 P 22
(replaces old share, memo entry only)

Share Right
Example: 1,000 shares in a 10,000 shares (10%)
Meaning: 1:1 (1,000 shares : 1,000 rights)
If the company issue another 10,000 new shares; 20,000 shares

1,000/20,000 = 5%
Accounting for share rights:

1. Share rights are accounted for separately
2. Share rights are not accounted for separately
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.
Two formulas may be used in the computation of the

theoretical or parity value of the right.
 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
o When 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
Not accounted for separately
A shareholder acquired 10,000 shares for P1,500,000. Subsequently, the shareholder received
10,000 share rights to subscribe new shares at P100 per share for every five rights held.
The market value of the share is P140, and the market value of the right is P10. The share
rights are all exercised by the shareholder.
Thank you!

Equity Investments

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Equity Investments (Dividends,

Share Split and Share Right)

 The Application Guidance of PFRS 9 provides that when a financial

 As a rule, transaction costs that are directly attributable to the

If the equity securities are acquired in an exchange, the

If two or more equity securities are acquired at a single cost

Investment in PLDT Shares 100,000 Cash 100,000

Types of Shares Voting (major decision) Dividend

Ownership - less than 20% - regular investor - PFRS 9 (FVPL, FVOCI)

FVPL - Held for trading

Investment in equity securities are accounted for as one of the

Under the Application Guidance B5.4.14 of PFRS 9, all investment in

However, investments in unquoted equity instruments are measured at

PFRS 9 Paragraph 3.2.12, provides that on derecognition of a financial

b. When the cash dividends are subsequently received:

Note: The cash dividends do not affect the investment account.

a. Date of Declaration – This is the date on which the payment of

c. Date of payment – This is the date on which the dividends declared

Date of Declaration Date of Record Date of Payment

Purch price includes dividends Purch Price excludes dividends

Property Dividends or Dividends in kind are dividends in the form of

Example: X Company distributes its holding of 10,000 shares in Y

A shareholder receives 500 shares of Y Company as property dividend

The property dividend is recorded as follows:

Liquidating dividends represent return of invested capital, and

The liquidating dividend is recognized as follows:

Normally, liquidating dividends are paid when the corporation is

However, in the case of wasting asset corporation or mining entity,

Accordingly, when dividends are received from a wasting asset

Example: A shareholder receives P100,000 dividend, designated as income

When liquidating dividends exceed the cost of investment, the difference is

Shares of another entity declared as dividends are not share dividends

Cost P11,000 P11,000

Stock Split ex. 2 for 1

(replaces old share, memo entry only)

Example: 1,000 shares in a 10,000 shares (10%)

Meaning: 1:1 (1,000 shares : 1,000 rights)

If the company issue another 10,000 new shares; 20,000 shares

Accounting for share rights:

The Theoretical or parity value is the assumed fair value

Two formulas may be used in the computation of the

o When share is selling ex-right

Market value of share ex-right minus

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