EQUITY INVESTMENTS

• Acquisition by exchange acquisition cost of equity securities 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 acquired at a single cost, the single cost is allocated to the
securities acquired based on fair value. If only one has a known market value, an amount equal
to that shall be allocated to that security.

• Sale difference between consideration received and carrying amount of derecognized financial
asset at FVPL shall be recognized in profit or loss. If an entity is to dispose of same class of equity
shares (common or preferred) acquired at different dates, it shall account the cost by using either
FIFO or average cost method

DIVIDENDS
Distribution of an entity’s earnings (to shareholders/ investors as part of their interest or return on their
investment)

When considered to be earned?

1. Date of declaration – date on which the dividend payment is approved by the Board of Directors.
Date on which dividends shall be recognized as revenue.
2. Date of record – date on which the Stock and Transfer Book of the corporation is closed for
registration
3. Date of Payment – date on which the dividends declared shall be paid
• Dividend-on – sale of shares between declaration and record date. Meaning, it carries the
right to receive dividends. Portion of sale price includes accrued dividends.
• Ex-Dividend - sale of shares between record and payment date. Original shareholder (or seller
is entitled based on what has been on record in the Stock and Transfer Book) has the right to
receive the dividends.

Cash Dividends – if equity securities are measured at FVPL or FVOCI or at cost, dividends earned are
considered income:

1. Earned but not received (date of declaration)

Dividend receivable 1,000
Dividend income 1,000

2. Subsequently received (date of payment)

Cash 1,000
Dividend receivable 1,000

Illustration: A shareholder owns 1,000 shares costing P100,000. Subsequently, the shareholder receives
notice of dividend declaration of P5 per share. If prior to record date, the shareholder sells the investment
for P150,000 which includes P5,000, journal entry to record is as follows:
 Cash 150,000
Investment in shares 100,000
Dividend income 5,000
Gain on sale of investment 45,000

*Dividend income was credited since the shareholder is to recognize upon declaration of the issuing corporation.
However, such income is considered as a deduction from Gain on Sale since the person entitled to receive such
dividend is the buyer at record date.

Property Dividends – or dividends in kind are in the form of property or noncash assets. Considered as
income and recorded at fair value. This includes dividends comprising of shares of another entity.

Illustration: Ex Company distributes its holding of 10,000 shares in Why Company as property dividend.
The shares of Why Company have a market value of P100 per share. A shareholder receives 500 shares
of Why Company as property dividend.

Investment in shares (500 x 100) 50,000

Dividend income 50,000

Assuming the company instead distributed P100 worth of merchandise for every share held. If one
shareholder owns 500 shares, the journal entry is as follows:

Merchandise inventory (100 x 500) 50,000

Dividend income 50,000

Liquidating Dividends – represent return of invested capital and are not income. May be in the form of
cash or noncash asset. In case of a wasting asset corporation or mining entity (assets are consumed in the
regular course of operations), dividends include partly income and partly return of capital.

Illustration: 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

*When liquidating dividend exceeds the cost of investment, the difference is credited to gain on
investment. Other way around, it shall be debited to loss.

Share Dividend or Stock Dividends (Bonus Issue) - may be the same as those held or different from those
held (common shareholders receiving preference shares and vice-versa). Not considered as income, as
there is no distribution of assets. Shareholders receives additional shares and still has the same
proportionate equity interest in the entity thus, reduces market value per share.

1. Share dividends of same class – recorded by means od a memorandum entry only on the part of
the shareholder.
 Illustration: A shareholder owns 10,000 shares costing P120 each and subsequently receives 20%
share dividend or 2,000 shares. The effect are as follows:

Cost per
Shares Total Cost
Share
Original shares 10,000 120 1,200,000
Share dividends 2,000 -
12,000 100 1,200,000

2. Share dividends different from those held

Illustration: A shareholder owns 10,000 ordinary shares costing P800,000 with market value at
P150 per share. Subsequently receives 10% share dividend in the form of preference shares,
which has a market value of P100 per share. The P800,000 is allocated as follows

Market Value Fraction Allocated Cost

Ordinary shares (10,000x150) 1,500,000 15/16 750,000
Share dividends (1,000x100) 100,000 1/16 50,000
1,600,000 800,000

Investment in preference shares 50,000

Investment in ordinary shares 50,000

3. Shares received in lieu of cash dividend - Treated as income at fair value of the shares received.
In the absence of fair value, income is equal to cash dividends that would have been received.

Illustration: A shareholder owns 10,000 shares costing P1,000,000 and subsequently receives
1,000 shares at P10/ share, market at P150/ share in lieu of cash dividends.

With Market Value If No Market Value

Investment in shares 150,000 100,000
Dividend income (1,000 x 150) 150,000
Dividend income (10,000 x 10) 100,000

4. Cash received in lieu of share dividends - Not treated as income and, in the case of “as if
approach”, means that the share dividends are assumed to be received and subsequently sold at
the cash received. Therefore, gain or loss may be recognized.

Illustration: A shareholder owns 10,000 shares costing P1,100,000 and subsequently receives
P150,000 cash in lieu of 1,000 (10%) share dividend.

Under the foregoing assumption, cost of P1,100,000 would have been applied to 11,000 shares
that would have resulted to P100 cost per share. The 1,000 shares are assumed to be sold for the
cash received.
 Cash 150,000
Investment in shares 100,000
Gain on Investment 50,000

*If we are to follow the BIR approach, the P150,000 is simply credited to dividend income without
reflecting the actual scenario, i.e. cash in lieu of share dividend.

5. Share Split – capital restructuring of a corporation effecting change in the number of shares
without capitalizing retained earnings. Only a memo entry is required to effect this transaction.
a. Split up – outstanding shares are called in and replaced by a larger number, accompanied by
a reduction in the par or stated value per share.

Example: 10,000 shares are split up 5-for-1 costing P100,000. Therefore, number of shares
now held equal to 50,000 with the same cost of P100,000

b. Split-down – reverse of split up.

Special Assessment – are additional capital contribution of the shareholders and recorded as additional
cost of the investment.

Illustration: A shareholder owns 10,000 shares costing P500,000. Subsequently, the Board passed a
resolution that shareholders shall contribute P5 for each share held to the corporation.

Investment in shares 50,000

Cash (10,000 x P5) 50,000

Redemption of Shares – Preference share may be called in for redemption and cancelation by the issuing
entity. This is treated as a sale on the part of the shareholder where the redemption price is considered
as the sale price.

Illustration: A shareholder acquires 10,000 preference shares for P100 per share and subsequently
redeemed by the issuing entity at P110 per share.

Acquisition Redemption
Investment in shares 1,000,000 Cash (10,000 x 110) 1,100,000
Cash (10,000 x P100) 1,000,000 Investment in shares 1,000,000
Gain on Investment 100,000

Share Right / Stock Right / Preemptive Right / Right Issue

Legal right granted to shareholders (chance to preserve their equity interest in the corporation) to
subscribe for new shares, generally below prevailing market price, issued by a corporation at a specified
price during a definite period. Evidenced by certificates called Share Warrants. Initially measured at Fair
Value
 A share right is a form of financial asset measured at fair value, which is inherent in every share
meaning for every shares owned there is a corresponding share right upon approval and declaration of
the Board.

Announcement of Share Right

1. Date of declaration - issuance of shares is approved by the Board of Directors
2. Date of record - date on which the Stock and Transfer Book of the corporation is closed for
registration
3. Expiration Date – date up to which the share rights shall be exercised. Afterwards, the share rights
would be worthless.

• Right-on – date between declaration and record date. Share and the right are inseparable
and are treated as one
• Ex-Rights – date between record and expiration date. Share can now be sold separate from
the right.

Accounting for Share Rights:

1. Accounted for separately - a portion of the carrying amount of the investment in equity shares is
allocated to the share rights equal to the fair value of the share rights at the time of acquisition.
Therefore, investor now owns two financial assets. Under this method, share rights are normally
classified as current assets.

Illustration: An investor acquired 10,000 shares costing P1,800,000. Subsequently, he received 10,000
share rights to subscribe for new shares at P100 per share for every five shares held. Market value of
share and right are P150 and P10, respectively.

Acquisition Receipt of Share Right

Investment in shares 1,800,000 Share Rights 100,000
Cash 1,800,000 Investment in shares 100,000

Assuming share rights are subsequently exercised and that the investor acquired 2,000 new shares
(10,000 shares held divided by 5) at P100 per share.

Investment in shares 300,000

Cash (2,000 x 100) 200,000
Share Rights 100,000

Sale and expiration of share rights: Assume (a) share rights are sold for P150,000; (b) share rights
are expired

SALE OF SHARE RIGHTS EXPIRATION OF SHARE RIGHTS

Cash 150,000 Loss on share rights 100,000
Share Rights 100,000 Share Rights 100,000
Gain on sale 50,000
 Theoretical or Parity Value of Share Right – is the assumed fair value of the right that is derived from the
market value of the share. Value of one right is computed as follows:

Share right is selling Right On Share right is selling Ex-Right

Market Value of Share Right-on – Subscription Price Market Value of Share Ex-Right – Subscription Price
Number of Rights to Purchase one share + 1 Number of Rights to Purchase one share

Illustration: Assume 10,000 shares costing P2,500,000 was acquired and share rights were received to
subscribe to new shares at P150 per share for every five shares held. Market value of the share is P210
per share. The right has no known market value.

Right-On: Value of one right = (210 – 150) / (5+1) = P10

Ex-Right: Value of one right = (210 – 150) / (5) = P12

RIGHT-ON EX-RIGHT
Cost of Original investment 2,500,000 Cost of Original investment 2,500,000
Theoretical value (10,000 x P10) 100,000 Theoretical value (10,000 x P12) 120,000
Remaining Cost of investment 2,400,000 Remaining Cost of investment 2,380,000

2. Not accounted for separately – share rights are recognized as embedded derivative but, not a stand-
alone derivative, which is a financial security with a value that is reliant upon or derived from an
underlying asset, i.e., Investment in equity instrument

Illustration: 10,000 shares acquired costing P1,500,00. Subsequently, 10,000 share rights were
received to subscribe for new shares at P100 per share for every five shares held. Market value of
share and right are P140 and P10, respectively. Share rights are all exercised.

Acquisition Exercise of Share Right

Investment in shares 1,500,000 Investment in shares 200,000
Cash 1,500,000 Cash [(10,000/5) x 100] 200,000

If instead of exercising the share rights, it was sold for P150,000.

Cash 150,000
Investment in shares 150,000
*Assumed sale amount of rights. However, if the rights are expired, only a memo entry is necessary.

Note: The standard has not prescribed which method to use.