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FINANCIAL ACCOUNTING AND REPORTING

INVESTMENTS

 Investments in EQUITY INSTRUMENTS (of another entity) may either be classified at Fair Value
through Profit or Loss or Fair Value through Other Comprehensive Income.
 Unless it is nonmarketable or the fair value cannot be measured reliably (cost method),
 the investor can exercise significant influence (equity method)
 or the investor has control (investment in subsidiary subject to consolidation).

Financial Assets at Fair Value Through Profit Or Loss

Requisites for  Both held for Trading or Non-trading

Classification
 Dividends as income
 Direct transaction cost incurred on acquisition should be
Transactions
expensed
recognized in Profit or
 Gain or loss on changes in fair value on subsequent
Loss
measurement
 Gain or loss on derecognition
 Measured at fair value
Statement of Financial  Under the assumption the Financial asset is held for trading,
Position FVPL shall be classified as a current asset (PAS 1)

Financial Assets at Fair Value Through Other Comprehensive Income

Requisites for  An irrevocable election to present in OCI an investment

Classification in equity instruments that is not held for trading
Transactions recognized  Dividends as income
in profit or loss
 Cumulative change in fair value due to subsequent
measurement as part of shareholders’ equity*
OCI  The change in fair value every year whether increase or
decrease is included in comprehensive income.
 Gain or loss on derecognition and may be transferred within
Equity (Retained Earnings)
 Initially measured at acquisition cost PLUS direct transaction
cost.
Statement of Financial  Subsequently measured at fair value
Position Items  Cumulative gain or loss on fair value in Equity (*same above)
 Non-trading investments are classified under the non-current
assets section of the statement of financial position
Note that PFRS 9 has eliminated the impairment loss category for equity instruments

Problem 1

On January 1, 2019, Geraint Company purchased marketable equity securities at its market value of
P5,000,000, while the company also paid commission, taxes and other transaction costs amounting to
P200,000. This investment represents 2% in the ordinary share capital of the investee. The securities had
the following market value on these dates:

December 31, 2019 4,700,000

December 31, 2020 5,300,000

1. No securities were sold during 2019 and 2020. What is the unrealized gain to be reported in profit or
loss in 2020 if the equity securities are held for trading?
a. 300,000
b. 600,000
c. 100,000
d. 700,000

2. If the “nontrading” equity securities acquired were irrevocably designated at FVOCI, what is the
unrealized gain to be recognized in the statement of changes in equity?
a. 500,000
b. 200,000
c. 100,000
d. 600,000

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Solution to number 1

Fair value on December 31, 2020 5,300,000

Less: Carrying amount before 2020 adjustment 4,700,000
Unrealized gain in profit or loss 600,000

Solution to number 2

Fair value on December 31, 2020 5,300,000

Less: Total cost 5,200,000
Unrealized gain in shareholders’ equity 100,000

Problem 2

On January 1, 2019 Gem Company purchased “trading” equity securities. The cost and market value on
December 31, 2019 were:

Cost Market
Security A 1,000,000 1,200,000
Security B 2,000,000 1,500,000
Security C 3,000,000 3,100,000

On July 1, 2020, Gem Company sold Security A for P1,400,000, before incurring P50,000 in brokerage
commission and taxes.

1. What is the amount of unrealized loss was recognized in the 2019 income statement?
a. 300,000
b. 400,000
c. 100,000
d. 200,000

2. What amount should be reported as gain on sale of trading securities in the 2020 income statement?
a. 250,000
b. 300,000
c. 100,000
d. 150,000

Solution to number 1

Fair value on December 31, 2019 5,800,000

Less: Carrying amount 6,000,000
Unrealized gain in profit or loss ( 200,000)

Solution to number 2

Net Selling Price (1,400,000 – 50,000) 1,350,000

Less: Carrying amount at time of sale 1,200,000
Gain on sale 150,000

Problem 3

On January 1, 2019, Loraine Company purchased nontrading equity securities. On December 31, 2019, the
cost and market value were:

Cost Transaction Cost Market

Security A 1,000,000 100,000 1,200,000
Security B 2,000,000 200,000 1,400,000
Security C 3,000,000 300,000 2,900,000

On July 1, 2020, the entity sold Security C for P3,900,000 before incurring P100,000 in brokerage
commission and taxes.

1. What amount of gain on sale should be recognized in the 2020 income statement if the securities are
designated as measured at FVTOCI under PFRS 9?
a. 900,000
b. 800,000
c. 400,000
d. 0

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2. What amount of gain on sale should be recognized in the 2020 income statement if the securities are
classified as “available for sale securities” under PAS 39?
a. 900,000
b. 500,000
c. 400,000
d. 300,000

Solution to number 1

Net Selling Price (3,900,000 – 100,000) 3,800,000

Less: Total acquisition cost (3,000,000 + 300,000) 3,300,000
Credit adjustment to Retained Earnings 500,000

Journal Entry:

Cash 3,800,000
FVOCI 2,900,000
Unrealized loss – OCI 400,000
Retained Earnings 500,000

Solution to number 2

Net Selling Price (3,900,000 – 100,000) 3,800,000

Less: Total acquisition cost (3,000,000 + 300,000) 3,300,000
Gain on sale 500,000

Problem 4

On January 1, 2019, Grace Company acquired a nontrading equity investment for P5,000,000. On
December 31, 2019, the market value of the investment was P4,000,000. On December 31, 2020, the issuer
of the equity instrument was in severe financial difficulty and the fair value of the equity investment had
fallen to P2,300,000. The entity does not expect the fair value to recover.

1. What amount of cumulative loss should be reported in the statement of changes in equity for
2020 as component of other comprehensive income if the investment is designated as measured
at FVTOCI (PFRS 9)?
a. 1,000,000
b. 2,700,000
c. 1,700,000
d. 0

2. What amount of cumulative loss should be reported in the statement of changes in equity for
2020 as component of other comprehensive income if the investment is classified as available for
sale (PAS 39)?
a. 1,000,000
b. 2,700,000
c. 1,700,000
d. 0

Solution to number 1

Fair value on December 31, 2020 2,300,000

Less: Total cost 5,000,000
Cumulative unrealized loss in shareholders’ equity 2,700,000

Solution to number 2

Fair value on December 31, 2020 2,300,000

Less: Total cost 5,000,000
Impairment loss in profit and loss 2,700,000

Journal Entry:

Impairment loss 2,700,000

Available for sale securities 1,700,000
Unrealized loss – OCI 1,000,000

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ACOUNTING FOR DIVIDENDS AND STOCK RGHTS

 Dividends – Distribution of earnings paid to shareholders based on the number of shares owned. The
most common type of dividend is a cash dividend. Dividends may be issued in other forms such as
stock and property.

 Dividends are typically recognized as income by the investor/shareholder, unless it is a liquidating

dividend, the equity method is being applied or the dividends are in the form of shares.

 Cash dividends are recognized as income regardless whether the dividends comes from the
cumulative net income after the date of the investment (post-acquisition retained earnings) or net
income prior to the acquisition of the investment (pre-acquisition retained earnings). Previously, it was
addressed in a PFRS that dividends from pre-acquisition retained earnings are liquidating dividends.
This treatment has now been superseded by revisions to PAS 27.

Basic rules on dividends

a. Cash dividends – Income recognized at the date of declaration, which is the date the board of directors
announces its intention to pay dividends.

b. Property dividends – Income at fair value.

c. Stock or share dividends – Recorded as a memorandum entry, however two important cases to take
note which are special stock dividends and a remeasurement of the cost per share:
1. A different class of shares received other than the original investment known as “special stock
dividends” shall be recognized as a new investment, therefore the TOTAL cost of the
investment shall be allocated using the “relative fair value method”. A common accounting
problem considered under these cases will be if only a single fair value is given. In this instance,
the available fair value shall simply be deducted from the total cost and the difference shall be
the value allocated to the remaining investment.

Total cost of 20,000 ordinary share investment (20,000 x 5,000,000

250)

Assume that, 10,000 preference shares are received with a fair value of 60 per share and the fair
value of the 20,000 ordinary shares that originally cost 250 each is 270.

Total Fair Value Fraction / Ratio

Ordinary (20,000 x 270) 5,400,000 5.4/6 (90%)
Preference (10,000 x 60) 600,000 .6/6 (10%)
Total 6,000,000

Although not income an entry shall be recorded as follows:

Investment in preference shares (10% x 5M) 500,000

Investment in ordinary shares 500,000

If the fair value of the ordinary shares is not provided, the preference share investment shall be
recorded at 600,000

2. Stock dividends will also reduce the cost per share as a result of the same or original cost
being allocated to a larger number of shares. This will of course be a factor in subsequent
sale transactions related to the investment.

If an investment of 50,000 shares is acquired at a total cost of 5,000,000 receives a 20% share
dividend distribution or a total of 10,000 additional shares, the before and after cost per share
is computed as follows:

Cost per share before share dividends (5,000,000 divided by 50,000) 100 / share

Cost per share after share dividends (5,000,000 divided by 60,000) 83.33 / share

Shares in lieu of cash dividends VS. Cash in lieu of stock dividends

 Let us assume that 50,000 shares are acquired at a cost of 3,000,000.

Situation 1: A dividend per share of P20 is declared but 5,000 shares with a fair value of 150 each is
issued

Situation 2: A 20% stock dividend is declared but instead cash dividends of 600,000 are received

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 Under situation 1, shares in lieu of cash, this shall be recognized as a property dividend and be
recorded as income at 750,000 (5,000 x 150), the fair value of the shares received. If the fair value of
the shares is not available, the amount of income shall be 1,000,000 (50,000 x 20).

 Under situation number 2, cash in lieu of stock dividends, the “as if sold approach” shall be followed.
Step 1 will be to compute for the new cost per share if the share dividends were received which is 50
per share (3,000,000 / 50,000 + 10,000 (20% x 50,000)). Then the number of share dividends that
would have been received shall be multiplied by 50 and compared to amount of cash dividends
received and a gain or loss on sale shall be recognized. Therefore the gain is 100,000 (600,000 less
(50 x 10,000))

When Are Shareholders Entitled to Dividends

 As mentioned earlier, dividends are recognized as income at the date of declaration. Meaning, dividends
receivable shall be debited and a corresponding credit to dividend income. But to determine whether
the shareholder should get a dividend, you need to look at two important dates. They are the "record
date" or "date of record" and the "ex-dividend date" or "ex-date."

 When a company declares a dividend, it sets a record date when the shareholder must be on the
company's books as a shareholder to receive the dividend. Companies also use this date to determine
who is sent financial reports and other information.

 Once the company sets the record date, the ex-dividend date is set based on stock exchange rules. The
ex-dividend date is usually set for stocks two business days before the record date. If a buyer
purchases the stock on its ex-dividend date or after, they will not receive the next dividend payment.
Instead, the seller gets the dividend. If the buyer purchases before the ex-dividend date meaning
“dividend on”, the buyer will get the dividend.

Here is an example:

Declaration Date Ex-Dividend Date Record Date Payable Date

9/1/2020 10/4/2020 10/6/2020 10/25/2020

If shares cost the investor 1,000,000 and a dividend receivable of 100,000 is recorded on the declaration date,
selling the shares for example 1,500,000 will result in a gain of only 400,000 if sold between 9/1/2020 and
10/3/2020 because it is “dividend on” and 500,000 if sold between 10/4/2020 and 10/24/2020 since it is “ex-
dividend”.

PROBLEMS

1. Data pertaining to dividends from Jenny Company’s ordinary shares investments for the year 2020 follow:
* On October 1, 2020, Jenny received P500,000 liquidating dividend from A Company. Jenny
owns a 10% interest in A Company.
* Jenny owns a 5% interest in B Company which declared a P5,000,000 cash dividend on
November 15, 2020 to stockholders of record on December 15, 2020 payable on January 15,
2021. Jenny does not have ability to exercise significant influence over B Company.
* On December 1, 2020, Jenny received from C Company a dividend in kind of one share D
Company ordinary shares for every 4 C Company ordinary shares held. Jenny holds 100,000 C
Company shares, which have a market price of P50 per share on December 1, 2020. The
market price of D Company ordinary is P30 per share.

What amount should Jenny report as dividend income in its 2020 income statement?
a. 500,000
b. 1,500,000
c. 1,000,000
d. 2,000,000

Solution:

Number of D Company shares from C Company the investee (100,000 / 4) 25,000

Multiply by fair value of D shares 30
Dividend income in the form of property dividends from C 750,000
Cash dividends from B Company (5,000,000 x 5%) 250,000
Total dividend income 1,000,000

 The liquidating dividend is a return of the investment rather than a return of investment therefore is a
deduction from the carrying amount of the investment.

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2. Jocelyn Company received dividends from its ordinary share investments during the year 2020 as
follows:
* A stock dividend of 10,000 shares from Volvo Company when the market price of Volvo’s
shares was P10 per share.
* A cash dividend of P1,500,000 from Opel Company ordinary shares in which Jocelyn owns a
20% interest.
* 5,000 shares of ordinary shares of Astra Company in lieu of cash dividend of P20 per share.
The market price of Astra Company’s shares was P150. Jocelyn holds originally 50,000
shares of Astra Company ordinary shares. Jocelyn owns 5% interest in Astra Company.

What amount of dividend revenue should Jocelyn report in its 2020 income statement?
a. 2,500,000
b. 2,250,000
c. 1,500,000
d. 750,000

Solution:

Number of Astra Company shares 5,000

Multiply by fair value per share 150
Dividend income in the form of shares in lieu of cash 750,000

 The stock dividend is a memorandum entry.

 The cash dividend of 1,500,000 is a deduction from the investment account since the equity method
should be applied because the investor can exercise significant influence.

3. On January 1. 2019, Jesse Company purchased 10% of Star Company’s ordinary shares for
P2,000,000. The investment is classified as a nonmarketable security and accounted for under the cost
method. The following data pertain to Star’s operations for 2019 and 2020.
2019 2020
Net income 1,000,000 3,000,000
Dividend paid None 5,000,000
What is the dividend income to be recognized in 2020?
a. 500,000
b. 600,000
c. 400,000
d. 300,000

Solution:

Dividend income (5,000,000 x 10%) 500,000

 As mentioned in the notes, dividend income shall be recognized based on the total declaration
whether or not coming from the before acquisition or post-acquisition retained earnings. As you can
see, from the time of acquisition only 4,000,000 (1M + 3M) was added to RE. Therefore there is
1,000,000 (5M – 4M) of pre-acquisition retained earnings declared as dividends.

4. On July 1, 2020, Jazzy Company purchased as a long-term investment 50,000 shares of Asia
Corporation ordinary shares for P80 per share. This purchase represents a 2% interest in Asia. On
August 1, 2020, Asia Corporation declared its annual dividend on its ordinary shares of P10 per share
payable on September 10 to shareholders of record at August 31, 2020. A retirement of an issue of
Jazzy’s serial bonds payable on August 25, 2020 required additional working capital and Jazzy sold all
50,000 shares of Asia’s stock for P5,200,000 at the same date including the accrued dividend. For
the year ended December 31, 2020, the gain on disposal to be reported by Jazzy on this transaction
should be
a. 700,000
b. 200,000
c. 500,000
d. 1,200,000

Solution:

Selling price 5,200,000

Less: Cost of the investment (50,000 x 80) 4,000,000
Dividend income / dividend receivable (50,000 x 10) 500,000 4,500,000
Gain on sale of share that are “dividend on” 700,000

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5. On January 1, 2020, Japan Company acquired 50,000 shares of David Company ordinary shares for a
total consideration of P6,000,000 as a nontrading investment. On October 1, 2020, Japan received from
David a preference shares dividend of one share for every 5 ordinary shares held. On this date, the
market price of David’s ordinary shares is P140 per share and the preference is P100 per share. What
is the balance of Japan Company’s investment in David Company preference shares?
a. 1,000,000
b. 750,000
c. 500,000
d. 0
Solution:
Total fair value of ordinary shares (50,000 x 140) 7,000,000
Total fair value of preference shares (50,000 / 5) x 100 1,000,000
Total fair value of ordinary and preference 8,000,000
Allocated cost for preference (6,000,000 x 1/8) 750,000

6. During 2019, Cecile Company purchased shares of another entity as follows:

January 1 20,000 shares at P100 2,000,000

July 1 30,000 shares at P120 3,600,000

The transactions for 2020 are as follows:

January 1 Received 20% stock dividend.

August 1 Received cash dividend of P10 per share.
December 1 Sold 30,000 shares at P150 per share.

What total amount of income from the investment should be reported for 2020?
a. 1,900,000
b. 1,700,000
c. 2,500,000
d. 2,300,000

Solution:

Cost per share of January 1 shares (2M divided by (20,000 + 4,000)) 83.33 /share
Cost per share of July 1 shares (3.6M divided by (30,000 + 6,000)) 100 /share

Selling price (30,000 x 150) 4,500,000

Less: January 1 Cost (24,000 x 83.33) 2,000,000
July 1 Cost sold (6,000 x 100) 600,000 2,600,000
Gain on sale 1,900,000
Dividend income (60,000 shares x 10) 600,000
Total income recognized from investment 2,500,000

Accounting for Stock Rights

Stock rights are issued to shareholders in order to maintain their proportionate ownership interest in the
corporation when new shares are issued at a discounted price compared to a public offering and for a limited
period only usually several weeks. The ratio is one stock right for every share owned by a shareholder.
However, the number of stock rights to buy one additional share shall not be the same. There are opposing
views in accounting for stock rights and the illustration below will show both.

Let us assume that a shareholder has 50,000 shares with a total cost of 5,000,000 or 100 per share and is
issued 50,000 stock rights to acquire 10,000 shares at 140 each. The fair value of the shares is 160 each
and the stock right is 10 each.

Accounted for Separately Not Accounted for Separately

Total Fair Value of SR (50,000 x 10) 500,000 Only a “memo entry” is recorded for the receipt of
the stock rights. And the exercise and acquisition of
Journal Entry: the shares shall only be the exercise price.

Investment in Stock Rights 500,000

Investment in Stocks 500,000 Exercise price (10,000 x 140) 1,400,000

Exercise price (10,000 x 140) 1,400,000 Journal Entry:

Cost of stock rights exercise 500,000
Total cost of new investment 1,900,000 Investment in Stocks 1,400,000
Cash 1,400,000

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Journal Entry:

Investment in Stocks 1,900,000

Cash 1,400,000
Investment in Stocks 500,000

 Accounting for stock rights separately has been the traditional approach followed for several
decades already. The fair value is simply used as the value to be allocated as the separate
investment of the stock rights based on the theoretical basis under PFRS 9 that “all investments and
contracts on those instruments must be measured at fair value”

 If stock rights are not accounted for separately, this is in line with another instrument described in
PFRS 9 known as embedded derivatives where the stock rights can be rightfully classified.
Embedded derivatives shall not be separated from the host contract if the host contract and the
embedded derivative have the same economic characteristics.

Theoretical Value of Stock Rights

 This is a formula that shall be applied to derive the fair value of the stock rights in case it is not
determinable in a specific situation. There are two applications of the formula depending whether
the shares are quoted “right-on” or “ex-right”.

RIGHT-ON EX-RIGHT

Market value of share less Exercise Price Market value of share less Exercise Price
Number of rights to purchase one share + 1 Number of rights to purchase one share

 The formulas are identical except for one little detail, the denominator for the “right-on” formula
shall have a plus 1 factor to represent the market value of the stock right that is included in the
market value of the share since it is quoted “right-on”.

 Let’s assume that 50,000 shares are acquired for 5,000,000 and 50,000 rights are issued to
purchase 12,500 shares or 4 rights to purchase one share at an exercise price of 100. The shares
are quoted at 125 and stock rights shall be accounted for separately.

 The market value of the stock rights if “right-on” is 5 (125 – 100) / (4 + 1) and 6.25 is “ex-right”
(125 – 100) / 4. The cost of the new investment shall be

RIGHT-ON EX-RIGHT

Exercise price (12,500 x 100) 1,250,000 Exercise price (12,500 x 100) 1,250,000
Cost of stock rights (5 x 50,000) 250,000 Cost of stock rights (6.25 x 50,000) 312,500
Total cost of new investment 1,500,000 Total cost of new investment 1,562,500

PROBLEMS

1. Jessica Company owns 60,000 shares of the outstanding ordinary shares of Chris Company. These
60,000 shares were originally purchased for P100 per share. On December 1, 2019, Chris Company
distributed 60,000 rights to Jessica. Jessica was entitled to buy one new share of Chris’ ordinary shares
for P120 and five of these rights. On December 1, 2019, each share of share has a market value of
P150 and each right had market value of P10. The stock rights are accounted for separately and
measured initially at fair value. On December 31, 2019, Jessica exercised all rights. What total cost
should be recorded for the new shares that Jessica acquired by exercising the rights?
a. 1,440,000
b. 2,040,000
c. 1,560,000
d. 1,840,000

Solution:

Allocated cost of stock rights at fair value (60,000 x 10) 600,000

Exercise price to purchase new shares (60,000 / 5 x 120) 1,440,000

Cost of stock rights exercised (60,000 x 10) 600,000
Total cost of new shares acquired 2,040,000

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2. Jasmine Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the
stockholders to subscribe for 1 share at P120. Milton Company owns 50,000 shares of Jasmine
Company with total cost of P6,000,000. The stock is quoted right-on at 140. The stock rights are
accounted for separately and measured initially at fair value. What is the cost of the new investment
assuming all of the stock rights are exercised by Milton Company?
a. 1,900,000
b. 1,700,000
c. 1,500,000
d. 1,200,000

Solution:

Market value right-on 140

Less; Exercise price 120
Difference 20
Divided by (4 + 1) 5
Theoretical value of stock rights 4

Exercise price to purchase new shares (50,000 / 4 x 120) 1,500,000

Cost of stock rights exercised (50,000 x 4) 200,000
Total cost of new shares acquired 1,700,000

3. Jensen Company invested in stock of Alma Company in 2017, 150,000 shares at a total cost of
P13,500,000 and in 2018, 100,000 shares at a total cost of P10,000,000. Jensen Company received
250,000 rights in 2019 to purchase Alma stock at P80 per share. Five rights are required to purchase one
share. At issue date, the rights had a market value of P5 each and the stock was selling ex-right at P95.
The stock rights are not accounted for separately. Jensen used the rights to purchase 40,000
additional shares of Alma Company and allowed the remaining rights to lapse. In 2020, Jensen sold
200,000 shares of Alma Company at 105 per share. What is the cost of the new shares acquired through
the exercise of the stock rights?
a. 3,500,000
b. 3,400,000
c. 4,000,000
d. 3,200,000

Solution:

Exercise price to purchase new shares (40,000 x 80) 3,200,000

Cost of stock rights exercised 0
Total cost of new shares acquired 3,200,000

-END-

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