INVESTMENT IN EQUITY SECURITIES

1. Accounting for Investment in O/S

Purpose Method Investment Classification

Dividend/Speculation (no Fair Value Method or cost Financial asset at FV through P/L
significant influence) method (legal entity) or OCI or Financial asset at cost

Significant influence (20%- 50%) Equity Method (single economic Investment in Associate
entity method)

Control (>50%) Consolidation Investment in Subsidiary

(prepare separate FS and
Consolidated FS)

Joint Control (Contractually Proportionate consolidation or Investment in Joint Venture

agreed) Equity Method

Accounting for Investment in P/S

Purpose Method Investment Classification

Dividend/Speculation Fair Value Method or Cost Financial asset at FV through P/L
method or OCI or Financial asset at cost

2. Acquisition of Equity Securities

FA at FV – P/L FV

*Initially FA at FV – OCI FV + TC

Unquoted equity instrument cost + TC*

*in limited circumstances, cost maybe an appropriate estimate of FV

FV of asset given up

*acquired in an exchange FV of securities received

Cost or CA of asset given up

both have FV allocate based on FV

*acquired at lump sum
only one has FV allocate amount to the security with a known
FV equal to its FV; remainder to the other
security without known FV

NOTE: deduct from purchase price the amount of dividends declared on the purchased shares it they were
purchased “dividend on”

3. Accounting for Dividends

A. Dividends – distribution of earnings/capital to the shareholders in proportion to their shareholdings.

 dividend on ex-dividend

date of declaration date of record date of payment

Dividend Receivable xx no entry Cash xx

Dividend Income xx Dividend Receivable xx

B. Type and Treatment of Dividends

Type Treatment Measurement

a) Cash dividend Dividend income Face amount
b) Property dividend Dividend income Fair value
c) Liquidating dividend Return of capital; deduction -
from investment account
d) Stock dividends
*same class Reduction in cost per share; -
- requires a memo entry no change in total cost of
only investment

*different class Allocate original cost of -

- requires an entry to investment between the two
allocate total cost
class of shares using their FVs
dividend income

e) Shares received in lieu of Dividend income 1) FV of shares received

cash dividend 2) Cash dividend that would
have been received
f) Cash received in lieu of “as if sold” approach; Net -
share dividend Selling Price less cost of shares
( reduce first the cost per
share) equals gain on sale of
investment

NOTE: Distribution of shares of other entities owned by the distributing entity is considered a
property dividend and not a stock dividend

4. Accounting for Shares Splits

A. Share Splits – restructuring the capital of an entity by effecting a change in the number of shares
without capitalizing R/E or changing the amount of legal capital

  No. of Shares Cost per Share

Split up

Split down

B. Treatment – recorded by a means of a memorandum entry; no effect on total cost of investment

 5. Special Assessment – additional capital contribution of the shareholders, recorded as additional cost of
investment by the investor and as share premium by the investee.

6. Redemption of Shares – recorded in the same manner as a sale of share wherein the redemption price is
considered as the sales price

7. Accounting for stock rights

A. Stock Rights- the legal right of shareholders of record to subscribe for additional or new shares of the
corporation before such shares are offered for sale to the public

- inherent in every share and is evidenced by share warrants

- valuable to shareholders because the price at which the new shares are sold is
generally below the prevailing market price

- normally presented as current assets if presented separately

B. Treatment

right on ex-right

date of declaration date of record date of issuance date of expiration

no accounting problem can be accounted for separately or not

(not accounted separately)

Transactions Accounted Separately Not Accounted Separately

a) Receipts of stock rights Stock rights xx 1 Memo entry
Inv. In E/S xx
b) Exercise of stock rights Inv. In E/S xx 2 Inv. In E/S xx
Cash xx 3 Cash xx 3
Stock Rights xx
*normally accounted as a
FA at FV through P/L
c) Sale of stock rights Cash xx Cash xx 4
Stock Rights xx Inv. In E/S xx
Gain on Sale xx
d) Expiration of stock rights Loss on Stock Rights xx Memo entry
Stock Rights xx

NOTE:
1) The amount to be debited to Stock Rights is its fair value; if not available, then use its parity value

*when the share is selling right on (before issuance date)

*when the share is selling ex-right (after issuance date)

2) The amount to be debited to the investment account is the subscription price + value allocated to stock
rights. Only a portion of the value of stock rights is debited if only a portion is exercised.
 3) Cash outlay is credited for the subscription price.

4) No gain/loss is recognized. The investment account is simply credited for the cash proceeds.

8. Conversion of P/S into O/S ( Investor’s Viewpoint)

Investment in O/S xx  at FV
Investment in P/S xx  at CA
Gain on Conversion xx  difference
9. Sale of Equity Securities – the difference between the consideration received and the CA of the Financial
Asset shall be recognized in P/L.

Net Selling Price xx

Less: Dividends (if dividend on) (xx)
Consideration Received xx
Add: New Financial Asset xx
Less: New Financial Liability (xx)
Net Amount xx
Less: CA of FA sold (xx)*
Gain/Loss on Sale xx

*if only a portion of the FA is sold, the FIFO or average cost approach shall be used in determining the
cost of securities sold (if carried at cost)