Investment in Equity

2 Securities
 Financial Instrument

Financial instrument is any contract that gives rise to a

financial asset of one entity and a financial liability or
equity instrument to another entity.

Characteristics:
a. There must be a contract.
b. There are least two parties to the contract.
c. The contract shall give rise to a financial asset of
one entity and a financial liability or equity instrument
to another entity.
 Financial Assets and Liabilities

• A financial asset is
(a) cash
(b) an equity instrument (of another entity) or
(c) a contractual right to receive cash (or another financial asset) or to
exchange financial assets or financial liabilities under conditions that are
potentially favorable

Examples:
▫ Cash on hand, in bank and in form of check
▫ Trade, notes and loans receivable
▫ Investments in stocks and debt instruments
 Financial Assets and Liabilities

• An equity instrument is a contract that represents a residual interest in

the net assets of the company.
Examples:
▫ Ordinary shares
▫ Preference shares
▫ Warrants and options

• A debt instrument is any security that represents a creditor relationship

with an investee company. It has a maturity value and maturity date.
Examples
▫ Corporate Bonds, BSP treasury bills, Government securities, redeemable
preferred shares
 Classification of Financial Assets

• Under PRFS 9, financial assets may be classified as:

▫ Financial Assets at Fair Value
Thru Profit or Loss
Thru Other Comprehensive Income
▫ Financial Assets at Amortized Cost

• Financial assets at fair value include both equity and

debt securities.

• Financial assets at amortized cost include only debt

securities.
Classification of Financial Assets
• There are three main models of accounting for
investments:
▫ Cost/amortized cost model
▫ Fair value through profit or loss(FV-PL)
▫ Fair value through other comprehensive income
model (FV-OCI)

• Other models, which would involve substantial

amount of percentage of ownership over the
investee (significant influence and control)
▫ Associate (20%-49% ownership )
▫ Subsidiary (50% and above ownership)

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Classification of Financial Assets
• Method of accounting for a particular
investment can depend on:
▫ Type of instrument (debt vs. equity)
▫ Management’s intent (Business model)
▫ Ability to reliably measure instrument’s fair
value, or
▫ Extent of influence over the investee company

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 Measurement summary
Cost/Amortized
Cost Model FVTPL FV-OCI

At acquisition, Cost (fair value +

measure at: transaction costs) Fair value Fair value

At each reporting Cost or amortized

date, measure at: cost Fair value Fair value
Unrealized
holding
gains/losses
reported in: Not applicable Net income OCI
Transfer total
realized to net
Realized holding income (recycling),
gains/losses or to retained
reported in: Net income Net income earnings
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Fair Value through Profit or Loss
• Fair value through profit or loss (FVTPL) in IFRS also
called Trading Securities.

• At acquisition, investment recorded at fair value.

Transactions costs are expensed

• At each reporting date, FVTPL investments are adjusted to

current fair value and any holding gain or loss is reported
in net income (profit or loss)

• Any earned interest/dividend income and any holding

gain or loss on the investment may be reported together as
“Investment Income”.

• Normally Current Asset.

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 Example
• On March 15, 2019, the company acquired investments in
stocks amounting to P192,990 plus commission of P500.
Assuming this investment is classified as FVTPL
• On September 15, 2019, the company received income of
P760

Entry on March 15:

Trading Securities 192,990
Commission expense 500
Cash 193,490

Entry on Sept 15:

Cash 760
Investment Income/Loss 760

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 Example
It reported on December 31, 2019 the following:
• Investments Carrying Amount Fair Value
In various shares P192,990 P191,200

Adjustment to fair value (192,990-191,200= 1,790 loss)

Entry to record adjustment at year end:

Unrealized loss –TS 1,790
Trading Securities 1,790

2019
Current assets:
Trading Securities P191,200

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 Example
It reported on December 31, 2020 the following:
• Investments Carrying Amount Fair Value
In various shares P191,200 P193,750

Adjustment to fair value (193,750-191,200= 2,550 gain)

Entry to record adjustment at year end:

Trading Securities 2,550
Unrealized gain-TS 2,550

2020
Current assets:
Trading Securities P193,750
 Example

On February 1, 2021, the entity sold the investment for

P195,000:
SP 195,000
CV (12/31/20) 193,750
Gain on Sale 1,230

Entry to record sale:

Cash 195,000
Trading Securities 193,750
Gain on Sale 1,230

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 Fair Value through OCI

• At acquisition, investments are recorded at

fair value. Transaction costs tend to be added
to investment’s carrying amount.

• At each reporting date, FV-OCI investments

are adjusted to current fair value and any
holding gain or loss is reported in other
comprehensive income (OCI)

• Accumulated holding gains/losses are

reported in Accumulated OCI, which is a
separate item under Shareholders’ Equity.
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 Fair Value through OCI

• When investments are disposed, previously

unrealized holding gains or losses need to be
transferred out of OCI/AOCI

• Upon disposal, unrealized holding gains or

losses are transferred directly into retained
earnings (bypassing net income).

• Normally, a Noncurrent Asset.

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 Example
• On March 15, 2019, the company acquired investments in
stocks amounting to P192,990 plus commission of P500.
Assuming this investment is classified as FVTPL
• On September 15, 2019, the company received income of
P760

Entry on March 15:

FA thru OCI 193,490
Cash 193,490

Entry on Sept 15:

Cash 760
Investment Income/Loss 760

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 Example

It reported on December 31, 2019 the following:

• Investments Carrying Amount Fair Value
In various shares P193,490 P191,200

Adjustment to fair value (193,490-191,200= 2,290 loss)

Entry to record adjustment at year end:

Unrealized loss –OCI 2,290
FA thru OCI 2,290

2019
Noncurrent assets:
FA thru OCI P191,200

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 Example
It reported on December 31, 2020 the following:
• Investments Carrying Amount Fair Value
In various shares P191,200 P193,750

Adjustment to fair value (193,750-191,200= 2,550 gain)

Entry to record adjustment at year end:

FA thru OCI 2,550
Unrealized loss-OCI 2,290
Unrealized gain-OCI 260

2020
Noncurrent assets:
FA thru OCI P193,750

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 Example

On February 1, 2021, the entity sold the investment for

P195,000:
SP 195,000
CV (12/31/20) 193,750
Gain on Sale 1,230

Entry to record sale:

Cash 195,000
FA thru OCI 193,750
Gain on Sale 1,230

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 Example

On February 1, 2021, the entity sold the investment for

P195,000:
Unrealized loss -2019 (2,290)
Unrealized gain -2020 2,550
Net Accumulated Amount 260

Entry to record the transfer of Accumulated OCI:

Unrealized gain OCI 260

Retained earnings 260

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