Overview

Investment is an asset held by an entity for purposes of accretion of wealth through distribution
of dividends, interest and rentals or for capital appreciation or other benefits to be obtained.

Course Materials
DEFINITION
Investments are assets not directly related to central revenue producing activities of the
enterprise but are acquired by the entity for any of the following purposes
- Other source of income
- Established long-term relationship with suppliers and customers;
- Acquire control or significant influence over another entity
- Appreciation in value

TYPES OF INVESTMENTS
1. Equity Investment – are investments in ownership shares and potential ownership shares
2. Debt Investment – are investments that typically had the following characteristics; maturity
value, interest rate, and maturity date.

EQUTIY INVESTMENTS
Classification of Equity Investments:
1. Equity Investments at Fair value through profit or loss ( FVTPL )
2. . Equity Investments at Fair value through other comprehensive income ( FVTOCI )
3. Investment in associates

Ownership Initial Year End Changes in Fair

Interest Recognition Valuation Value

Equity Less than 20% Cost, Fair Value Taken to Profit

Investment at Transaction or Loss
FV -PL (Treated as
Expense )
Equity Less than 20% Cost + Fair Value Taken to stock
Investment at Transaction Cost
FV -OCI
 Investment 20% - 50% Cost + Carrying Value -
Associates Transaction Cost
INITIAL RECOGNITION
Equity Investments at Fair value through profit or loss – If the ownership interest acquired by
the investor is less than 20% of the outstanding shares of the investee and it is held for trading
should be initially reported as cost. Any transaction costs incurred in connection with such
acquisition should be reported as expense. These are securities that are acquired principally for
the purpose of generating profit from short-term fluctuations in price or dealer margin.

Equity Investments at Fair value through other comprehensive income - If the ownership
interest acquired by the investor is less than 20% of the outstanding shares of the investee not
intended for immediate trading but ownership interest is not enough to give the investor ability
to exercise significant influence over the investee. This should be initially reported at cost plus
transaction cost incurred. Are those financial assets that are not (a) loans and receivables that
are originated by the enterprise (b) financial assets for trading.

Investment in associates – If the ownership interest acquired is 20% - 50% it gives the holder of
the securities the power to participate in ( but not to govern ) the financial and operating policy
decision of the investee. Investment in associates should be reported initially at cost plus
transaction cost incurred. Transaction cost are incremental cost that are directly attributable
to the acquisition, issue or disposal of a financial asset or liability.

YEAR – END VALUATION

Equity Investments at Fair value through profit or loss should be recorded at year end and at
its fair market value. The difference between fair value and cost should be taken to profit or
loss. Cash dividend received from the investee is reported as dividend revenue.

Equity Investments at Fair value through other comprehensive income should be reported at
its fair value. The difference between cost and fair value is taken to other comprehensive
income ( shareholder’s equity ). Cash dividend received from the investee is reported as
dividend revenue.
Investment in associates should be reported at its carrying value. Carrying value is the sum of
cost plus share in profit less share cash dividend. Profit and dividend received should be up to
extend of its ownership interest.

Assume the following information:

On January 1, 2022 Company A acquired ordinary shares of Company B for P 1 ,600,000. The
investments represent 15% of the outstanding shares of Company B. The transaction incurred
were P 160,000. On December 31, 2022 the fair value of the investment was P 1,640,000.
Company B declared and paid dividends of P 200,000 and reported net income of P 500,000.

Assumption 1. The investment is designated as Equity Investments at Fair value through

profit or loss

Jan. 1, 2022 – To record acquisition of investment.

Equity Investment at FV – P/L P 1,600,000
Broker’s Fee 160,000
Cash 1,760,000
Dec. 31, 2022 – To record the receipt of dividend
Cash P 30,000
Dividend Revenue 30,000
( 200,000 x 15% )
Dec. 31, 2022 – To record share of profit
NO ENTRY ( Not entitled to the receipt of profit )

Dec. 31, 2022 – To record year-end valuation

Equity investment at FV -PL P 40,000
Unrealized Gain 40,000
 Fair value at year end P 1,640,000
Original cost 1,600,000
Unrealized Gain P 40, 000

Assumption 2. The investment is designated at Equity Investments at Fair value through

other comprehensive income

Jan. 1, 2022 – To record acquisition of investment.

Equity Investment at FV – OCI P 1,760,000
Cash 1,760,000
Dec. 31, 2022 – To record the receipt of dividend
Cash P 30,000
Dividend Revenue 30,000
( 200,000 x 15% )
Dec. 31, 2022 – To record share of profit
NO ENTRY ( Not entitled to the receipt of profit )

Dec. 31, 2022 – To record year end-valuation

Equity investment at FV -OCI P 120,000
Unrealized Gain 120,000

Fair value at year end P 1,640,000

Original Cost 1,760,000
Unrealized Loss P120,000
Assumption 3. The investment is designated as Investment in associates and assumed the
ownership acquired is 25% .

Jan. 1, 2022 - To record acquisition of investment

Investment in Associates P 1,760,000
Cash 1,760,000
Dec. 31, 2022 - To record the receipt of dividend
Cash P 50,000
Investment in Associates 50,000

Dec. 31, 2022 – To record share of profit

Investment in Associates P 125,000
Income from investment 125,000

Dec. 31, 2022 – To record year-end valuation

NO ENTRY

Original cost P 1,760,000

ADD: Share in Profit 125,000
LESS: Dividend 50,000
Carrying Value P 1,835,000