EQUITY INVESTMENTS

INVESTMENTS
- Are assets held by an entity for the accretion of wealth through distribution such as interest,
royalties, dividends, and rentals, for capital appreciation or for other benefits to the investing
entity such as those obtained through trading relationships.

ACCOUNTING FOR EQUITY SECURITIES

EQUITY INSTRUMENT
- any contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities. Examples of equity instruments:
a. Ordinary shares
b. Certain preference shares
c. Warrants or written call options

An investment in equity security is a financial asset since it is an equity instrument of another entity.

CLASSIFICATION OF INVESTMENT IN EQUITY SECURITIES

% of ownership Preference shares Ordinary shares
<20% FVTPL or FVTOCI FVTPL or FVTOCI
20% to 50% FVTPL or FVTOCI Investment in Associate
>50% to 100% FVTPL or FVTOCI Investment in Subsidiary
The % of ownership is based on existing and potential ownership. However, in recording share in
dividends or income, the existing ownership must be used.

Standards Applicable for Investments in Preference Shares

Types of Investment Purpose Method Applicable Standards
PAS 2
Financial asset Dividend / Speculation Fair Value PFRS 7
PFRS 9

Standards Applicable for Investments in Ordinary Shares

Types of Investment Purpose Method Applicable Standards
PAS 2
Financial asset Dividend / Speculation Fair Value PFRS 7
PFRS 9
Investment in PAS 28
Significant influence Equity method
Associate PFRS 7
PAS 28
Investment in Joint
Joint Control Equity method PFRS 11
Venture
PFRS 7
PAS 27
a. Separate FS: Cost or
PAS 28
Investment in Equity method
Control
Subsidiary
PFRS 10
b. Consolidated FS:
PFRS 7

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INITIAL MEASUREMENT
Investment in equity securities under the scope of PFRS 9 is initially measured as:
1. FVTPL – fair value excluding transaction cost
2. FVTOCI – fair value including transaction cost

ACCOUNTING FOR REGULAR PURCHASE OR SALE OF FINANCIAL ASSET

Regular way purchase or sale of a financial asset
A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms
require delivery of the asset within the time frame established generally by regulation or convention in
the marketplace concerned.

A regular way purchase or sale of financial assets is recognized and derecognized using either trade date
or settlement date accounting. The method used is to be applied consistently for all purchases and sales
of financial assets that belong to the same category of financial asset as defined in PFRS 9 (note that for
this purpose, assets held for trading form a different category from assets designated at fair value
through profit or loss). The choice of method is an accounting policy.

Trade Date Accounting

Under trade date accounting, the financial asset and liability are recognized on the date the enterprise
commits to the purchase.

Settlement Date Accounting

Under settlement date accounting, the financial asset is recognized on the date it is delivered.

Summary of recognition and derecognition in a regular way purchase and sale of financial assets:
Trade Date Settlement Date
1. When to recognize the Commitment date Delivery date
financial asset?
2. When to derecognize the Commitment date Delivery date
financial asset?
3. Do changes in fair value from
trade date to settlement date
(for financial asset measured at
fair value) be recognized?
Purchase Yes Yes
Sale Ignore Ignore

TRANSACTIONS SUBSEQUENT TO ACQUISITIONS

DIVIDENDS
Three Different Dates Relating to Dividends
a. Date of Declaration is the date when the board of directors announces the distribution of
dividends. Dividend income may or may not be recognized on this date.
b. Date of record is the cut-off date that determines who among the shareholders is entitled to
dividend per listing as of the record date. No journal entry is required on this date.
c. Date of payment is the date when the dividend is received.

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CASH DIVIDENDS
Cash dividend is the payment of cash to shareholders in proportion to the number of shares owned.
Cash dividend may be:
a. certain amount of pesos per share
b. certain percent of the par or stated value (e.g., 10% cash dividends = 10% x par value or stated
value)

PROPERTY DIVIDENDS
Property dividend is a dividend paid in the form of some asset other than cash. Examples of Property
dividends:
a. Noncurrent assets covered by PFRS 5 (e.g., property, plant and equipment, Intangibles, and
Investment in Associate)
b. Assets other than those covered by PFRS 5 (e.g., current assets just like inventory, noncurrent
assets covered by PFRS 9 like FVTOCI)
Accounting for Property Dividends
Property dividends, regardless of the types, should always be recorded at the fair value at the date of
declaration irrespective of the fair value on the date of settlement.

LIABILITY/SCRIP DIVIDENDS
A liability or scrip dividend is a deferred cash dividend.

CASH RECEIVED IN LIEU OF SHARE DIVIDENDS

Cash received in lieu of share dividends is accounted as if the stocks were received and subsequently
sold at the amount of cash received. This not a dividend income, however, gain or loss shall be
recognized.
The gain or loss on sale may be computed as follows:
Net selling price XX
Less: Carrying amount of the investment sold XX
Gain (or loss) on sale XX

For investment measured at cost, the carrying amount is computed as follows:

Original carrying amount of the shares XX
Divide by:
Original shares XX
Add: Share dividend XX XX
Carrying amount per share of the investment sold XX
Multiply by: Share dividends XX
Carrying amount of the investment sold XX

For investments measured at fair value, the carrying of the investment sold is the fair value of the share
dividends that would have been received.
SHARES RECEIVED IN LIEU OF CASH DIVIDEND

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Shares received in lieu of cash dividend are recognized as income at the fair value of the stock received.
But for an investment from which dividends are received is measured at cost, the dividend income is
equal to the cash dividends that should have been received.
DIVIDENDS OUT OF CAPITAL/LIQUIDATING DIVIDENDS/RETURN OF INVESTMENT
Dividends out of capital are actually liquidating dividend. It is not an income and therefore credited to
the investment account.

STOCK SPLIT OR SHARE SPLIT

Stock split or share split is a decision by the company's board of directors to increase the number of
shares that are outstanding by issuing more shares to current shareholders. Stock split may either be
split up or split down.
A. Split up is a transaction whereby the original shares are called in for cancellation and replaced
by a larger number accompanied by a reduction in the par value or stated value.
B. Split down or reverse share split is a transaction whereby the original shares are cancelled and
replaced by a smaller number accompanied by an increase in the par value or stated value.

Accounting Treatment of Stock Split

Accounting for stock split whether split up or split down is similar with share dividends. Upon receipt of
all the shares as a result of share split and remeasurement of all the shares to fair value, the journal
entries are as follows:
Category Accounting Treatment
1. Investment in unquoted equity securities Recorded as memorandum entry only
measured at cost
2. Financial asset at FVTPL Dr FVTPL (@ fair value)
Cr Unrealized Gain – P&L
3. Investment in equity securities Dr FVTOCI (@ fair value)
designated as at FVTOCI Cr Unrealized Gain - OCI

SPECIAL ASSESSMENTS
Special assessments are additional contributions required by an entity to its shareholders especially
during financial difficulties. This is treated as additional cost of investment and recorded as debit to
investment and credit to Cash.

STOCK RIGHT
A stock right or preemptive right is a privilege giving current stockholders the first right to buy shares in
a new offering, thus maintaining their proportionate ownership interest.

Accounting for Stock Right

Accounting for stock rights will depend if the rights emanates from investment in equity securities
measured at cost, fair value through profit or loss securities or fair value through other comprehensive
income.
Investment in unquoted Financial Asset at Investment in equity
securities measured at cost FVTPL designated as FVTOCI
Upon receipt Memorandum entry Memorandum entry Record the stock rights at its
of stock rights fair value by debit to Stock

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 rights and credit to Unrealized
gain (P&L).
Debit Investment in equity
Debit Investment in equity and Debit FA at FVTPL and
Upon exercise FVTOCI and credit to Cash and
credit to Cash credit to Cash
Stock rights
Debit to loss on stock rights
When expired Memorandum entry Memorandum entry
and credit stock rights.
Debit Cash and credit to Debit Cash and credit Debit cash or Loss on sale-
investment in equity at the net to FA at FVTPL at the P&L- (if any) and credit to
When sold
amount received. (No gain or net amount received. stock rights or gain on sale if
loss) (No gain or loss) any.
Stock rights are usually accounted for at fair value through profit or loss and are considered
Classification
as derivative and presented usually as current asset.

Theoretical Value of the rights

If the fair value of the stock rights is not given, then the company can compute its value using the
theoretical value of the rights. The formulas are as follows:
a. When the stock is selling right-on:
Value of one right = Market value of stock right-on minus subscription price
Number of rights to purchase one share plus 1

b. When the stock is selling ex-right:

Value of one right = Market value of stock ex-right minus subscription price
Number of rights to purchase one share

RECLASSIFICATIONS OF INVESTMENTS IN EQUITY SECURITIES

No reclassifications to and from equity securities are allowed since equity securities are classified as
FVTOCI, which is prohibited from reclassification.

LECTURE DRILLS
Problem 1
During 2023, an entity purchased marketable equity securities as a trading investment. For the year
ended December 31, 2023, the entity recognized an unrealized gain of ₱500,000. There were no security
transactions during 2024. The entity provided the following information on December 31, 2024:

Security Cost Market Value

A 2,600,000 2,200,000
B 2,400,000 2,900,000
5,000,000 5,100,000

In the 2024 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of ₱100,000
b. Unrealized loss of ₱100,000
c. Unrealized loss of ₱400,000

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 d. Unrealized gain of ₱400,000

Problem 2
On January 1, 2023, an entity purchased equity investments held for trading.
Purchase price Transaction cost Market – 12/31/2023
Security A 1,000,000 100,000 1,200,000
Security B 2,000,000 200,000 1,500,000
Security C 3,000,000 300,000 3,100,000
On July 1, 2024, an entity sold Security C for ₱3,500,000.

What amount should be reported as gain on sale of equity investments in 2024?

a. 500,000
b. 400,000
c. 200,000
d. 100,000

Problem 3
An entity acquired at the beginning of 2023 non-trading equity investment for ₱6,000,000 plus
transaction cost of ₱800,000 and irrevocably designated as financial asset at fair value through other
comprehensive income. The fair value was ₱8,000,000 at December 31, 2023 and the transaction cost
that would be incurred on the sale of the investment is estimated at ₱100,000. What amount of gain
should be recognized in OCI for 2023?
a. 2,000,000
b. 1,200,000
c. 1,100,000
d. 1,900,000

Problem 4
On January 1, 2023, an entity purchased non-trading equity investments which are irrevocably
designated at FVOCI:
Purchase price Transaction cost Market – 12/31/2023
Security A 1,000,000 100,000 700,000
Security B 2,000,000 200,000 2,900,000
Security C 4,000,000 400,000 4,600,000
On July 1, 2024, the entity sold Security C for ₱5,200,000.

1. What amount of unrealized gain should be recognized in OCI for 2023?

a. 1,500,000
b. 1,200,000
c. 500,000
d. 600,000

2. What is the net adjustment to retained earnings as a result of the sale of investment in 2024?
a. 600,000 credit
b. 600,000 debit

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 c. 800,000 credit
d. 800,000 debit
Problem 5
An entity acquired a non-trading equity investment a number of years ago for ₱6,000,000 and
irrevocably designated it as at FVTOCI. On December 31, 2023, the cumulative loss recognized in other
comprehensive income was ₱800,000 and the carrying amount of the investment was ₱5,200,000. On
December 31, 2024, the issuer of the equity instrument was in severe financial difficulty and the fair
value of the equity investment had fallen to ₱2,400,000.
What amount of unrealized loss should be reported as component of OCI in the statement of
comprehensive income for 2024?
a. 2,800,000
b. 3,600,000
c. 800,000
d. 600,000

Problem 6
An entity received the following dividends during the current year:
 ₱500,000 cash dividend from Sico Company in which the entity owns a 30% interest.
 ₱600,000 liquidating dividend from Kong Company in which entity owns a 5% interest.
 ₱400,000 cash dividend from Bew Company in which entity owns a 10% interest.
 Share dividend of 4,000 shares from Porr Company with the market price of ₱20 per share.
 5,000 shares of Lurk Company in lieu of cash dividend of ₱20 per share. The entity owns 50,000
shares of Lurk with market price of ₱150.
What amount should be reported as dividend income for the current year?
a. 1,650,000
b. 1,000,000
c. 1,150,000
d. 1,400,000

Problem 7
An entity owned 50,000 shares of another entity. These 50,000 shares were originally purchased for
₱120 per share. The investee distributed 50,000 rights to the entity. The entity was entitled to buy one
new share for ₱90 and two of these rights. Each share had a market value of ₱130 and each right had
market value of ₱20 on the date of issuance.
What total cost should be recorded for the new shares that are acquired by exercising the rights?
a. 2,250,000
b. 3,250,000
c. 3,050,000
d. 5,500,000

Problem 8
An entity issued rights entitling the shareholders to subscribe for 1 share at ₱100 plus 4 rights. An
investor owned 50,000 shares with total cost of ₱5,000,000. The share is quoted right-on at 125.
What is the cost of new investment if all rights are exercised?

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 a. 1,500,000
b. 1,250,000
c. 1,562,500
d. 1,450,000

Problem 9
An entity purchased for ₱2,400,000, 50,000 newly issued 6% cumulative ₱20 par value preference
shares. Each preference share had one share warrant attached which entitled the holder to acquire at
₱150 one ordinary share of ₱100 par value for each two warrants held. The market price on this date of
the preference share without warrant was ₱50 and the market price of the share warrant was ₱10. All
the share warrants were sold for ₱700,000 during the year.

1. What amount should be recorded as cost of investment in preference shares?

a. 2,400,000
b. 2,000,000
c. 1,200,000
d. 1,000,000

2. What amount should be recognized as gain on sale of warrants?

a. 300,000
b. 700,000
c. 400,000
d. 0

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