Investment in

Equity
Securities
Dividends, share split and share right

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Learning Objectives
1. Be familiar with investments and classify different financial assets;
2. Determine the initial and subsequent measurement of financial
assets;
3. Identify the financial assets that can be measured at fair value
through profit or loss (FVPL), at fair value through other
comprehensive income (FVOCI), and at amortized cost
4. Solve problems on financial assets at fair value
5. Calculate cash divididend, property dividend, share dividend and
liquidating dividend.
6. Solve problems on equity securities

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Equity Investments

a. Trading securities or financial assets at (FVPL)

b. Nontrading equity investment or financial assest at FVOCI
c. Investment in associate
d. Investment in subsidiary
e. Investment in unquoted equity instruments

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Initial Recognition of Financial Asset

• Measured at fair value plus transcation costs that are directly

attributable to the acquisition.
• Note that transaction costs directly attributable to the acquisition
of financial assets held for trading or financial asset at FVPL shall
be expensed immediately.

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Lump sum Acquisition
• If 2 or more equity securities are acquired at a single cost or
lump sum, the single cost is allocated to the securities acquired
on the basis of their fair value.
• If only 1 security has a known market value, an amount is
allocated to the security with the known market value equal to
its market value.
• The remainder of the single cost is allocated to the other
security with no known market value.
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Sale of Equity Investments

PFRS 9, paragraph 3.2.12, provides that on derecognition of a

financial asset measured at fair value through profit or loss, the
difference between the consideration received and the carrying
amount shall be recognized in profit or loss.

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Cash Dividends
• If the equity securities are measured at FVPL or at FVOCI or at cost,
dividends earned are considered as income.

• Cash dividends earned BUT NOT received:

Dividends receivable xxx
Dividend income xxx

• Cash dividends subsequently received:

Cash xxx
Dividend receivable xxx

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 3 Important Dates

Date of declaration Shares are selling “dividend on” - date

between the date of declaration and date of
record

Date of record
Between date of record and date of payment,
shares are selling “ex-dividend” which means
shares can be sold but still entitled to receive
Date of payment dividends.

When do you recognize dividend as income?

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Liquidating Dividend
• Represents return of invested capital hence, NOT income.
• You are receiving what you invested, not the earnings of your investment.
• Entry:
Cash or (whatever was received) xxx
Investment in Shares xxx
• Dividends received from a wasting asset corporation are designated partly income
and partly return of capital. The portion representing liquidating dividend should
be credited to the investment account.

• When liquidating dividend exceeds the cost of investment, difference is credited to

gain on investment.
• When liquidation is completed and the CA of the investment is not fully recovered,
the balance is written off as a loss.
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Share Dividends
• IAS term for share dividend is “bonus issue”
• Share of another entity held as equity investment declared as dividends
are NOT share dividends BUT property dividends.
• Share dividends are NOT income
• Kinds of share dividend:
v same as those held
v different from those held

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Share Dividends of the Same Class
• Recorded only by means of a memorandum entry on the part of the shareholder.
• Do not affect the total cost of the investment but reduce the cost of the
investment per share.
• Example: a shareholder owns 5,000 shares costing P100 per share received a 10%
share dividend. What is the effect of the share dividend?

Shares Cost per share Total cost

Original shares 5,000 100 500,000
Share dividends 500
Total 5,500 90.91 500,000

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Share Dividends Different from those Held
• Share dividends of different class are NOT income
• Original cost of the investment is apportioned between the original shares and the
share dividends on the basis of market value of each date of receipt.
• Example: Mr. A owns 3,000 ordinary shares costing P450,000. Later, he received 3%
preference share dividend at which time the ordinary shares and preference shares
have market value of P200 and P500, respectively. How should the cost be
allocated to the shares?
Market value Fraction Allocated cost
OS (3,000 sh x P200) 600,000 600/645 418,605
PS (90 sh x P500) 45,000 45/645 31,395
Total 645,000 450,000

Entry: Investment in preference shares 31,395

Investment in ordinary shares 31,395

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Shares Received in Lieu of Cash Dividends
• Shares received in lieu of cash dividends are income at fair value of the
shares received.
• In the absence of fair value of the shares received, the income is equal to
the cash dividends that would have been received.
• Example: Ms. D owns 2,000 shares costing 200,000. Subsequently, she
received 75 shares shares in lieu of cash dividend of P5 per share. The
market value per share is P125.
• Entry to record receipt of share dividend at fair value:
Investment in shares (75 sh.x P125) 9,375
Dividend income 9,375

• Entry to record receipt of share dividend without known fair value:

Investment in shares (2,000 sh x 5) 10,000
Dividend income 10,000

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Cash Dividend in Lieu of Share Dividend

It will be accounted by:

• First, assuming that the shares dividend was received. By assuming this, the
number of shares will increase and the value of each share will decrease.
• Second, assuming that the shares that was assumed received will be sold at the
selling price equal to the cash dividend actually received (replacement dividend).
• Third, the company will recognize gain or loss on the assumed sale.

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How to Compute Gain or Loss

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Cash Received in Lieu of Share Dividends
Suppose a shareholder who owns 4,000 shares costing P400,000 received
P50,000 in lieu of 400 shares originally declared as 10% share dividend.
Using the “as if” approach, share dividend are assumed received and
subsequently sold.
Entry will be:
Cash 50,000
Investment in shares (400 sh x P90.91) 36,364
Gain on sale of investment 13,636

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Cash Received in Lieu of Share Dividends
BIR Approach - all cash received, whether originally designatd as
cash dividend or share dividend is rcognized as INCOME.
Entry to record receipt of cash in lieu of share dividend will be:
Cash 50,000
Dividend income 50,000

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• Share Split - change in the number of shares without capitalizing
retained earnings or changing the amount of its legal capital.
• May be split up or split down
• Split up is a transaction whereby the outstanding are called in
and replaced by a larger number, accompanied by a reduction in
the par or stated value of each share.
• Split down is a transaction whereby the outstanding are called in
and replaced by a smaller number, accompanied by an increase
in the par or stated value of each share.

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Accounting for Share Split
• Share split does not affect the total cost of investment.
• Only memorandun entry is made to record receipt of new shares

Special assessments are additional capital contribution of the

shareholders.
Recorded as additional cost of the investment

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Share Right or Stock Right
• Share right or pre-emptive right is a legal right granted to
shareholders to subscribe for new shares issued by a corporation
at a specified price during a definite period.
• IAS term for share right is right issue.
• Purpose: to give the shareholders the chance to preserve their
equity interest.
• Share warrants instrument or certificate evidencing ownership of
share rights.
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Accounting for Share Rights
• Share right is a form of a financial asset.
• 2 School of Thoughts:
1. accounted for separately - measured intially at fair value. A
portion of the CA of the original investment in equity shares is
allocated to the share rights at an amount equal to the fair value
of the share rights at the time of acquisition. Classfied as current
assets.
2. not accounted for separately - recognized as embedded
derivative; shall be separated from the host contract and
accounted for separately under certain conditions. (IntAct 3)

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• 3 Important dates:
date of declaration
date of record - also the date of issuing the share warrants
expiration date - date up to which the share rights shall be
exercised.
• Between the date of declaration and date of record, shares are considered
selling right-on which means the share and the right are inseparable and
are treated as one.
• If sale is made prior to the record date, the difference between the SP and
the CA of the investment is considered gain or loss on sale of investment.
• Between the date of record and expiration date - on or after the date of
record, the shares are selling ex-right which means that the share can now
be sold separate from the right or vice versa.

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Theoretical or Parity Value of Share Right
• Theoretical or parity value is the intrinsic or assumed fair value of
the right that is derived from the market value of the share.
• 2 Formulas:
1. When the share is selling right on
MV of share right-on - Subscription price = Value of one right
# of rights to purchase one share + 1
2. When the share is selling ex-right
MV of share ex-right - Subscription price = Value of one right
# of rights to purchase one share
If the share right has no known market value, the theoretical or parity value is
determined to approximate the fair value of the share right at the time of acquisition.
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Illustration
Mr. B acquired 2,500 shares costing P625,000. Subsequently, he
received share rights to subscribe for new shares at P120 per share
for every 4 rights held. The market value of the share is P230 per
share. The right has no known market value.
Determine the value of the share right if:
a. the shares are selling right-on
b. the shares are selling ex-right

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a. Shares are selling right on
Value of one right = MV of share right-on - Subscription price
# of rights to purchase one share + 1
= (230 - 120) ÷ (4 + 1)
= 22 per right

b. Shares are selling ex-right

Value of one right = MV of share ex-right - Subscription price
# of rights to purchase one share
= (230 - 120) ÷ 4
= 27.50 per right

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Dividend and Measurement of Income
Cash dividend Face value
Property dividend Fair value at the date of declaration
Share dividend in lieu of cash dividend Priority 1: Fair Value of Shares at date of
declaration
Priority 2: Amount of cash that should
have been received
Share dividend Zero
Cash Dividend in Lieu of Share Dividend Zero
Liquidating Dividend Zero

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Knowledge Check 1
A net unrealized loss on an entity’s portfolio of FVOCI equity
securities shall be reflected in the current financial statements as
a. direct reduction to retained earnings
b. current loss resulting from holding equity securities
c. footnote or parenthetical disclosure only
d. component of other comprehensive income

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Knowledge Check 2
NUL Company provided the following data for the current year:
• On Sept. 1, NUL Company received a P600,000 cash dividend from XYZ
Company in which NUL Company owned a 40% interest.
• On Oct. 1, NUL Company received P80,000 liquidating dividend from Mega
Company. NUL owned 5% interest in Mega Company.
• NUL Company owned a 10% interest in Glow Company which declared and
paid P2,000,000 cash dividend on Dec. 15.

What amount should be reported as dividend income for the current year?
a. 200,000 b. 500,000 c. 880,000 d. 680,000

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Learning Activity
Breakout into 4 groups. You are given 15 minutes to collaborate
and discuss the answers. Choose who will be the group’s presenter.
Group 1 - answer problem 16 - 1
2- 16 - 2
3- 16 - 3
4- 16 - 4

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