Investment in equity securities PDF

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Investment In Equity SecuritiesMa’am Bravo’s lecture video notesDebt Securities- You only make investment if you have excess cash. - If you have cash you make investment and buy debt securities which are called debt investment. - The income that you will earn is interest. - If you buy debt securitie...

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20 per nag report ng one million 1m x 20 percent, entry is debit investment in associate credit invest income

Investment In Equity Securities Ma’am Bravo’s lecture video notes Debt Securities -

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You only make investment if you have excess cash. If you have cash you make investment and buy debt securities which are called debt investment. The income that you will earn is interest. If you buy debt securities meaning you are a creditor, nagpapautang ka.

Investment in Subsidiary -

Equity Investments at Fair Value Trading equity securities -

Equity Investments -

You buy shares and that makes you a shareholder/stockholder. You do not buy debt securities. The income that you will earn is dividends. Represent residual interest dun sa entity or investee or could represent ownership.

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Equity Investment in Fair Value (FVPL/FVOCI)

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Less than 20 percent of investment Residual or no control and influence IFRS 9 If ever the investee will be declaring dividends or yung investor kung anong treatment niya dun sa dividends, ittreat niya lang yon as dividends income based on the dividends received, yung income niya will be based on dividend received, fair value of property.

Investment in Associates/Joint Venture -

20%-50% of investment With significant influence IAS 28 Investment in associate under equity method, invest income based on the reported net income of the investee, sample we own

If your intention of buying equity securities is to trade it or sell it in a short period of time. When it’s selling price increases they sell it and they earn gain because they are selling it more than its carrying amount. It is accounted for as FVPL

Non-trading equity securities

Types of Equity Investments

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More than 50% investment With control IFRS 10

You have the intention of holding it for a longer period. You have an irrevocable choice to account it for as FVPL or FVOCI, meaning on the first day or the day of acquisition you already have to designate whether you will account it through FVPL or FVOCI.

NOTE: Di pwede mag reclassify from FVPL to FVOCI kasi dapat FVOCI lang in the date of acquisition. Walang reclassify kapag investment in equity securities.

Why Are They Called FVPL and FVOCI? FVPL -

When the share fluctuates on the market, the change in the fair value of the share is what we call holding gains or holding loss.

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The holding gain is shown in the statement of comprehensive income under the section of profit or loss

FVOCI -

The holding gain or holding loss is presented in the sci under the section of other comprehensive income which is after the profit or loss.

Accounting Treatment

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Trading equity instrument Non-trading equity instruments for which the enterprise did not exercise its option to take the change in fair value in other comprehensive income You initially debit equity investment FVPL at purchase price only. Treatment in transaction cost is expense. At reporting period preparing the financial statements particularly the statement of financial position, the investment is presented under the current asset section and your account will be equity investmentFVPL and the amount should be at fair value. There is no cumulative account written on the equity section because the holding gain there is in profit and loss section, lahat ng na sa profit and loss is being closed at the end of the reporting period. Changes in fair value ay papasok sa profit or loss kapag idederecognize na yung asset: net selling price less carrying amount, gain or sale na papasok sa profit or loss Kapag invest in equity securities by default FVPL ang treatment, kapag unquoted yan pero may available na value FVPL yung treatnment

At the end of the period, update the fair value which results to a change in profit or loss

FVOCI -

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FVPL -

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Non-trading equity investments for which the enterprise exercised its option to take change in fair value in other comprehensive income. You initially record it at purchase price plus transaction cost. Transaction cost are the commission you pay for the under writer because this shares is included in the market and it also includes the transfer taxes. At reporting period preparing the financial statements particularly the statement of financial position, the investment is presented under the non-current asset section and your account will be equity investment-FVOCI, also at fair value. At the lower portion of your statement of financial position, there will appear in the equity section which is the cumulative balance of the unrealized gains and losses on equity investment-OCI. What appears on the equity section is the cumulative, meaning from the very start to the reporting date. Change during the period papasok sa SCI, kapag cumulative balance sa SFP sa shareholder’s equity. Kapag idederecognize na yung asset: selling price less cost, direct charge sa retained earnings. At the end of the period, update the fair value which results to a change in other comprehensive income.

Subsequent Transactions Share Split -

For example you have 1000 shareholdings and if the investee corporation implements

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share split 2 is to 1, your 1000 shares became 2000 shares. The effect of that is a reduction in the par value or stated value of the share accompanied by a proportionate increase in the number of shares outstanding The carrying amount of the investment doesn’t change but the number of shares increases. In effect, the stated value or par value of the shares are now reduced We do not debit or credit any account to record the share split. The only requirement will be a memo entry To account a share split is easy, however the impact is very material For example you hold 1000 shares before the split, then after the split, 2 is to 1 so now it is 2000 shares. If you subsequently sell a portion of this share, the problem may ask you how much is the gain or the loss on the disposal of the share. You will not be able to get the correct answer on the question being asked if you were not able to account of the share split because if you compute for your gain or loss on the sale of your shares, your carrying amount for the items you sold will be based only on the 1000. However, if you should have accounted your share split properly the carrying value should have been divided by 2000.

Dividends -

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These are corporate distribution to shareholders proportionate to the number of their shareholdings. If the investee corporation declare dividend, the recipient is the shareholders and this are already distribution of earnings. Three significant dates: a. Date of declaration – this is when the investee corporation board of directors declare the dividends. So the investee corporation debits retained earnings and credits dividends payable. At the point of view of the investors, the shareholders

also recognize the revenue on the day of declaration. However, there are times wherein they only recognize it when they receive it, but the correct one is they should recognize at the date of declaration b. Date of record – the investee corporation determines who among the shareholders as of this date shall receive the dividends declared. So listing lang yan, wala ding entry. c. Date of payment – this is the time you receive the cash, if it is a cash dividend then credit dividends receivable if you have established it earlier, or if you did not record in the date of declaration you just debit cash and credit dividends revenue. Note: if you sell your securities within the period of declaration and record, it is said the securities or the shares are “dividends on”. So if the declaration is 5 pesos per share, the 5 pesos is said to be included in the selling price. So if you are to compute how much your gain or loss on the disposal is, you have to exclude the dividends because you are already selling two financial instruments, the dividend itself and the equity security. If you sell your securities within the period of record and payment, the shares are said to be “exdividend”. So the selling price and the value don’t anymore include the dividend. So if you are asked on the gain or loss on the disposal, you just get the selling price and deduct whatever is its carrying amount. Forms of dividends 1. Cash dividends – debit cash, credit dividends revenue. a. For FVPL – in profit or loss as dividend income b. For FVOCI – in profit or loss as dividend income, unless representing a recovery of part of the cost of investment. Meaning dividends received

will be treated as a reduction to the invest account, tinitreat as liquidating dividends, hindi talaga income but return of investment. Debit cash, credit investment account. 2. Stock dividends or bonus issue – memo entry. Increases only the number of shares but not the interest of the shareholders. 3. Property dividends – debit the dividend you receive, credit dividend revenue at fair value. If the investee corporation declared dividend in the form of a share but not in the same class held by the shareholders it is called a special bonus issue and is accounted for as property dividend. 4. Scrip dividends – a delayed cash dividend. *Liquidating Dividends – it is separated because it is actually not on the same nature. It arises from the distribution of the contributed capital not from the retained earnings or unappropriated retained earnings. Not recorded as an income but recorded as a credit account because they are already considered as return of investment. Share rights -

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Sometimes called preemptive right For example an investor holds 1000 and the corporation wherein bank holds 10000 shares, so basically you hold 10%. However, if the investing corporation issues additional share of 20000, total now is 30000 shares. For you to maintain the 10%, you will be first offered to buy the additional 20%. That is what we call the share right, so that your shareholdings or pre-emptive interest in the corporation will be maintained. In case there is no fair value, you can get the theoretical fair value:

FV of share ex-rights – subscription price Number of rights needed to buy one share - Receipt : Equity Investments – Share Rights (at FV) xx Investment Income xx

- Exercise of share warrant Equity Investments Cash Equity investments – Share Rights

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xx xx xx

If there is no entry upon receipt of share rights, unless inabutan kayo ng end of reporting period, recognize the new shares when rights are exercised:

Equity Investments (at FV) Cash (exercise price) Investment income

xx xx xx...