ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 14.

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Topic: Equity Investments
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

EQUITY INVESTMENTS

EQUITY INVESTMENTS

a. Trading securities or financial assets at FVPL

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

ACQUISITION OF EQUITY INVESTMENTS

• When a financial asset is recognized initially an entity shall measure at fair

value plus transaction cost that are directly attributable to the acquisition.
Transaction cost is directly attributable to the acquisition of financial asset
held for trading or financial asset at fair value through profit or loss shall be
expensed immediately.

Lump sum acquisition

If two 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 one security has a known market value, an amount is allocated to the security
with a known market value equal to its market value.

Sale of equity investments

When the equity shares are of the same class acquired on different dates at different
cost, a problem will arise as to the determination of cost of shares sold when only a
portion is subsequently sold. The entity shall determine the cost of shares sold using
either the FIFO or average cost approach.

Cash dividends

If the equity securities are measured at fair value through profit or loss, or at fair
value through OCI or at cost, dividends earned as income.

a. When the cash dividends are earned but not received:

Dividends receivable xxx

Dividend income xxx

b. When the cash dividends are subsequently received:

Cash xxx

Dividends receivable xxx

Note: The cash dividends do not affect the investment account.

When are dividends considered earned?

a. Date of declaration
b. Date of record
c. Date of payment

Page 1 of 6
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.
 ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 14.0
Topic: Equity Investments
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

• Between the date of declaration and the record date, the shares are selling
“dividend-on” means when shares are sold after the date of declaration but prior
to record date, the shares carry with them the right to receive dividends.

When to recognize dividends as income

• Dividends shall be recognized as revenue when the shareholder’s right to receive

payment is established
• Dividends shall be recognized as revenue on the date of declaration
• Once a dividend has been declared, a legal liability binding on the corporation is
created
• When shares are sold “dividend-on” and the dividend accrued is specifically
included in the sale price, that portion of the sale price pertaining to the
accrued dividend should be credited to dividend income.
• Sale price should be credited to dividend income.

PROPERTY DIVIDENDS OR DIVIDENDS IN KIND

• are the dividends in the form of property of noncash asset

• are also considered as income and recorded at fair value.

Noncash assets xxx

Dividend income xxx

LIQUIDATING DIVIDENDS

• represent return on invested capital, and therefore, are not income. The payment
may be in the form of cash or noncash asset.
• The liquidating dividend is recognized as return of investment. Normally,
liquidating dividends are paid when the corporation is dissolved and liquidated.
• Wasting asset corporation or mining entity liquidating dividends maybe paid even
before dissolution and liquidation.
• When dividends are received from wasting asset, the dividends are designated as
partly income and partly return of capital.
• When liquidating dividends exceed the cost of investment, the difference is
credited to gain on investment.
• When the liquidation is completed and the carrying amount of investment is not
fully recovered, the balance is written off as a loss.

SHARE DIVIDENDS OR STOCK DIVIDENDS

• Are in the form of the issuing entity’s own shares. The IAS term for share dividend
is “bonus issue”.
• Shares of another entity declared as dividends are not share dividends but property
dividends.

KINDS OF SHARE DIVIDENDS

• Share dividends may be the same as those held or different from those held.
• Share dividends whether of the same class or different are not income. The reason
is that there are no additional assets received by the entity.
• The shareholder receives additional shares but still has the same proportionate
equity interest in the entity.
• The shareholder may have more shares but at reduced market value.

Page 2 of 6
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.
 ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 14.0
Topic: Equity Investments
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

SHARE DIVIDENDS OF SAME CLASS

• Share dividends of the same class are recorded only be means of a memorandum entry
on the part of the shareholder.
• Share dividends do not affect the total cost of the investment but reduce the cost
of the investment per share.

SHARE DIVIDENDS DIFFERENT FROM THOSE HELD

• A shareholder may receive a share dividend which is different from the original
shares
• Share dividends of different class are not income
• The original cost of the investment is apportioned between the original shares and
the share dividends on the basis of market value of each at the date of receipt.

SHARE RECEIVED IN LIEU OF CASH DIVIDENDS

• When cash dividends are declared and received, it is without doubt that the cash
dividends are income
• It is generally accepted that shares received in lieu of cash dividends are income
at fair value of the shares received. The reason is that such shares are in effect
property dividends.
• In the absence of fair value of the shares received the income is equal to the
cash dividends that would have been received.

CASH RECEIVED IN LIEU OF SHARE DIVIDENDS

• When dividends are declared and received, unquestionably, the share dividends are
not income. A problem will arise when cash is received in lieu of share dividends.

AS IF APPROACH

• The “as if “approach means that the share dividends are assumed to be received and
subsequently sold at the cash received. Therefore, a gain or loss may be recognized.

BIR APPROACH

• All cash received, whether originally designated as cash dividend or share

dividend, is recognized as income.
• The cash received is simply debited to cash and credited to dividend income.
• The “as if” approach is theoretically sound and should be followed for financial
accounting purposes.

SHARE SPLIT

• A corporation may restructure its capital by effecting a change in the number of

shares without capitalizing retained earnings or changing the amount of its legal
capital.
• Share split may be split up or split down.

SPLIT UP

• Transaction whereby the outstanding share are called in and replaced by a larger
number, accompanied by a reduction in the par or stated value of each share.

SPLIT DOWN

• Transaction whereby the outstanding shares are called in a replaced by a smaller

number, accompanied by an increase in the par or stated value.
• Share split does not affect the total cost of investment.

Page 3 of 6
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.
 ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 14.0
Topic: Equity Investments
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

• Memorandum entry is made to record the receipt of new shares by virtue of share
split.

SPECIAL ASSESMENTS

• Are additional capital contribution of the shareholders.

• On the part of the shareholders, special assessments are recorded as additional
cost of investment.

REDEMPTION OF SHARES

• Is recorded in the same manner as sale of share. The redemption price is treated
as the sale price.

SHARE RIGHT OR STOCK 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.
• Share right is inherent in every share. A shareholder receives one right for every
share owned.
• Share right is valuable to a shareholder because the price at which the new shares
are sold generally below the prevailing market price.
• The purpose of the share right is to give the shareholders the chance to preserve
their equity interest in the corporation.
• The ownership of share rights is evidenced by instruments or certificates called
share warrants.

ACCOUNTING FOR SHARE RIGHTS

• PFRS 9 does not address the accounting for share rights categorically. But a share
right is a form of a financial asset. There are two schools of thought on the
matter, namely
1. Share rights are accounted for separately
2. Share rights are not accounted for separately.

ACCOUNTED FOR SEPARATELY

• All investments in equity instruments and contracts on those instruments must be

measured at fair value.
• Share rights are a form of equity instrument and therefore shall be measured
initially at fair value.
• A portion of the carrying amount 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.
• Share rights are normally classified as current assets if the rights are accounted
for separately.

NOT ACCOUNTED FOR SEPARATELY

• Share of rights may be recognized as embedded derivative but not a “stand-alone”

derivative
• Embedded derivative is a “component of a hybrid or combined contract (host
contract) with effect that some of the cash flows of the combined contract vary
in a way similar to stand alone derivative
• Embedded derivative shall be separated from the host contract and accounted for
separately under certain conditions
• If the host contract is a financial asset, the embedded derivative is not separated

Page 4 of 6
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.
 ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 14.0
Topic: Equity Investments
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

• If the host contract measured at fair value through profit or loss, the embedded
derivative is not separated.
• The share right as an embedded derivative is not accounted for separately because
the host contract investment equity instrument is a financial asset.

APPROACH TO BE FOLLOWED

• The subject matter for accounting share states that this standard does not address
whether an embedded derivative shall be presented separately in the statement of
financial position.
• The authors strongly believe that the second approach not accounted for separately
stands on solid and authoritative ground.

FORMAL ANNOUNCEMENT OF SHARE RIGHT

• Date of declaration - is the date where issuance of share rights is approved by

Board of Directors
• Date of record - date on which the stock and transfer book of the entity will be
closed for registration and only those shareholders registered as of the record
date are entitled to receive share rights.
• The date of record is also the date of issuing the share warrants
• Expiration date - the date up to which the share rights shall be exercised.

BETWEEN THE DATE OF DECLARATION AND DATE OF RECORD

• During this period the shares are considered to be selling right-on. This means
that the share and the right are inseparable and are treated as one.
• The share cannot be sold without also selling the right or vice versa
• The difference between the sale price and the carrying amount of the investment is
simply considered as gain or loss on sale of investment.

BETWEEN THE DATE OF RECORD AND EXPIRATION DATE

• On the day of record, the warrants evidencing the share rights are issued to the
shareholders. On or after this date, the shares are said to be selling ex-right.
• Selling ex-right means that the share can now be sold separate from the right or
vice versa.
• Original investment account- credited when the rights are received because the
share rights are “derived” from the original investment.
• If the share of rights does not have a market value, the theoretical or parity
value of the share rights is used in the measuring the fair value of the share of
rights.

EXERCISE OF THE SHARE RIGHTS

• When exercised, the cost of the new investment includes the subscription price and
the cost of the share rights exercised.
• When an investor is entitled only to a FRACTION OF A SHARE, the investor may
purchase additional rights in order to acquire one full share.
• The cost of new investment includes the subscription price, cost of share rights
originally owned and cost of share rights purchased.

SALE OF SHARE RIGHTS

• It is a financial asset separate from the original shares.

• It can be sold independently of the original investment

Page 5 of 6
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.
 ACC 124 – Conceptual Framework and Intermediate Accounting 1 – Hand-out 14.0
Topic: Equity Investments
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

EXPIRATION OF SHARE RIGHTS

• Can be exercised only up to a certain date after which the rights become worthless.
• If the rights are not exercised but expired, the allocated cost of the share rights
is accounted for as loss.
• Recognition of loss is defended on the philosophy that original shares have lost
some of their value because the new shares are offered for a sale at a price which
is below the current market price thereby creating dilution in the value of shares.

THEORETICAL OR PARITY VALUE OF SHARE RIGHT

• Is the intrinsic or assumed fair value of the right that is derived from the market
value of the share.
• Two formulas may be used

WHEN THE SHARE IS SELLING RIGHT ON

𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒 𝑅𝑖𝑔ℎ𝑡 − 𝑜𝑛 𝑚𝑖𝑛𝑢𝑠 𝑆𝑢𝑏𝑠𝑐𝑟𝑖𝑝𝑡𝑖𝑜𝑛 𝑃𝑟𝑖𝑐𝑒
= 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑂𝑛𝑒 𝑅𝑖𝑔ℎ𝑡
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑅𝑖𝑔ℎ𝑡𝑠 𝑡𝑜 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑂𝑛𝑒 𝑆ℎ𝑎𝑟𝑒 𝑝𝑙𝑢𝑠 1

WHEN SHARE IS SEELING EX-RIGHT

𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒 𝐸𝑥 − 𝑟𝑖𝑔ℎ𝑡 𝑚𝑖𝑛𝑢𝑠 𝑆𝑢𝑏𝑠𝑐𝑟𝑖𝑝𝑡𝑖𝑜𝑛 𝑃𝑟𝑖𝑐𝑒
= 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑂𝑛𝑒 𝑅𝑖𝑔ℎ𝑡
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑅𝑖𝑔ℎ𝑡𝑠 𝑡𝑜 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑂𝑛𝑒 𝑆ℎ𝑎𝑟𝑒

- END OF HAND-OUT -

Page 6 of 6
Sources:
Intermediate Accounting – Vol. 1 – 2022 Edition – Valix, C., Peralta, J., & Valix, C. A.
Practical Financial Accounting – Vol. 1 – 2018 Edition – Valix, C. & Valix, C. A.