- ments - Additional Concepts trner oncepts 641 nee chapter, WE will focus only on the impairment requirements that are applicable to debt instruments measured at FVOCI. It should be noted that the impairment requirements of peRS 9 are applicable only to debt-type financial assets that are gither measured at amortized cost or FVOCI (mandatory). The im| airment requirements are mot applicable to equity instruments. Credit risk and credit losses are relevant only to debt instruments. Equity instruments are measured at FVPL, unless the entity makes an irrevocable election on initial recognition to subsequently measure them at FVOCI. Under these measurements, all changes in values (whether due to impairment or not) are always recognized in profit or loss for FVPL and in other comprehensive income for FVOCI. Debt-type financial assets measured at FVOCI r losses on debt instruments measured at FVOCI are recognized in profit or loss. However, the loss allowance is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset in the statement of financial position. Impairment gains 0 Illustration: Impairment of financial asset measured at FVOCI On January 1, 20x1, ABC Co. acquires 10%, 3-year bonds with face amount of P1,000,000 for P1,000,000. The bonds are held under a "hold to collect and sell” business model. Accordingly, the bonds ate classified under the FVOCI measurement category. The entry to record the acquisition is as follows: lout, atin bonds ~ FVOCI 7,000,000 0x1 Investme: Cash 1,000,000 On December 31, 20x1, the fair value of the bonds ecteased to P850,000. Scanned with CamScanner642 Po saphena ABC. Co. assesses whether the credit risk on the investment has increased significantly since initial recognition, ABC Co. determines that there has been no Significant increase in credit risk since initial recognition. ABC Co, then estimates expected credit losses equal to 12-month expected credit losses of P50,000. Dec: | Impairment loss ~ P/L 50,000 a , | Unrealized loss - OCI * 100,000 q Investment in bonds - FVOCI 150,000 (85 1™) To reeas 12-month expected credit losses and other fair value changes on the debt instrument The cumulative balance of loss in OCI is P100,000. This amount consists of the total fair value change of P150,000 net of the loss allowance of P50,000. “Entries for interest income are ignored in order to simplify the illustration, On January 1, 20x2, ABC Co, sells the bonds for P850,000. Dec. | Cash 850,000 oy Investment in bonds ~ FVOCI 850,000 20x1 _ . B To record the sale of ixvestment Dec. | Loss on sale 100,000 aL Unrealized loss - OCI 100,000 20x1 k , To recycle amounts accuntulated in other comprehensive income to profit or loss Note: When the fair value of a financial asset falls below zero, it is classified as a financial liability. This may be the case for some derivative instruments, i Expected credit losses on Reclassification date The application of the impairment requirements of PFRS 9 commences on the reclassification date when financial assets that were previously measured at FVPL (where impairment accounting does not apply) are reclassified either to amortized cost or FVOCI (mandatory). Scanned with CamScannerOn the other hand, the application of the impairment quirements ceases on the reclassification date when financial assets are reclassified to FVPL. : Amortized cost to FVPL - cessation of impairment hange in business model, ABC Co. is to reclassify the tment in bonds that are measured at amortized qlustration 1 following 4 ¢ following inves cost to FVPL. Gross carrying amount 500,000 Loss allowance (lifetime expected credit losses) (6,000) 494,000 Net carrying amount The fair value of the financial assets on reclassification date (Jan. 1, 20x3) is P490,000. The reclassification entry is as follows: | [= [Bonds (FVPL assets) 490,000 | a Loss allowance 6,000 Loss on reclassification (squeeze) 4,000 Investment in bonds (Amortized cost) 500,000 | IMlustration 2: FVPL to AC - commencement of impairment ABC Co, reclassifies investments in bonds measured at FVPL and with carrying amount of p500,000 to the amortized cost category. | The fair value of the bonds on reclassification date (Jan. 1, 20x3) is °490,000. d credit losses equal to 12-month _ ABC Co, estimates expecte d at the reclassification date. pected credit losses of P4,000 | Ihe entries are as follows: Unrealized loss - P/L 10,000 | Bonds (FVPL assets) 10,000 To reeord the change in fair aalue on reclassification: | ¥ date Scanned with CamScanner644 Chapter 1 Jax. | Investment in bonds (Amortized cost) 490,000 1 Bonds (FVPL assets) 490,009 203 | 75 reclassify the investment to the amortized cost category Jan. | Impairment loss - P/L 4,000 ; Loss allowance 4,000 To record the commencement of accounting for impairment 20x3 Illustration 3: Amortized cost to FVOCI —- retention of impairment ‘Following a change in business model, ABC Co. is to reclassify the following investment in bonds that are measured at amortized cost to FVOCI. Gross carrying amount 500,000 Loss allowance (lifetime expected credit losses) (6,000) Net carrying amount 494,000 —— The fair value of the financial assets on reclassification date (Jan. 1, 20x3) is P490,000. ABC Co. estimates that the 12-month expected credit losses at the reclassification date is P4,000. The reclassification entry is as follows: ag Bonds (FVOCT assets) 490,000 ies Loss allowance 6,000 Other comprehensive income (squeeze) 4,000 Investment in bonds (Amortized cost) 500,000 When a financial asset is reclassified from amortized cost to FVOCI, any difference between the carrying amount and the fair value on reclassification date is recognized in other comprehensive income. The loss allowance ceases to be recognized as a deduction from the gross carrying amount of the bonds and is now recognized as an accumulated impairment amount in OCI, which Scanned with CamScanner| ily ents — Additional Concepts be disclosed. This is better illustrated in the two entries would pelow: Bonds (FVOCI assets) 490,000 OCI - fair value change (squeeze) 10,000 Investment in bonds (Amortized cost) 500,000 Tm. | Loss allowance 6,000 " : . OCI = accumulated impairment 6,000 Moreover, when financial assets are- reclassified from amortized cost to FVOCI, the measurement of expected credit losses is unchanged. Thus, ABC Co. continues to measure expected credit losses equal to the lifetime expected credit losses and does not recognize the 12-month expected credit losses. Illustration 4: FVOCI to Amortized cost - retention of impairment . — ABC Co. reclassifies investment in bonds measured at FVOCI to amortized cost. The fair value of the bonds on reclassification date (Jan. 1, 20x3) is P490,000. Information on the previous classification (i.e., at FVOCI) follows: Carrying amount — equal to acquisition COSt......-++++.+ 500,000 * There have been no changes in fair values during the time the bonds were held as FVOCI. * However, ABC Co. has recognized lifetime expected credit losses of P6,000 on the bonds. The impairment loss was Tecognized in profit or loss but the related loss allowance (credit) was recognized in other comprehensive income and did not reduce the carrying amount of the investment (as | Tequired by PFRS 9). he entries are as follows: "| Other comprehensive income, ‘3 | Investment in bonds (FVOCI) range in fair valire ont 10,000 10,000 To recognize the ch reclassification date Scanned with CamScanner646 Chapter 1] After recording the entry above, the carrying amount of the investment is now equal to P490,000, the fair value on reclassification date. Jan, 1, 20x3 Investment in bonds — Amortized cost Investment in bonds — FVOCI Other comprehensive in¢ome To reclassify the investment and to adjust the reclassification date fair value of the investment for the cumulative balance of loss that has resulted from changes in fair value 500,000 490,000 10,000 Jan, 20x3 Other comprehensive income Loss allowance : To recognize the loss allowance with an offset to the accumulated impairment that was recognized in OCI 6,000 6,000 * The OCI account is analyzed as follows: 1/1)x3 - change in fair value 10,000 ‘iikk3 - offset to loss allowance _ 6,000 Ocl 6,000 beg. (accum. impairment) 10,000 1/1/x3 - reclassification end. Alternative entries: Jan. | Other comprehensive income ; 10,000 sie Investment in bonds (FVOCI) 10,000 Jan. | Investment in bonds + Amortized cost @} - 500,000 ons ~| Investment in bonds— FVOCI “| 490,000 fs Loss allowance : 6,000 Other comprehensive income © 4,000 (@ This amount is squeezed after recording the other amounts: ® The OCI account is analyzed as.follows: Scanned with CamScannerr- ncestinents — Additional Concepts 647 noes ocr 6,000. beg. (accum. impairment) 1x3 - change in fair value 10,000 4,000 to derecognize the remaining bal. end. — Notice that although the loss allowance is now treated as a reduction to the carrying amount of the financial asset, the ‘measurement of expected credit losses is unchanged. The carrying amount of the investment after the reclassification is analyzed below: Investment in bonds - Amortized cost 500,000 Loss allowance (6,000) Net carrying amount after reclassification 494,000 It is as if the bonds have always been measured at amortized cost Illustration 5: FVPL to FVOCI - commencement of impairment ABC Co. reclassifies investment in bonds measured at FVPL and with a carrying amount of ?500,000 to the FVOCI category. The fair value of the bonds on reclassification date Jan. 1, 20x3) is 490,000. ABC Co. estimates expected credit losses equal to 12-month &xpected credit losses of P4,000 at the reclassification date. The entries are as follows: Unrealized loss — P/L 10,000 Bonds (FVPL assets) 10,000 To record the change in fair value on reclassification date Investment in bonds (FVOCI) 490,000 ~ Bonds (FVPL assets) 490,000 To reclassify the investyent to the amortized cost categoru Scanned with CamScanner648 Chapter 14 jan. | Tmpairment loss — P/L 4,000 L Other comprehensive income 4,000 2083. | ry pecord the commencement of accounting for impairment Notice that although the impairment loss is recognized in profit or loss, the loss allowance (the credit) is recognized in othey comprehensive income. This will be disclosed as accumulated impairment. Illustration 6: FVOCI to FVPL — cessation of impairment ABC Co. reclassifies investment in bonds measured at FVOCI to FVPL. The fair value of the bonds on reclassification date Jan. 1, 20x3) is P490,000. Information on the previous classification (ie., at FVOCI) follows: Carrying amount - equal to acquisition cost...........0 500,000 There have been no changes in fair values during the time the bonds were held as FVOCI. However, ABC Co. has recognized lifetime expected credit losses of P6,000 on the bonds. The impairment loss was recognized in profit or-loss but the related loss allowance (credit) was recognized in other comprehensive income and did not reduce the carrying amount of the investment (as required by PFRS 9). The entries are as follows: Jan. | Other comprehensive income 10,000 1 20x3 Investment in bonds (FVOCI) 10,000 To recognize the change in fair value on reclassification date Jax, | Bonds (FVPL assets) 490,000 2 ee Gain on reclassification (squeeze) 4,000 490,000 Investment in bonds ~ FVOCI 4,000 Other comprehensive income To reclassify the investment 2 Scanned with CamScanner> ppvestments ~ Additional Concepts 649 «The OCI account is analyzed as follows: ocr 6,000 beg. (accum. impairment) 4/1/x3 - change in fair value 10,000 4,000. to derecognize the remaining bal. end. - Dividends Dividends may be received from investments in equity securities. Such dividends may include the following: 1, Cash dividends - dividends that are receivable in cash. 2, Property dividends - dividends that are receivable in hon- cash assets. 3. Share dividends (bonus issue) ~ dividends that are receivable in the form of the investee’s own equity securities. Shares of other entities received from the investee as dividends are not share dividends but property dividends. Recognition of dividend revenue Only cash dividends and property dividends can be recognized as “dividend revenue” (dividend income). Share dividends are not _ Tecognized as dividend revenue. Dividends are recognized in profit or loss only when: a the entity’s right to receive payment of the dividend is established; b. it is probable that the economic benefits associated with the dividend will flow to the entity; and ® the amount of the dividend can be measured reliably. Dates relevant to the accounting for dividends * Date of declaration - the date when the board of director; formally announces the distribution of dividends. ° Scanned with CamScanner650 Chapter i 2. Date of record - the date on which the stock and transfer book of the corporation is closed for registration. Only those who are listed as of this date are entitled to receive dividends. > Ex-dividend date - to provide shareholders ample time to register, they are normally allowed to register about three to five days prior to the date of record. This period Prior to the date of record is referred to as the ex-dividend date, 3. Date of distribution — the date when the dividends declared are distributed to the shareholders. Dividend revenue is usually tecognized at the date of declaration except in cases where the investor’ s right to receive payment is established at some other date. This may be the case when the dividend declaration is subject to further approval bya relevant authority or when title to the instrum ent is in dispute as of date of declaration. Dividend-on and Ex-dividend After the date of declaration but before the date of record, shares are said to be selling dividend-on, meaning the purchase price includes the dividends, The purchased dividends should be excluded from the initial measurement of the investment and shall not be recognized as dividend revenue. This treatment is similar to the purchased interest on investments in bonds, as discussed earlier. Shares purchased dividend-on will be registered to the buyer because the shares are purchased before the date of record. Accordingly, the buyer will receive the dividends. Thus, in order for the seller to still realize the dividends, the dividends are sold together with the shares. After the date of record but before the date of distribution, shares are said to be selling ex-divid lend, meaning the purchase Price excludes the dividends. Thus, there is actually no accounting Scanned with CamScannera spoesimonts~ Additional Concepts 651 soblem. The initial measurement of the investment may be equal jo the purchase Price. Shares purchased ex-dividend are still registered to the gller as at the date of distribution because the shares are urchased after the date of record. Accordingly, the seller will receive the dividends. Thus, the shares are sold separately without necessarily selling the dividends. Date of declaration a3 : Dividend-on: purchase price includes dividends Date of record Bate of distribution i Ex-dividend: purchase price excludes dividends Illustration 1: Dividend-on and Ex-dividend On March 31, 20x1, XYZ, Inc. declares cash dividend of P10 per - share to shareholders of record on April 15, 20x1. The dividends will be distributed on April 30, 20x1. Case #1: ABC Co. purchases 10,000 XYZ, Inc. shares for P100 per share on -April 9, 20x1. The investment is measured at FVOCI. Requirement: Provide the entry to record the acquisition. Solution: The shares are purchased dividend-on because, the acquisition date is after the date of declaration (March 31, 20x1) but before the date of record (April 15, 20x1). Consequently, the purchase price includes the dividends. The initial measurement of the investment 'Scomputed as follows: rol Purchase price (10,000 x P100 per sh.) ; 1,000,000 “s: Purchased dividends (1005000) "itial measurement of investment 900,000 ELE lOO Scanned with CamScanner cuettpeebie a + abyvtiaeChapter, n The entry to record the purchase is as follo Investment in equity instrumen vocr | 900,000 | [> ‘April 9, | Dividend income (or Dividend receivable)* 100,000 | ‘1 20x Cash 1,000,009 | acl *-Divident recone” may be debited in Tiew of “Dividend income” to reoys purchased dividend. Regardless of the account used, no dividend income he shall be recognized, The entry to record the receipt of dividends is as follows: April 30, | Cash (10,000 x P10) 100,000) 20x1 Dividend income (or Dividend receivable) 100,000 | Case #2: ABC Co. purchases 10,000 XYZ, Inc. shares for P100 per share on April 26, 20x1. The investment is measured at FVOCL Requirement: Provide the entry to record the acquisition. Solution: The shares are purchased ex-dividend because the acquisition date is after the date of record (April 15, 20x1) but before the date of distribution (April 30, 20x1). Consequently, the purchase price excludes the dividends. There is no accounting problent here. The initial measurement of the investment is equal to the purchase Price. The entry to record the purchase is as follows: April26, | Investment in equity instruments - FVOCI | 7,000,000 20x1 Cash — 1,000,000, | There is no entry for the dividends because the seller is the one who receives them, Scanned with CamScannerre. pment — Additional Concepts 653 surement of dividends Cash dividends - are recognized as dividend revenue at the "mount of cash received or receivable. 1 Property dividends — are recognized as dividend revenue at the _ fair value of the non-cash assets received or receivable, determined as of the date of declaration. 3, Share dividends (stock dividends or bonus issue) - are not recognized as revenue because no asset is distributed by the investee. The investee’s total assets, liabilities, and equity are not affected by the distribution of share dividends. Share dividends received from financial assets measured at fair value are recognized at fair value with a corresponding credit to unrealized gain in profit or loss for FVPL and other comprehensive income for FVOCI. Share dividends received from investments in unquoted equity securities measured at cost “ are recorded through memo entry only. No asset is recognized for the share dividends because they cannot be measured reliably (i.e., fair value is not available). Their only effect is an increase in the number of shares held and a decrease in the carrying amount per share. The total carrying amount of the investment is not affected, If the share dividends received from an investment in ordinary shares are in the form of preference shares and the investment is measured at cost “, the cost of the original investment is allocated to both the ordinary shares held and the preference shares received. The allocation may be made arbitrarily, e.g., using aggregate par values. Ié in case fair value becomes determinable, both the share dividends and the investment that was previously Measured at cost are measured at fair value. w “Measurement at cost will be discussed momentarily.) Mui : cee Liquidating dividends — liquidating dividends represent return of capital (not return on capital). Therefore, they are not Scanned with CamScanneroot Chapter 1] recognized as dividend revenue but rather a deduction from the carrying amount of the investment. Liquidating dividends are received when the investee is either undergoing liquidation or a wasting asset corporation. Illustration 1: Cash dividends ABC Co. holds 10,000 shares of XYZ, Inc. as investment in equity securities. On April 1, 20x1, ABC Co. receives notice of declaration of P10 per share cash dividends. ABC Co, collects the cash dividends on April 20, 20x1. Requirement: Provide the necessary journal entries.” Solution: | April, 20x1 | Dividend receivable (10,000sh. x10)} 100,000 | Dividend income 100,000 | April 20, | Cash 100,000 fran 2002 Il Dividend receivable 100,000 If the dividend is collected simultaneously with the receipt of notice of dividend declaration, “cash” is debited and “dividend income” is credited. The “Dividend revenue” account may be used in lieu of the “Dividend income” account. illustration 2: Property dividends ABC Co. holds 10,000 shares of XYZ, Inc. as investment in equity securities. On April 1, 20x1, ABC Co. receives inventory with a cost of P130,000 and fair value of P120,000 as property dividend. Requirement: Provide the necessary journal entries. Solution: | | April. | tnventory | 120,000 | oa eee Dividend income Scanned with CamScanner<— Additional Concepts 655 ius stration 3: Share dividends from FVPL or FVOCI apc Co. holds 10,000 shares of XYZ, Inc. as investment in equity egcurities. On April 1, 20x1, ABC receives shares with fair value of 130 000 and aggregate par value of P100,000 as share dividend. case #1: Raye wirement: Provide the journal entry assuming the investment is measured at FVPL (held for trading). Solution: wri, | Held for trading securities 130,000 2eel Unrealized gain ~ P/L 130,000 Case #2: Requirement: Provide the journal entry assuming the investment is measured at FVOCI. Solution: |4rl1, | Investment in equity securities - FVOCI | 130,000 pe Unrealized gain - OCI 130,000 PERS 9 requires investments in equity instruments to be measured at fair value. Only in a rare circumstance that measurement at cost isallowed, such as when all levels 1 to 3 of the fair value hierarchy 's unavailable. The procedures in the succeeding illustrations apply when an investment in Dee equity securities is Measured at cost. Uustration 4; Share dividends from investment in unquoted “quity Securities measured at cost ABC Co. holds 10,000 shares of XYZ, Inc. as investment in ‘navoted equity securities measured at cost. The investment has * carrying amount of P1,155,000. On April 1, 20x1, ABC Co, “ives 5% share dividends with aggregate par value of P5,000. Scanned with CamScanner656 Chapter 31 Case #1: Initial recognition The share dividends are not recognized. Only a memo entry may be made to record the receipt: “received 500 shares from XYZ, Inc. 5G share dividends. Total XYZ, ine. shares nov | shares.” April t, 2Oct repress Notice that the receipt of share dividends does not affect the carrying amount of the investment. The share dividends received will be realized only when they are subsequently sold. Case #2: Subsequent disposal of share dividends On April 30, 20x1, all the share dividends received were sold at P112 per share. The proceeds from the sale is computed as follows: Total shares held prior to share dividend 10,000 Multiply by: Share dividend percentage 5% Number of shares received as dividends 500 Multiply by: Sale price per share nz Proceeds from sale 56,000 The carrying amount of the shares sold is computed as follows: Carrying amount of investment before the sale 1,155,000 Divide by: Total number of shares held (10,000 +500) 10,500 Carrying amount per share Te 10. Multiply by: Number of shares sold 500 Carrying amount of shares sold 55,000 The entry to record the sale is as follows: April | Cash 56,000 | 30, Investment in equity securities at cost 55,000 | ast Gain on sale (squeeze) 1,000 | Scanned with CamScannerFr pooost is - Additional Concepts 657 glustration 5; Share dividends on investments measured at cost (pro and Average Methods) ‘ABC Co. is an investor in XYZ, Inc. On February 1, 20x1, XYZ, Inc. eclared 10% share dividends to shareholders of record as of March 1, 20x1. The date of distribution is on April 1, 20x1. ‘ABC Co. measures its investment in XYZ, Inc. shares at cost. The investment consists of the following before the receipt of the gividends: Investment in unquoted equity securities - XYZ, Inc. Lot Date of acquisition Number of shares Total acquisition cost 1 July 1, 19x7 10,000 330,000 2 Sept. 21, 19x9 12,000° 264,000 3 March 15, 20x1 6,000 132,000 Totals 28,000 726,000 On April 5, 20x1, ABC Co. sold half of the share. dividends received for P25 per share. Requirement: Compute for the gain or loss on the sale using (a) HEO method and (b) Average method. Solutions: (a) FIFO method — under the FIFO (first-in, first-out) method, the shares sold are assumed to come from the earliest acquisitions. Accordingly, the cost assigned to the shares sold comes from the Cost of the earliest acquisitions. ie Total = Original Total acqui- . New Date of shares Share © shares _ sition cost acquisition held dividends _held__cost__per sh. 5 (c) = (a) (e) = (a) 7 (a) =(a)x10% + (b) = (0) 2 duty 1, 19x7 40,000 4,000 41,000 330,000 30 Seot 21, 19x9 12,000 1,200 13,200 264,000 20 7 ~wWiais 22,000 2,200 24.200 594.000 Scanned with CamScanner3 a Chapter 1] Notice that no dividend is computed from the shares purchased on March 15, 20x1 because the shares are purchased after the date of record (ex-dividend). The seller, and not ABC Co., will receive the share dividends. The proceeds from the sale is computed as follows: Total share dividends received (we table abore) 2,200 Multiply by: Portion sold 50% Number of shares sold 1,100 Multiply by: Sale price per share 25 Proceeds from sale 27,500 The carrying amount of the shares sold under the FIFO method is computed as follows: Newcost Allocated per sh, cost No. of shares sold (2,200 sh. x 1/2) 1,100 Allocation: Dividend from the: > July 1, 19x7 purchase (1,000) 30.00 30,000 Balance 100 7 " > Sept. 21,19x9 purchase 100 20.00 2,000 As allocated : 32,000 The entry to record the sale is as follows: April | Cash 27,500 age Loss on sale (squeeze) ; 4,500 a I in equity securities at cost 32,000 investment in equity securities (b) Average method - under the average method, the shares sold are not identified to specific acquisitions. Thus, the cost per share assigned to the shares sold is determined by averaging the total carrying amount of the investment with the total number of shares held. Scanned with CamScannerueestments— Adlitional Concepts 659 The carrying amount of the shares sold under the Average method is computed as follows: Total carrying amount of investment 726,000 pivide by: Total shares held after receipt of share dividends 30,200¢ Average cost per share Tod Multiply by: Number of shares sold 1,100 Carrying amount of shares sold 36,444 ¢ (30,200 = 28,000 before share dividends + 2,200 share dividends) The entry to-record the sale is as follows: April | Cash (1,100 x P25) 27,500 5 Investment in equity securities at cost 26,444 20x1 . Gain on sale (squeeze) 1,056 7 Notice the similarity of the procedures above with the FIFO and Average cost formulas used for inventories. Illustration 5: Share dividend different from shares held - investment measured at cost On April 1, 20x1, ABC Co. received 1,000 preference shares as 10% Share dividends on its investment in unquoted equity securities Measured at cost composed of 10,000 ordinary shares. The. Preference and ordinary shares have par values per share of P10 and 5, respectively. The carrying amount of the investment is ®300,000. The Carrying amount of the investment in unquoted equity ‘ If the investment is measured at cost, the entry to record the receipt of the shares is as follows: April, \Investment in equity securities at cost (1,000 x 8)| 8,000 2G Dividend income 8,000 Cash in lieu of share dividend If share dividend is declared but the investor opts to receive cash instead, no dividend revenue is recognized. Recall that share dividends are not recognized as revenue. The investor records the transaction “as if” the share dividends have been received but were subsequently sold at # price equal to the cash dividends received. The difference bel the cash received and the assigned carrying amount of the share’ assumed to have been sold is recognized as gain or loss. Scanned with CamScannerjg—Additional Concepts os iio stration ae Co: holds 40,000. shares of XYZ, Inc. as investment in equity : measured at cost. The investment has a carrying : secu of 110,000. On April 1, 20x1, ABC Co. receives P12,000 amount ae shin lied of 1,000 share dividends. ¢ the cost allocated to the shares “assumed to have been received and é atsequently sold” is computed as follows: i carrying amount of investment measured at cost 110,000 pivide by: (10K sh. held + 1K sh. div. assumed received) 11,000, © Cost per share P10 Multiply by: No. of shares “assumed received and sold” 1,000 Cost allocated to the shares “assumed received and sold” £10,000 —— The entry to record the cash received and the shares “assumed to ~ have been received and sold” is as follows: © Papi, [Cash 12,000 at Investment in equity securities at cost 10,000 Gain on investment — P/L (squeeze) 2,000 The “as if” method above is based on the notion that by shares, the investor fails to pting to receive cash instead of the corporation.- Therefore, a maintain his original interest in "portion of the investment must be realized. However, in limited “circumstances, propriate estimate of fair: value. _ Msufficient information is available to determine fair value, OF if there is a wide range of possible fair value measurements and cost _ Fpresents the best estimate of fair value within that range- Scanned with CamScanner664 Chapter 17 Cost is never the best estimate of fair value for investments in quoted equity instruments (or contracts on quoted equity instruments). Share split A share split (stock split) occurs when the investee calls in issued shares and replaces them with new shares, normally for a larger number of shares but with a corresponding reduction in par value, The aggregate par value of the shares remains the same before and after the share split. For example, ABC Co. holds 10,000 shares of XYZ, Inc. with par value of P10 per share. XYZ declares a 2-for-1 split. ABC Co. will surrender the 10,000 shares and will teceive 20,000 new shares with a reduced par value of P5 per share. The aggregate par value of the shares held by ABC Co: remains the same before and after the share split as shown below: _ 7 Before share split: (10,000 shares x P10 par value) P100,000 After shave split: (20,000 shares x P20 par value) 2100,000 Share splits do not affect the issuer’s total assets, liabilities and equity. Only the composition of equity is affected because share splits are accounted for by reclassifying amounts between share capital and share premium. Share splits are declared for various reasons. One reason is, if an entity accumulates a large amount of undistributed earnings, the market value of its shares will likely increase. However, the higher the market price of a share is, the less readily some investors can purchase it. This can restrict the availability of equity financing for the entity. Many entities believe that wider ownership of corporation shares Promotes better public relations. They, therefore, target a market Price sufficiently low to be within the range of the majority of potential investors. To reduce the “market value of shares, they issue share split (stock split). Share splits are either split up or split down. Under split up: old shares are replaced with a larger number of new shares but Scanned with CamScanneravestets — Additional Concepts 5 ; with a corresponding decrease in par value. The share split gescribed in the previous example refers to split up. The term vshare split” normally refers to split up. Under split down (reverse share split), old shares are replaced with smaller number of shares but with a corresponding 4 increase in pat value. : Accounting for share splits Like share dividends, share splits are also accounted for differently depending on the classification of the investment, that is, whether the investment is measured at fair value or at cost. If share split is received from an investment measured at Pie fair value, any change in fair value brought about by the share ; 5 split is recognized as unrealized gain or loss in profit or loss for 7 FVPL and in other comprehensive income for FYOCL q If sare split is received from an investment in unquoted : -equity securities measured at cost, only a memo entry is needed. 3 Special assessments When an entity is undergoing financial distress, its shareholders may be required to provide. additional contribution. This additional contribution is called special assessment. Special assessments are accounted for as additional cost of investment for the investor and as an increase in share premium for the investee. Upon payment of the additional contribution, the investor debits the investment account and credits cash, Stock rights. : Man entity decides to issue new have the right to. purchase from theit current holdings, before the shi Potential investors, This privilege refe reemntive ‘right or right of preemp ateholders from. suffering 4 dilution ©! eit consent. c Stock rights are evidenced x f ‘Atrants are certificates that entitle the ho! shares, the existing shareholders the new issue, in proportion to ares are offered to. other rred: to as a stock right ion), protects existing f voting rights without ‘share warrants. Share ers thereof to acquire Scanned with CamScanner666 _ Chapter 11 shares at a stated price within a specified period. Unlike warrants issued with other securities, warrants issued for stock rights are of short duration. : The share warrant states the number of shares that the holder can purchase. Normally, a shareholder is entitled to one stock right for each share held. The share warrant also states the price at which the new shares can be purchased. The price is normally less than the current market value of the shares, which gives the rights a value in themselves. From the time they are issued until they expire, stock rights may be purchased and sold just like any other security. Accounting for stock rights Stock rights, being equity instruments, are measured at fair value. Stock rights are also considered derivatives. Just like with dividends, the accounting for stock rights depends on the following important dates: a. Date of declaration — the date the entity declares its intention to issue stock rights to existing shareholders b. Date of record — the last day of registration in the entity’s stock and transfer books. Only those registered as of this date are entitled to receive stock rights. c. Date of issuance ~ the stock rights are issued to the registered shareholders. d. Exercise period — the period over which the holder can exercise the stock rights. i e. Date of expiration ~ the last day the stock rights can be exercised, after which the stock rights are forfeited. Rights-on aoe After the date of declaration but before the date of record, shares are said to be selling rights-on, meaning the shares are sold together with the stock rights. Neither one of them:can be sold separately. The buyer will be entitled to the stock rights attached to the shares- This is similar to dividend-on as discussed earlier, Scanned with CamScannerpooestetts = Additional Concepts a 667 During ‘this Period, the stock rights are considered embedded derivatives, An embedded derivative is a component of a hybrid contract that is attached to a non-derivative host contract. The host contract is the shares held from which the stock rights are received. ‘ There is no accounting problem here because PFRS 9 does not require stock rights attached to shares that ate selling rights-on to be separated from the host contract (most especially if the host contract is measured at FVPL). - : If the shares are sold prior to the date of record, the difference between the carrying amount of the investment and the net disposal proceeds is simply recognized as gain or loss. Ex-rights After the date of record but before the date of expiration, shares aré said to be selling ex-rights, meaning the shares are sold separately _ ftom the stock rights. The seller will be entitled to the stock rights. - Thisis similar to ex-dividend as discussed earlier. During this period, the stock rights lose their status as - embedded derivatives. PERS 9 states that “a. derivative. that is _ attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial ‘ instrument.” Since the stock rights can be sold separately, much like any other security, they should be accounted for separa tely. Classific i ation a | Stock rights are normally accounted for at FVPL because they, Malify as derivatives and also because of their short duration. quently, they are classified as current assets. Nustrata ights ‘ : - « Ustration: Accounting for stock righ s i 3 Co, holds 43 Wo see of XYZ, Inc. as investment.in equity “Utities measured at FVOCI. On March 31, 20x1, ABC Co. pe ' Scanned with CamScanner668 Chapter 11 received 12,000 stock rights to subscribe for new shares at P6¢ per share for every 4 rights held. The fair value per stock right is P2. The stock rights are recorded as follows: Mar. 31, | Investment in stock rights at FVPL (12,000 x2) | 24,000 20x41 Unrealized gain - P/L 24,000 > On April 16, 20x1, 4,000 stock rights were exercised. The acquisition cost of the additional investment is determined as follows: Number of stock rights exercised 4,000 Divide by: Number of rights needed to purchase 1 share 4 Number of shares purchased 1,000 Multiply by: Exercise price per share 6 Cost of securities purchased 6,000 5 — April 16, | Investment in equity securities at FVOCI | 6,000 The entry to record the exercise is as follows: aig | Cash _|.6,000 | The entry to derecognize the carrying amount of the stock rights exercised is as follows: April 16,| Unrealized loss ~ P/L 8,000 201 Investment in stock rights at FVPL (24,000 1/3) | - 8,000} > On April 29, 20x1, 5,000 stock. rights were sold ¢ at P150 per right. § The entry to record the sale is as follows: Apr. 29, -| Cash (5,000 x P1.50). ie 201 | Loss on sale of stock Fighits (squeeze) Investment in stock rights at FVPL 10,000 = (#22,000 x 5,000 sold/12,000 total stock rights received) Scanned with CamScannerEg; _ Additional Concepts ents set a on May 1, 20x1, the remaining 3,000 stock tights have expired. she entt to record the expiration is as follows: Loss on expiration of stock rights 6,000 Investment in stock rights at FVPL 6,000¢ 4000 = (P24,000 x 3,000 expired /12,000 total stock rights received) Estimating the fair value of stock rights PERS 9 states that “if an entity is unable to determine reliably the fair value of an embedded derivative on the basis of its terms and conditions, the fair value of the embedded derivative is the difference between the fair value of the hybrid (combined) contract and the fair value of the host contract, if those can be determined.” The following are relevant terms in estimating the fair value of stock rights: : 1. Market value of share selling right on - tefers to the fair value of the shares before issuance date. This amount includes both the . fair value of the share and the fair value of the stock right. 2. Market value of share selling ex-right - refers to the fait value of nt includes only the the shares after issuance date. This amou! fair value of the share. Basically, ‘the fair value of the stock right can be estimated as the difference between the market value of share selling right. “On (combined) and market value of share selling ex-right (host Contract only). é 5 i : a Matket value of share selling right-o" EV ofshare + FV of right) 2 Market value of share selling exright © of tare only) : FV of stock righ!) — umed fair value of stock right : Uustration: Hetina ting the fair value bf tae eas i te eo in March 31, 20x1, ABC C8 pane iss ce of stock rights, Hvestment in equity securities: PHOF © esa : Scanned with CamScanner ibis Eitan ss = Sopalibees Saree Biel cay eE ies a sin lite