Investment In Equity Securities 2.pptx

INVESTMENT IN EQUITY SECURITIES

By: Mhelka J. Tiodianco

Investment in equity securities

-means the acquisition of equity securities for the purpose of accruing income through dividends and increase in market value, or controlling another entity.

Equity securities

Ordinary Shares Other Share Capital

Preference Shares

Equity securities

To acquire OWNERSHIP SHARES SHAREHOLDERS

Rights

Options

SHARE

Ownership interest or Right of a shareholder in an entity.

Share in earnings Election of Directors

SHARE CERTIFICATE

Subscription of additional shares

Share in net assets upon liquidation

Acquisition of equity securities

The Application Guidance of PFRS 9, provides that when a financial asset is recognized liability, an entity shall measure it at fair value plus transaction costs that are directly attributable to the acquisition.

“The fair value is usually the transaction price, meaning, the fair value of the consideration given.” As a rule, transaction costs that are directly attributable to the acquisition of the financial asset shall be capitalized as cost of the financial asset. However, transaction costs 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.

Acquisition by Exchange If the equity securities are acquired in an exchange, the acquisition cost is determined by reference to the following in the order of priority.

Fair value of the asset given

Fair value of the asset received

Carrying amount of the asset given

Lump sum Acquisition 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.

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.

The remainder of the single cost is then allocated to the other security with no known market value.

Investment Categories

Investments in equity securities are accounted for as one of the following categories: a.Trading securities or financial assets at fair value through profit or loss

b. Financial assets at fair value through other comprehensive income c. Investment in associate

d. Investment in subsidiary e. Investment in unquoted equity instrument

Investment in unquoted equity instruments

Under the Application Guidance B5.4.14 of PFRS 9, all investments in equity instruments must be measured at fair value. However, investments in unquoted equity instruments are measured at cost if the fair value cannot be measured reliably.

Sale of equity securities

PFRS 9, paragraph 3.2.12, provides that on derecognition of financial asset measured at fair value through profit or loss, the difference between the consideration received and the carrying amount of the financial asset shall be recognized in profit or loss.

When equity securities are of the same class acquired on different dates at different costs, a problem will arise as to the determination of cost of securities sold when only a portion of this securities is subsequently sold.

In such case, the entity shall determine the cost of the securities 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 other comprehensive income or at cost, dividends earned are considered as income.

a. When the cash dividends are earned but not received: Dividends receivable xx Dividend income xx # b. When the cash dividends are subsequently received: Cash xx Dividend receivable #

The Cash Dividends do not affect investment

xx

When are dividends considered earned? Date of declaration This is the date on which the payment of dividends is approved by the Board of Directors. Date of payment This is the date on which the dividends declared shall be paid.

Date of record This is the date on which the stock and transfer book of the corporation is closed for registration.

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

Between the date of record and the date of payment, the shares are selling “ex-dividend” This means that the shares can be sold, and still the original shareholder has the right to receive the dividends on payment date.

Example of Formal dividend Declaration

“The Board of Directors at their meeting on November 15, 2015, declared an annual dividend on ordinary share of P5, payable on January 30, 2016, to shareholders of record at the close of business on January 15, 2016.” Date of declaration – November 15, 2015 Date of record

– January 15, 2016

Date of payment

– January 30, 2016

When to recognize dividends as income? Only the remainder of the sale price should be used as basis for determining gain or loss on the sale of the investment.

Dividends shall be recognized as revenue when the shareholder's right to receive payment is established. Accordingly, the dividends shall be recognized as revenue on the date of declaration. The reason is that when dividends are declared, the shareholder has already acquired the right thereto so much so that if the shares are subsequently sold, the sale price normally includes the accrued dividends. 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.

Property dividends

Property dividends or dividends in kind are dividends in the form of property or noncash assets.

Property dividends are also considered as income and recorded at fair value. Noncash assets xx Dividend income xx

Liquidating dividends

Liquidating dividends represent return of invested capital, and therefore, are not income. The payment may be in the form of cash or noncash assets.

The liquidating dividend is recognized as follows: Cash or other appropriate amount xx Investment in equity securities xx

Problem 23-4 Acclaim Company purchased shares of another entity as permanent investment. January 2, 2015 2,000 shares at 50 100,000 December 20, 2015 3,000 shares at 66 198,000 The transactions for 2016 are as follows: July 15 Received cash dividend of P5 per share. Dec. 15 Received 20% stock dividend. 28 Sold 3,000 shares at P60 per share. Use FIFO approach. Shares

Cost per share

Total cost

Original shares 2,000 50 July 15 Cash 25,000 3,000 66 Dividend Income (5,000xP5) Dec. 28 Cash (3,000x60) 180,000 Stock dividend 1,000 Investment in equity securities New shares 6,000 49.67 Gain on sale of investment

100,000 198,000 25,000 133,000 298,000 47,000

3,000 sharesx20%=600/3,600 x 198,000

33,000 133,000

Dec. 15 Memo-Received 1,000 shares representing 20% stock dividend 2,000 sharesx20%=400 + 2,000 X 100,000 on 5,000 original shares held. Shares now100,000 held, 6,000 shares.

Problem 32-2 Accessible Company

Accessible Company purchased for a lump sum of P3,075,000 the following long-term instruments.

A Corporation share capital 8,000 shares B Corporation share capital 16,000 shares C Corporation bond P 1,000,000 face value At the time of Purchase, the securities were quoted at the following prices: A share, P100 B share, 150 C bond, 90 Required: Prepare Journal Entry to record the lump sum acquisition with proper allocation of the single cost.

Problem 32-2 Accessible Company

Market Value

Fraction

Allocated cost

800,000

8/41

600,000

2,400,000

24/41

1,800,000

900,000

9/41

675,000

A (8,000x 100) B (16,000 x 150) C (1,000,000 x 90%)

4,100,000 Investment in A shares Investment in B shares Investment in C shares Cash

3,075,000 600,000 1,800,000 675,000 3,075,000

Problem 23-5 1. Distraught Company acquired 40,000 ordinary shares of Aye Company at P50 per share. Investment in Aye Company shares (40,000 x 50) Cash

2,000,000 2,000,000

Market Value Fraction Cost 2. The Aye Company shares are exchanged in a 5-for-1 split. Ordinary Shares (200,000 x 15) 3,000,000 30/32 1,875,000 Preference Shares (20,000 x 10) 200,000 2/32 125,000 Memo- Received 200,000 Aye Ordinary3,200,000 shares as a result of 5 for 1 split of 40,000 2,000,000 original shares. 3. Received a preference share dividend of 1 share for every 10 ordinary shares held. Ordinary shares is selling ex-dividend at 15 and preference share is selling at 10 Investment in Aye preference shares 125,000 Dividend income (200,000/4 = 50,000 x 6)

125,000

Problem 23-5 4. Received a dividend in kind of 1 ordinary share of Bee Company, market price, P6, for every four Aye ordinary shares held. Investment in Bee Ordinary shares Dividend Income (200,000/4 = 50,000 x 6)

300,000 300,000

Sold 80,000 ordinary shares of Aye Company at P15 per share. Cash (80,000 x 15) 1,200,000 Investment in Aye Ordinary shares (80,000/200,000 x 1,875,000) 750,000 Gain on sale of investment 450,000

Problem 23 - 21 Maxim Company acquired 40,000 ordinary shares on October 1 for P6,600,000 to be held for trading. On November 30, the investee distributed a 10% ordinary stock dividend when the market price of the share was P250. On December 31, the entity sold 4,000 shares for P1,000,000. What amount should be reported as gain on sale of investment in the current year?

a.) 340,000 b.) 400,000 c.) 500,000 d.) 600,000

Problem 23 - 21 Original shares on October 1

40,000

Stock dividend on November 30 (10%) Total Shares Shares sold on December 31 Balance

4,000 44,000 ( 4,000) 40,000

Sales price 1,000,000 Cost of shares sold (4,000/44,000*6,600,000) (600,000) Gain on sale 400,000

Problem 23 - 22 Presumptuous Company revealed the following information pertaining to dividends from nontrading investments in ordinary shares during the year ended December 31, 2015: • The entity owned a 10% interest in Beal Company, which declared a cash dividend of P500,000 on November 30, 2015 to shareholders of record on December 31, 2015 and payable on January 15, 2016. • On October 15, 2015, the entity received a liquidating dividend of P100,000 from Clay Mining Company. What amount of dividend income should be reported for the current year? a.) 500,000 b.) 600,000 c.) 150,000 d.) 50,000

Cash Dividend

500,000 x 10% Dividend Income 50,000 (D.)