Chapter 4 - Investments in Equity Securities

The Intermediate Accounting Vol 1,
2019 Edition, Robles and Empleo
Chapter 4: Investments in Equity

Securities
Nature of Equity Securities
 Equity securities represent ownership interests such as
common, preferred, or other capital stock.
 They include rights to buy and sell the ownership interests
 Share capital (capital stock) of other companies may be
purchased by an enterprise for a number of reasons, as
follows:
1) As temporary placements of excess cash and held primarily
for sale in the near term to generate income on short-term
price fluctuations;
2
Nature of Equity Securities
2) To obtain long-term customer or supplier or creditor
relationship to secure certain operating or financing
arrangements with these companies; or
3) To exercise significant influence or even control over the
operating policies of another entity.
3
Classification of Equity Securities
Ownership Percentage
0% 20% 50% 100%
Less than 20% 20%-50% More than 50%
Level of Influence
Little Significant CONTROL
or none Parent-subsidiary relationship exist
Consolidate the financial statements,
unless falling under exemption in
PAS/IAS 27
Equity investments Investment in Investment in

at fair value associate or joint subsidiaries (IFRS 10)
(IFRS 9) venture (IAS 28)
4
Classification of Equity Investments
 An entity classifies its investments in equity securities under
one of the following:
a. Equity investments at fair value through profit or loss
(FVPL) –An investor that purchases share capital of another
entity for trading purposes (Trading Equity Securities);
b. Equity investment at fair value through other
comprehensive income (OCI) –An investor that purchases
equity investments for purposes other than for trading shall
make an irrevocable choice at the date of initial recognition
(Non-trading Equity Securities;
5
Classification of Equity Investments
c. Investment in associate –Equity securities which provide the
holder the ability to participate (but not to control) the financial
and operating policy decisions of the investee company or
Investment in joint venture –An investor that jointly controls
the operation of another entity through share capital ownership;
and
d. Investment in subsidiaries –Equity securities that give the
holder the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities.
6
Equity Investments measured at Fair Value
a. Equity Investments at Fair Value through Profit or
Loss
Equity investments at fair value through profit or loss
are measured at initial recognition and at each reporting date
at fair value. Transaction costs are charged to expense.
7
Illustration: Assume that NSR Corporation purchased 2,000
shares of P100 par ordinary share capital of PME Company
for P125 per share plus 1% broker’s commission. The shares
represent 2% equity in PME Company. The entry to record
the acquisition in the books of NSR Corporation is:
Equity Investments – FVPL 250,000
Brokers’ Commission 2,500
Cash 252,500
Acquired equity investments
8
Assume that the PME Company shares were quoted at P132 at
year-end. NSR Corporation will prepare the following entry to
appropriately bring the investment to fair value.
Unrealized Gains on Equity
Investments – Profit or Loss 14,000
If during the subsequent year, NSR sold the shares of PME,

realizing net proceeds of P270,000, the entry for such sale is
Cash 270,000
Gain on Sale of Equity Investments 6,000
9
b. Equity Investments at Fair Value through Other
Comprehensive Income
If the investor makes an election to designate the non-
trading equity investment as at fair value through other
comprehensive income, the investment shall be recorded upon
acquisition at purchase price (presumably the fair value) plus
directly attributable transaction costs.
10
Illustration: Assume that NSR Corporation purchased 2,000
shares of P100 par ordinary share capital of PME Company
for P125 per share plus 1% broker’s commission. The shares
represent 2% equity in PME Company. NSR classified the
securities as at Fair Value through Other Comprehensive
Income, the entry to record the acquisition is:
Equity Investments at FV through OCI 252,500
Cash 252,500
Acquired equity investments
11
Assuming that the fair value is P132 per share, the entry is
Unrealized Gains and Losses on Equity
Investments – OCI 11,500
Assuming that NSR Corporation sold the shares in PME for

P270,000 during the subsequent year, unrealized gain of P6,000
shall be recognized in OCI, and the disposal shall be recorded as
follows:
12
Cash 270,000
If NSR Corporation chooses to transfer the cumulative balance of

the Unrealized Gains and Losses to the Retained Earnings account,
then it will prepare the following entry in addition to the foregoing
entries:
Retained Earnings 17,500
13
Transactions Subsequent to Initial Recognition
Share split
• A reduction in the par or stated value of share capital
accompanied by a proportionate increase in the number of
shares outstanding.
• It does not affect the equity of a shareholder in the issuing
corporation, nor does it affect the issuing corporation’s
total shareholders’ equity.
• The investor records the receipt of the additional shares
through a memorandum entry only indicating the change in
the number of shares.
14
Share split: Example
Illustration: Assume that X Company holds 2,000 of P100
par ordinary shares of Y Company with a carrying value of
P252,500, which reflected fair value at last reporting date. Y
Company effected a 2-for-1 share split and issued additional
shares to its shareholders.
The memorandum entry is
Memo: Y Company effected a 2:1 share split on its
ordinary shares. As a result, the entity now holds a
total of P4,000 ordinary shares of Y Company.
15
Dividends
• Are corporate distributions to its shareholders proportionate
to the number of shares held by the latter.
• May be in the following forms:
(a) Cash dividends
(b) Bonus issue of stock dividends
(c) Property dividends
(d) Scrip dividends
16
Dividends
Cash Dividends
- Are generally recognized as income when received or
receivable
- The distribution of dividends involves 3 significant dates:
(a) Date of declaration, which is the date when the Board of
Directors of a corporation declares the distribution of
dividends;
(b) Date of record, or the date when the corporation draws a list
naming the shareholders who are entitled to dividends; and
(c) Date of payment, which is the date when the dividends are
distributed to shareholders.
17
Cash Dividends
Majority of dividends distributed by

corporations is paid in CASH.
Cash Dividends: Example
Illustration: Assume that Chris Company owns 1,000 ordinary
shares of Jay Company acquired at P120 per share. If Chris
received P5 cash dividend per ordinary share of Jay Company, the
entry is
Cash 5,000
Dividend Revenue 5,000
If Jay Company declared the dividends on December 1, 2019

payable on January 31, 2020 to shareholders of record as of
December 31, 2019, Chris Company would prepare the following
entries:
19
Cash Dividends: Example
On December 1 or December 31, 2019
Dividends Receivable 5,000
On January 31, 2020

Cash 5,000
Dividend Receivable 5,000
20
Liquidating Dividends
• In some instances, a portion of the dividends
received by an investor may have resulted from the
investee’s earnings prior to the acquisition of the
shares by the investor.
• Returns of capital to the investing shareholders.
• There are also instances, when the dividends
declared come from the balance of contributed
capital accounts of the issuing corporation.
• The receipt by the investor of such dividends is not
credited to an income account but to the investment
account.
Liquidating Dividends: Example
Illustration: Assume that Company A holds 1,000
shares of P100 par ordinary share capital of Company B
for P125 per share on January 1, 2019. On December
31, 2019, Company B paid dividends of P12 per share;
P10 comes from current year earnings and P2 from the
retained earnings of Company B on January 1, 2019.
Company A shall prepare this entry:
Cash 12,000
Equity Investments 2,000
Dividends
Bonus Issue or Share Dividend
 A corporation may distribute to shareholders additional shares
of the company’s own share as share dividends.
 Distribution of bonus issue in the same class of share
capital increases the number of shares held by each
shareholder, without any change in the total shareholders’
equity balance or net assets of the distributing corporation.
 Thus, an investor receiving a bonus issue records the
transaction by making a memorandum entry.
23
Bonus Issue or Share Dividend: Example
shares of Jay Company with carrying value at P120 per share.
Subsequently, Chris Company received 20% bonus issue from
Jay Company.
Memo: Received 200 ordinary shares of Jay Company

representing 20% bonus issue on 1,000 shares previously
held.
24
Special Bonus Issue or Share Dividend: Example
A bonus issue in the form of another class of share capital, also
termed as special bonus issue, is treated similar to property
dividends. The shares received as bonus issue is recognized at
fair value with a credit to dividend income.
Illustration: Assume that Chris Company owns 1,000 of Jay

Company ordinary shares, which were designated as at fair
value. A year after acquisition, Jay Company distributes as
dividends one share of its P100 par value preference share for
every 10 of its ordinary shares. On the date of distribution, each
ordinary share sells ex-dividend at P144 while each preference
share sells at P160.
25
Special Bonus Issue or Share Dividend: Example
Chris Company will, therefore, receive 100 preference shares of
Jay Company as dividend. The entry to record the receipt of
these shares is
Received as dividend one preference share
for every 10 ordinary shares of Jay
26
Dividends
Property Dividends
 A distribution to shareholders that is payable in non-cash
assets is generally referred to as property dividends or
dividends in kind.
• Per IFRIC 17, paragraph 11, an entity shall measure a

liability to distribute non-cash assets as dividends to its
owners at the fair value of the assets to be distributed.
27
Property Dividends: Example
shares of Jay Company acquired at P140 per share. These shares
are measured at fair value. One year after acquisition, Jay
Company distributes as dividends one ordinary share of Ollie
Company, for every 10 ordinary shares of Jay Company. The
Ollie Company shares are held by Jay Company as investments.
Ollie Company ordinary share has par value of P100 and sells at
P120 at the time of distribution by Jay. The entry is:
Received as dividend one ordinary share
of Ollie for every 10 ordinary shares of Jay
28
Share Rights
• A corporation issuing additional shares of stock to increase
its capital shall first offer the share issue within a
prescribed period to the existing shareholders proportionate
to their holdings.
• This shareholders’ right that enables them to maintain their
ownership interest in the corporation is called preemptive
right.
• A certificate called share warrant evidences a
shareholder’s preemptive right.
29
Share Rights
• At the date the rights are received, the share rights usually
do not have a known fair value; thus, no entry is made to
record its receipt other than a memorandum entry.
• Upon exercise of the rights, the new shares acquired shall
be measured at the fair value of the shares.
30
Share Rights: Example
Illustration: Assume that Chris Company owned 1,000
ordinary shares of Jay Company acquired at P140 per share.
These shares were designated at fair value through profit or
loss. These shares were designated at fair value through profit
or loss. Subsequently, during the same year, Jay Company
issued rights to its shareholders entitling the holders thereof to
purchase one ordinary share, P100 par, at P130 per share for
every 4 shares held. Chris used all the rights to purchase
shares of Jay. On the date of the exercise of the rights, the
shares sell at P160.
31
Share Rights: Example
The following entries are made in the books of Chris
Company:
Receipt of share rights:
Memo: Received 1,000 share rights from Jay Company
for the purchase of one share for every four rights
submitted at P130 per share.
Exercise of the rights:
Cash 32,500
Investment Income 7,500
32
Financial Statement Presentation
Financial assets at fair value through profit or loss – current assets

Financial assets at fair value through other comprehensive income
– non-current assets
33
Impairment of Equity Investments measured at Fair Value
• Under IFRS 9, equity investments measured at fair value are no

longer tested for impairment. The measurement to fair value is
sufficient to include such impairment, if any.
34
Investment in Associates and Joint
Ventures
 As defined in IAS 28, Investment in Associates and Joint

Ventures, an associate is an entity over which the investor has
significant influence. A joint venture, on the other hand, is an
arrangement whereby the parties, that have joint control of the
arrangement, have the rights to the net assets of the arrangement.
Examples:
a) Entity X is an entity, whose 20% of voting shares are held by F.
The remaining shares of Entity X are held by other shareholders.
The 20% equity of F in Entity X provides F significant influence
over Entity X. F has investment in Associate X.
35
Ventures
Examples:
b) Entity Z’s outstanding voting shares are held by the following
shareholders: Entity A, 35%, Entity B, 35%, Entity C, 20%,
Entity D, 5%, and Equity E, 5%. Entities A and B jointly control
the operations of Z, Entity C has significant influence over Z,
while Entities D and E neither control nor exercise significant
influence. Entities A and B (which are joint venturers and have
joint control of Z) and Entity C (which has significant
influence over Z). Entities C and D, on the other hand, shall
account for their investment at fair value.
36
Ventures
• Significant influence is the power to participate in the financial

and operating policy decisions of the investee but is not control
or joint control of those policies.
• The existence of significant influence by an investor is usually
evidenced in one or more of the following ways (IAS 28, par 6):
(a) Representation on the board of directors or equivalent governing
body of the investee;
(b) Participation in policy-making processes, including participation
in decisions about dividends or other distributions;
(c) Material transactions between the investor and the investee;
(d) Interchange of managerial personnel; or
(e) Provision of essential technical information
37
Ventures
• In consolidated financial statements of the investor and in
financial statements of investor with no subsidiaries, an
investment in associate or joint venture that is not held
exclusively for disposal within twelve months from acquisition
date shall be accounted for using the equity method, unless all
the following conditions exist:
(a) The investor is a subsidiary of another entity;
(b) The investor’s debt or equity instruments are not traded in a
public capital market;
(c) The entity did not file, nor is it in the process of filing its
financial statements with a securities commission or other
regulatory organizations for the purpose of issuing any class of
instruments in a public market; and
38
Ventures
(d) The ultimate parent or any intermediate parent of the entity

produces consolidated financial statements for public use that
comply with IFRS.
When the investor does not use the equity method because it meets
all the foregoing conditions, it shall account for the investment at
fair value and shall apply IFRS 9.
39
Ventures - Equity Method
The investment in associate or joint venture is initially recognized
at purchase price plus transaction costs.
Investment in Associate/Joint Venture xx
Cash* xx
*or an appropriate account title representing the consideration given
The carrying amount of the investment is increased or decreased to

recognize the investor’s share of the profit or loss of the investee
after the date of acquisition.
Share in Profit of Associate/Joint Venture xx
Share in profits of the associate
(or joint venture)
40
If on the date of acquisition, the fair value of the investee’s net

assets exceeds their carrying amount, the excess shall be amortized,
as an adjustment to the investment account and to the share in profit
of the associate. Thus, to amortize the excess of investment cost
attributable to undervalued inventory and depreciable/amortizable
asset, the entry is
Share in profit of the associate/ Joint venture xx
Adjustment to share in profit of associate (or joint
venture) due to excess of fair value of non-monetary
assets
41
Any further excess of the cost of the investment and the investor’s
share of the fair values in net identifiable assets of the associate at
the date of the acquisition of the investment is attributable to
goodwill. Goodwill is not subject to amortization but is tested for
impairment, at least annually. If goodwill is assessed as impaired,
the investor shall take up its proportionate share in impairment loss
as follows:
Share in profit of the associate/ Joint venture xx
Share in impairment loss of goodwill
42
If the cost of the investment is less than the equity in the fair value
of the net identifiable assets of the associate or joint venture,
indicating a bargain purchase for the investment, the investor shall
take up the difference as an adjustment in its share of profit of the
associate or joint venture in the period of acquisition. The entry is:
Share in profit of associate/ Joint venture xx
Distributions (dividends) received or receivable from an investee

reduce the carrying amount of the investment. The entry for the
receipt of the dividend is
Cash or Dividends Receivable xx
Investment in Associate (Joint Venture) xx
43
Changes in the investee’s shareholders’ equity that have not been

recognized in the investee’s profit or loss are considered as
adjustments to the carrying amount of the investment. These
changes are recognized in other comprehensive income section of
the statement of comprehensive income.
Other Comprehensive Income (Share in
Revaluation Increase of Associate/Joint
Venture) xx
Share in the associate’s recognized other
comprehensive income.
44
Changes in the investee’s shareholders’ equity that have not been

recognized in the investee’s profit or loss are considered as
adjustments to the carrying amount of the investment. These
changes are recognized in other comprehensive income section of
the statement of comprehensive income.
Other Comprehensive Income (Share in
Revaluation Increase of Associate/Joint
Venture) xx
Share in the associate’s recognized other
comprehensive income.
45
Illustration: The following transactions were completed by D
Corporation involving its investment in E Company during the year
2019. The journal entries follow the identified transactions.
• Purchased 25,000 E Company ordinary shares at P150 each on
January 1, 2019. The shares represent 25% of the voting rights in E
Company. The net assets of E Company on this date have carrying
value of P14,000,000.
Investment in Associate 3,750,000
Cash 3,750,000
• Received cash dividends of P10 per share from E Company.
Cash 250,000
Investment in Associate 250,000
46
• Profit reported by E Company for the year 2019 is P2,000,000.
Share in Profit of Associate 500,000
• The carrying amount of E’s identifiable assets equals their fair
values, except for land which, at the date of acquisition of the
investment, had fair value in excess of carrying amount of P200,000,
building which had fair value in excess of carrying amount of
P400,000, and inventories which were undervalued by 20,000. On
January 1, 2019, the building has an estimated useful life of 10 years.
The inventories on January 1, 2019 had all been sold during the year.
There is no indication of impairment in goodwill.
47
In the foregoing example, the December 31, 2019 statement of

financial position of D Corporation should show a balance of
P3,985,000 for the Investment in Associate, under the Non-current
Assets classification and the account Share in Profit of Associate
with a balance of P485,000 is reported on the face of the statement
of comprehensive income for the year ended December 31, 2019.
48
Acquisition of Investment in Associate during the year
Using the transactions in the illustration, but assume that D
Corporation purchased the 25,000 E Company ordinary shares at
P150 each on April 1, 2019. All other transactions are the same.
Journal entries are as follows:
Investment in Associate 3,750,000
Cash 3,750,000
Purchase of investment
Cash 250,000
Receipt of cash dividends
49
Acquisition of Investment in Associate during the year
Using the transactions in the illustration, but assume that D
Corporation purchased the 25,000 E Company ordinary shares at
P150 each on April 1, 2019. All other transactions are the same.
Journal entries are as follows:
Share in reported profit

Receipt of cash dividends
50
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Chapter 4 - Investments in Equity Securities

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The Intermediate Accounting Vol 1,

2019 Edition, Robles and Empleo

Chapter 4: Investments in Equity

Equity investments Investment in Investment in

If during the subsequent year, NSR sold the shares of PME,

Assuming that NSR Corporation sold the shares in PME for

If NSR Corporation chooses to transfer the cumulative balance of

Majority of dividends distributed by

If Jay Company declared the dividends on December 1, 2019

On January 31, 2020

Memo: Received 200 ordinary shares of Jay Company

Illustration: Assume that Chris Company owns 1,000 of Jay

• Per IFRIC 17, paragraph 11, an entity shall measure a

Financial assets at fair value through profit or loss – current assets

• Under IFRS 9, equity investments measured at fair value are no

 As defined in IAS 28, Investment in Associates and Joint

• Significant influence is the power to participate in the financial

(d) The ultimate parent or any intermediate parent of the entity

The carrying amount of the investment is increased or decreased to

If on the date of acquisition, the fair value of the investee’s net

Distributions (dividends) received or receivable from an investee

Changes in the investee’s shareholders’ equity that have not been

Changes in the investee’s shareholders’ equity that have not been

In the foregoing example, the December 31, 2019 statement of

Share in Profit of Associate 12,500

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