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Investments

I.
Definition
Held by entity for :
1. Accretion of Wealth
2. Capital Appreciation
3. Other benefits to the investing entity
II.

Investments Includes:
1. Trading Securities
2. Investment in Equity Securities
3. Investment in Bonds
4. Investment in Associates
5. Investment in Subsidiary
6. Investment in Property
7. Investment in Fund
8. Investment in Joint Venture

III.

Purposes
1. Accretion of Wealth
2. Capital Appreciation
3. Ownership Control
4. Meeting Business Requirements
5. Protection

IV.

Statement Classification

1. Current Investments
Readily realizable
Intended to be held for not more than one year

2. Non-current Investments
Not expected to be realized within twelve months
Intended to be held for more than one year

V.
Financial Instruments
Characteristics:
1. There must be a CONTRACT
2. There are at least TWO PARTIES to the contract
3. Contract gives rise to a FINANCIAL ASSET of one party and FINANCIAL
LIABILITY or EQUITY INSTRUMENT of another entity.
VI.
Financial Asset
Asset that is:
1. Cash
2. Contractual right to receive cash or other financial instrument from another
entity
3. Contractual right to exchange financial instrument with another entity under
conditions that are potentially FAVORABLE.
4. Equity instrument of another entity.

Not considered Financial Assets


1. Physical Assets
2. Intangible Assets
3. Leased Assets
4. Prepaid Expenses

VII.
Financial Liability
Liability that is contractual obligation to
1. Deliver cash or other financial asset to another entity
2. Exchange financial instrument with another entity under condition that are
potentially UNFAVORABLE.

Not considered financial liabilities


1. Deferred revenue and Warranty obligations
2. Income taxes payable
3. Constructive obligations

VIII. Equity Instrument


Equity = Assets Liabilities
Residual interest in the assets of the entity after deducting all of its liabilities

Redeemable Preference Share

Preference share that provides for mandatory redemption by the issuer for a fixed
or determinable amount at a future date
Financial Liability of the issuer

Preference share that gives the holder the right to reacquire the issuer to redeem
the instrument at a particular date for a fixed or determinable amount
Financial Liability

IX.

Classifications of Financial Assets


1. Financial Assets at Fair Value
2. Financial Assets at Amortized Cost
Financial assets at Fair Value

Includes both equity securities and debt securities

1. Equity Securities
Any instrument representing ownership shares and right, warrants or options to
acquire or dispose of ownership shares at a fixed or determinable price.
Ownership interest in the entity

2. Debt Securities
Any security that represents a creditor relationship with an entity.
Has a maturity date and a maturity value

Equity Securities
A. Classifications
1.
2.
3.
4.

Equity investments at Fair Value through Profit or Loss


Equity investments at Fair Value through Other Comprehensive Income
Investment in Associates
Investment in Subsidiaries
B. Recognition Principle

Equity Investments
1. FV through P/L
2. FV through OCI

Initial Measurement
FAIR VALUE
PURCHASE PRICE (FV)

Transaction Costs Treatment


OUTRIGHT EXPENSE
CAPITALIZE

Unrealized Gains/Losses
Result of changes in fair value at reporting date.
1. Unrealized Gain FV > Cost
2. Unrealized Loss FV< Cost
Gain or Loss on sale of securities

Net proceeds from sale (NP) Carrying amount of the investment (CA)
1. NP > CA Gain
2. NP < CA Loss
C. Transactions subsequent to Initial Recognition
Classifications of the equity investments (whether FVPL or FVOCI) does not affect the
accounting for these subsequent transactions.
Share Split

REDUCTION in the Par or Stated value of share capital accompanied by a proportionate


increase in the number of shares outstanding

Shares Outstanding Increase


Par or Stated Value Decrease
Shareholder Equity No Effect
Memo Entry

Dividends

Corporate distributions to its shareholders proportionate to the number of shares held


by the latter.

1. Cash Dividends
No Effect on Investment Account
a. Dividends earned but not received
Dividends Receivable

xxx

Dividend Income

xxx

b. Dividends earned are subsequently received


Cash

xxx
Dividends Receivable

xxx

3 Dates relevant:

1. Date of Declaration payment of dividends is approved by the Board of Directors


2. Date of Record stock and transfer book of the corporation is closed for registration.
3. Date of Payment dividends declared shall be paid
Date of Declaration

Dividend-On market price of a share includes the amount of the


dividend.

Date of Record
Date of Payment

Ex-Dividend market price does not include the amount of the


dividend.

WHEN TO RECOGNIZE DIVIDENDS AS INCOME Date of Declaration

2.

Property Dividends
Dividends in form of property or Non-Cash Assets
Also considered as Income
Recorded at Fair Value
Non-Cash Assets

xxx

Dividend Income
3.

xxx

Liquidating Dividends
Return of invested capital
Not Income
Payment may be in form of Cash or Non-Cash Assets
Cash or other appropriate amount

xxx

Investment in Equity Securities


4.

xxx

Stock Dividends
In the form of the issuing entitys own shares
IAS term Bonus Issue
Not Income
No Effect on assets of the entity
Cost of Investment
- No Effect
Cost of Investment per share Decrease
Shares
- Increase

a. Stock dividends different from those held


Stock dividends of different class are not income.
Original cost of investment is apportioned between the original shares and the
stock dividends on the basis of market value of each at the date of report.
b. Shares received in lieu of cash dividends
Income at fair value of the shares received
In absence of fair value of shares received, INCOME = Cash dividends that would
have been received.
c. Cash received in lieu of stock dividend
As if approach followed
Stock dividends are assumed to be received and subsequently sold at the cash
received
Gain or Loss may be recognized

5. Special Assessments
Additional capital contribution of the shareholders
Shareholders - Additional Cost of Investment
Entity
- Share Premium
6. Redemption of Share
same manner as sale of share
redemption price = sales price
Stock Right

Legal right granted to shareholders to subscribe for new shares issued by a


corporation at a specified price during a definite period.
IAS term stock issue
Inherent in every share
Shareholders receive one share for every share owned.

Accounting for Stock Right


a. Accounted for Separately
Initial measurement Fair Value
Portion of the CA of the original investment in equity security is allocated to the stock
rights at an amount equal to the fair value of the stock rights at the time of acquisition.
Normally classified as CURRENT ASSET
b. Not accounted for separately
Stock rights are recognized as embedded derivative but not a stand-alone derivative
Embedded derivative shall be separated from the host contract and accounted for
separately under certain conditions.
Dates:
Date of Declaration
Date of Record
Date of Payment

Right-On share and the right are inseparable and treated as one
- shares cannot be sold without also selling the right (vice versa)
Ex-Right share can now be sold separate from the right or vice
versa.

On Right On Gain or Loss on Sale of investment = SP CA of investment

Stock right with NO MARKET VALUE

Theoretical or Parity Value of stock rights is used in measuring the fair value of the stock
rights.
1. Shares selling Right-On
Value of One Right = MV of share right-on LESS Subscription Price
Number of rights to purchase + 1
2. Shares selling Ex-Right
Value of One Right = MV of share ex-right LESS Subscription Price
Number of rights to purchase
Reclassification of Equity Security

Reclassification

Result of changes in business model for managing financial assets


When reclassification occurs, entity shall apply the reclassification PROSPECTIVELY from
reclassification date*

*Reclassification Date

First day of the reporting period following the change in business model that result in an
entity reclassifying the financial asset.

Does not result into a change in business model:]


1. Change in intention related to a particular financial asset
2. Temporary disappearance of a particular market for a financial asset
3. Transfer of financial asset between parts of the entity with different business models
Reclassification from fair value to amortized cost

Fair value at the reclassification date becomes the new carrying amount of the financial
asset at amortized cost.
CA financial asset at amortized cost Face value of the financial asset
Amortized through P/L over the remaining life of the financial asset using the
effective interest method

Reclassification from amortized cost to fair value

Fair value is determined at the reclassification date,


Previous CA fair value > recognized in P/L

Debt Securities
Debt Securities

Financial instruments issued by a company that typically have the following


characteristics:
1. Maturity Value
2. Interest rate that specifies the periodic interest payments
3. Maturity Date

Typical examples
1. Bond certificates
2. Treasury Notes

May sell at a price different from the face value of the instruments
1. Rate of Interest stated on the Instrument (Stated rate) = Rate of return desired by
investors (Market Rate)
Instruments will sell at face value
2. Stated Rate > Market Rate
It will pay more than the face value
Instruments sell at premium
3. Stated Rate < Market Rate
Purchasers pay less than the face value
Instruments sell at discount
Classification of Investment in Debt Securities
1. At Amortized Cost
2. At Fair value through Profit or Loss
Should be made on the basis of both:
1. Business model for managing the financial asset
2. Contractual cash flow characteristics of the financial asset

Debt Securities
Securities

NO

Business Model Test:


Is the instrument
purchased held for
collection?

YES

Does the instrument


possess contractual cash
flow characteristics?

NO

YES

Does the company


exercise its option to
designate the securities at
FV?

YES

NO

Classify as Debt
Investments at FV
through P/L

Classify as Debt
Investment at
Amortized Cost

BOND
Bonds

Contract of debt where Issuer borrows fund from the Investor.


Evidenced by a certificate
Issued in denomination

Classification of Bond Investments


1. Trading securities
2. Financial Assets at amortized cost
Initial measurement

FAIR VALUE plus Transaction Costs that are directly attributable to the acquisition.

Subsequent Measurement
1. Trading bond investments
Measured Fair value through profit or loss
If held for trading it is not necessary to amortize any premium or discount
2. Bond Investments
Classified as Financial Assets measured at amortized cost using the effective interest method
Acquisition of Bond Investments
1. On Interest date
Purchase Price = Acquisition Cost
2. Between Interest date
Purchase price normally includes accrued interest*
*Accrued Interest - interest that is either payable or receivable has been recognized, but not yet paid or
received.
Investment in Bonds at Amortized Cost

Classified as - Non-current Investments


Same procedures as for Trading Bond Investment
Difference Debit of Investment in Bonds or Financial Asset at amortized cost instead of
Trading Securities

Amortization of Premium or Discount

Over the Life of the Bonds


Life of the Bonds = from the date of Acquisition to date of Maturity

Entry
a. Amortization of Bond Discount
Investment in Bonds
Investment Income

xxx

b. Amortization of Bond Premium


Investment Income
xxx
Investment in Bonds

xxx

xxx

May be made (1) Interest Date or (2) End of the reporting period

Philosophy of Amortization
Reason for amortization
Bring the carrying amount of the investment to face value at the date of maturity.
Bond Premium
Loss on the part of the Bondholder
Paid more than what can be collected at date of maturity.
Bond Discount
Gain on the part of the Bondholder
Paid less than what can be collected
Sale of Bonds Prior to Maturity
Necessary to determine CA of the bond investment to be used as a basis in computing gain or
loss on the sale
Amortization of Premium or Discount should be recognized up to the date of sale.
Callable Bonds
Those which may be called in or redeemed by the issuing entity prior to their date of maturity
Redemption price CA of bond investment
Recognized in P/L

Convertible Bonds
Those which gives the bondholders the right to exchange their bonds for share capital of the
issuing entity at any time prior to maturity.
Serial Bonds
Those which have a series of maturity dates or those bonds which are payable in instalments
Methods of Amortization
A. Straight Line Amortization
Equal amortization of premium or discount each accounting period
Example:
Face Value

2,000,000

Date of Bonds

1/1/11

Acquisition Cost 1/1/11 =

1,850,000

Date of Maturity

1/1/14

Discount on Bonds

150,000

Interest payable semi-annually on June 30 and


Dec 31

Amortization of Discount
2011

P 50,000

2012

P 50,000

2013

P 50,000

B. Bond Outstanding Method


Applicable to serial bonds
Example:
Face Value

2,000,000

Date of Bonds

Acquisition Cost 1/1/11 =

1,900,000

Interest payable semi-annually on 6/30 & 12/31

Discount on Bonds

100,000

1/1/11

Annual Installment on 12/31/11 and every


December 31 =
500,000

Amortization of Discount
Year
2011
2012
2013
2014

Bond Outstanding
2,000,000
1,500,000
1,000,000
500,000
P 5,000,000

Fraction
20/50
15/50
10/50
5//50

Discount Amortization
40,000
30,000
20,000
10,000
P 100,000

C. Effective Interest Method


1. Nominal Rate rate appearing on Face Value of the bonds
2. Effective Rate actual rate of interest earned on the investment
Discount
Increase on Carrying Amount of Bond Investment
ER > NR
Premium
Decrease on Carrying Amount of Bond Investment
ER < NR
Amortization Table

Date

FV X Nominal Rate
Interest Received

CA X Effective Rate I/R less I/I


Interest Income
Discount/Premium

Present Value Factors

1. PV of 1 = (1+i)-n
2. PV of Annuity of 1 = 1 (1+i)-n

CA outs. +Dis Pre


Carrying Amount

Investment in Associates
Significant Influence
20 % to 50% ownership
If less than 20% ownership it is still has significant influence if :
1. Representation in the Board of Directors
2. Participation in Policy making process
3. Material transactions between the investor and investee
4. Interchange of management personnel
5. Provision of essential technical information
No Significant Influence
Investor holds, directly or indirectly, less than 20% of voting power of the investee
Accounting for Investment in Associate
Methods
1. Equity Method
Applicable when the investor has significant influence over the investee.
Applicable only in investments in ordinary shares.
Initial measurement = Cost
Subsequent measurement
Increase Net income of investee
Decrease Net Loss and Dividend payments
2. Cost Method
Applied with respect to investment in unquoted equity instrument
Applicable when investor does not have significant influence over the investee
Initial measurement = Cost
Subsequent
Does not share in investees profit or loss
Dividends received =Dividend income

Excess of Cost over Carrying Amount


May be attributed to the following:
a. Undervaluation of the investees assets
b. Goodwill

Excess
If the assets of the investee are fairly valued, attribute excess cost to Goodwill
attributable to undervaluation of depreciable asset, Amortize over the remaining life of
depreciable asset
attributable to undervaluation of land, Not Amortized
attributable to undervaluation of inventory, Amount is expensed when the inventory is already
sold
Attributable to Goodwill, not amortized but the entire investment is tested for impairment at
the end of each reporting period.

Acquisition Cost
Less: Carrying Amount of Net Assets acquired

p xxx
xxx

Excess of Cost over Carrying amount

p xxx

Less: Attributable to Building (if any)

xxx

Attributable to Land (if any)

xxx

Attributable to Inventory (if any)

xxx

Attributable to Machinery (if any)

xxx

Goodwill

p xxx

Excess of Net Fair Value over Cost


Acquisition Cost
Less: Carrying Amount of Net Assets acquired

p xxx
xxx

Excess of Cost over Carrying amount

p xxx

Less: Attributable to Building (if any)

xxx

Attributable to Machinery (if any)


Excess of Net FV over cost

xxx
p xxx

Investment Income Computation


Share in Net income

p xxx

Amortization of excess attributable to ()

xxx

Excess net fair value

xxx

Net Investment Income

p xxx

Investee with Heavy Losses

Investor discontinues recognizing its share of further losses


Investment is reported nil or zero value
If the associate subsequently reports income, investor resumes including its share of
such income after its share of income equals the share of losses not recognized.

Investee with cumulative preference share

Compute share of earnings of losses after deducting the preference dividends


Net income
Less: Preference share dividend
Net income to OS
X%
Share in Net Income

Investee with non-cumulative preference share

Compute share of earnings after deducting the preference dividends only when
declared.

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