Investment in Equity Securities

Prepared by: Ronna Rica L. Co

3 dates for dividends

1. Date of Declaration
- Date approved by BOD
- Dividend shall be recognized as revenue at this date
- Shareholders right to receive payment is established
2. Date of records
- Stock and transfer book is closed for registration
- Only those shareholders registered on this date are entitled to receive dividends.
3. Date of payment
- Dividend is paid

Dividends
1. Cash dividend
- Treated as income
- Credited to investment account
- Not treated as income if equity method is used
2. Property dividend
- Or dividends in kind
- Treated as income at fair value of property received
3. Liquidating dividend
- Represents return on investment
- Not income
4. Stock dividend
- Increase share/ decrease cost per share / no effect on the total cost of investment
- Not income
a. Same as those held
memo entry on part of investor
Do not affect total cost of investment
Reduce the cost of investment per share
b. Different from those held
allocate cost of original investment between original shares and the
different stock dividends on the basis of fair value.
reduce the total cost of original investment because new investment
account is set up for stock dividend received.

Shares received in lieu of cash dividend

- Dividend are income at fair value of shares received
- In absence of fair value, income is equal to cash dividend that would have been
received.
- Entry: Investment in shares xx
Dividend income xx

Cash received in lieu of stock dividends

- as-if approach is followed
- Stock dividends are assumed to be reduced and subsequently sold at the cash
received.
- Gain or loss may be recognized.
 Share split
- Does not affect total cost of investment
- But there is an increase or decrease in the cost per share
- Memo entry only
1. Split up
- Outstanding shares are called in and replaced by a larger number.
- Accompanied by reduction in the par or stated value.
2. Split down
- Outstanding shares are called in and replaced by a smaller number.
- Accompanied by an increase in the par or stated value.

Stock right or preemptive right

- Legal right granted to shareholders to subscribe for new shares at specified price
during definite period.
- Right issue (IAS Term)
- Inherent in every share
- Shareholder receives 1 right for 1 share owned
- Valuable to an investor because new shares are sold below prevailing market price
- Purpose: enable the shareholder to preserve their equity or proportionate interest.
- Evidenced by an instrument or certificate known as share warrant

Measurement of stock right

- Initially at fair value. Portion of CA of original investment in equity securities is
allocated to the stock rights at an amount equal to fair value of stock rights. Stock
rights are independent of original shares.
- Normally classified as current asset if stock rights are accounted for separately.

Stock rights
1. Accounted for separately
2. Not accounted for separately
- Embedded derivative but not stand alone derivative. Component of a hybrid or
combined contract(host contract), with the effect that some of the cash flow of
combined contract vary in a way similar to stand alone instrument.
- Embedded derivative shall be separated from the host contract and accounted for
separately under certain conditions.
- However, if host contract is a financial asset, embedded derivative is not separated.
- If host contract is measured at fair value thru profit or loss embedded derivative is
not separated.

Theoretical or parity value of stock right

- Is the assumed fair value
- When the share is selling right-on
Value of 1 right = market value of share right-on less subscription price
# of rights to purchase 1 share + 1
- When share is selling ex-right
Value of 1 right = market value of share ex-right less subscription price
# of rights to purchase 1 share
 Cost of new shares or investment
Initial cost ( stock rights x fair value or value of 1 right) xx
+ cash paid for new shares xx
Cost of new shares or investment xx
Initial measurement of investment
Purchase price xx
Add: Transaction cost xx
Less: Purchased dividend (xx)
Xx

Dividend on
- Excluded from cost of investment
- Example: Purchase date January 1, 2017; dividend declaration date December 15,
2016; date of record January 31, 2017; date of payment March 31, 2017

Initial CV (BS date) UG/UL ( change in

FV)
TS/FVPL PP FV P/L
AFS/FVOCI PP + TC FV OCI*
Invest. in Assoc. PP + TC FV none

*Cumulative balance
1. PFRS 9 cumulative balance of UG/UL taken to SHE. (FV Original Cost = UG/UL)
2. PAS 39 0

Sale
1. TS
Net SP FV = G/ L on Sale
2. AFS
a. PAS 39
Net SP Cost = G/L on Sale
b. PFRS 9 0 ; no G/L