CHAPTER

BLUE NOTES
11 S
L
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.
Note: The share is evidenced by an instrument called share certificate.

Initial Measurement = fair value plus transaction costs

Fair Value = Transaction Price
Acquired in Exchange Acquired at a Single Cost or Lump Sum
In order of Priority, FV =  the single cost is allocated to the securities
1. fair value of the asset given up acquired on the basis of their fair value.
2. fair value of the securities received  If only one share has a kwon market value, an
3. carrying amount of the asset given amount is allocated to the securities with a
known market value equal to its market value,
then the remainder of the single cost is allocated
to the other security with no known market value.

Investment in Unquoted Equity Instrument

All investments in equity instruments contracts on those 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.

Accounting for Dividend Income

Kind of Dividends Measurement of Income
1. Cash Dividends At face value
2. Property Dividends – dividends in the At fair value
form of assets other than cash
3. Stock Dividends – in the form of the Not recognized as income
issuing entity’s own shares. Recorded by a memorandum entry only
4. Liquidating Dividends – represents Not recognized as income but a deducted on the
return of capital cost of investment
Note: Dividends are recognized as income on the date of declaration.
In case of Stock Dividends different from those held, allocate the cost of the original investment between the original shares and
the different stock dividends on the basis of fair value.

Shares Received in Lieu of Cash Dividends
Measurement of Income (in order of priority)
1. fair value of the shares received
2. cash dividends that would have been
received
Cash Received in Lieu of Shares Dividends
Measurement of Income (as if approach)
 the stock dividends are assumed to be received
and subsequently sold at the cash received
 a gain or loss may be recognized

Share split
 Only memorandum entry is made to record the receipt of new shares by virtue of share split
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40 USL Blue Notes Chapter 11 – Investment in Equity Securities

 Share split does not affect does not affect the total cost of investment. But there is a decrease or an increase in
the cost per share because the total cost now will apply to a larger or smaller number of shares

Special assessments are additional capital contribution of the shareholders. On the part of the shareholders, special
assessments are recorded as additional cost of the investment and on the part of the entity as a premium.

Stock right or preemptive right is a legal right granted to shareholders to subscribe for new shares issued by a
corporation at a specified price during a definite period.

Accounting for Stock Rights

Accounted for Separately Not Accounted for Separately

A portion of the carrying amount of the original
investment in equity securities is allocated to the
stock rights at an amount equal to the fair value of
the stock rights at the time of acquisition.
Cost of Stock Rights = Fair Value or Theoretical/Parity
Value
Stock rights are recognized as embedded derivative*.
No cost is allocated to the stock rights.
Note:* An embedded derivative is a “component of a hybrid or
combined contract (host contract) with the effect that some
of the cash flows of the combined contract vary in way
similar to a stand-alone derivative”

Theoretical / Parity Value Formula

 Share is Selling Right- on
Value of 1 right = MV of share right on –
subscription price
_____________________
Number of rights to
purchase one share + 1

 Share is Selling Ex-Right

Value of 1 right = MV of share ex-right –
subscription price
___________________
Number of rights to
purchase 1 share

Note: Stocks rights accounted for separately are normally classified as

current assets.

Exercise of Stock Rights Sale of Stock Rights Expiration of Stock Rights

 The cost of the new
investment includes the
subscription price and the
cost of the stock rights
exercised
 The difference between the
selling price and cost is
recognized as gain or loss to
be presented in income
statement
 The cost of the stock right is
expensed and recognized as
loss.

Sale of Equity Securities

PFRS 9, paragraph 3.2.12, provides that on derecognition of a financial asset, the difference between the
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Chapter 11 – Investment in Equity Securities USL Blue Notes 41

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, the entity
shall determine the cost of the securities sold using either the FIFO or Average Cost Approach.

Illustrative Problems

1. Accounted for Separately

A shareholder received 1,800,000. Subsequently, the shareholder received 10,000 stock rights to subscribe for
new shares at 100 per share for every five rights held. The market value of the share is 150 and the market
value of the right is 10.
The acquisition of the original investment is recorded as follows:
Investment in equity securities 1,800,000
Cash 1,800,000
Receipt of stock rights
Stock rights 100,000
Investment in equity securities 100,000
Exercise of stock rights
Investment in equity securities 300,000
Cash 200,000
Stock rights 100,000
If sold for 150,000
Cash 150,000
Stock rights 100,000
Gain on sale of stock rights 150,000
If not exercise
Loss on stock rights 100,000
Stock rights 100,000

2. A shareholder acquired 10,000 shares costing 2,500,000.

Subsequently, the shareholder received stock rights to subscribe for new shares at 150 per share for every five
right held.
The market value of the shares is 210 per share.
Right-on:
Value of one right = (210 -150)/(5+1)
= 60/6
= 10 per share
The cost of 2,500,000 is allocated as follows:
Cost of original investment 2,500,000
Theoretical value of stock right 100,000
Remaining cost of original investment 2,400,000
If ex-right:
Value of one right = (210 -150)/(5)
= 60/5
= 12 per right

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42 USL Blue Notes Chapter 11 – Investment in Equity Securities

The cost of 2,500,000 is allocated as follows:

Cost of original investment 2,500,000
Theoretical value of stock right 120,000
Remaining cost of original investment 2,380,000

3. Not Accounted for Separately

A shareholder acquired 10,000 shares for 1,500,000. Subsequently, the shareholder received 10,000 stock
rights to subscribe for new shares at 100 per share for every five rights held.
The market value of the share is 140, and the market value of right is 10. The stock rights are all exercised by
the shareholder.
Journal entries
a. To record the acquisition of the original investment:
Investment in equity securities 1,500,000
Cash 1,500,000
b. To record the receipt of the rights:
Memo entry – received 10,000 stock rights to subscribe for new shares at 100 per share for every five rights
held, or a total of 2,000 new shares.
c. To record the exercise of the stock rights:
Investment in equity securities 200,000
Cash 200,000
If the 10,000 rights are sold for 150,000, entry is:
Cash 150,000
Investment in equity securities 150,000
If the stock rights are not exercised but expired, only a memorandum is necessary to record the expiration.

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