Chapter 15
Investment in equity securities
INVESTMENT IN EQUITY SECURITIES – the acquisition of equity securities for the purposes of accruing
income through dividends and increase in market value or controlling equity. They represent ownership
shares. They may represent rights and options to acquire ownership shares.
SHARE – is the ownership interest or right of a shareholder in entity. Rights pertain to share in earnings,
election, subscription and share in net assets liquidation. It evidence with share certificate.
ACQUISITION OF EQUITY SECURITIES
Prfs 9, provides that when a financial asset is recognized initially, it shall be measured at fair value
(transaction price, or amount given, if not determinable then cost or carrying) plus transaction costs that
are directly attributable to the acquisition.
If 2 securities acquired, if only one has market value, use ratio then, balance will be cost of remainder
security.
Costs attributable to financial assets held for trading shall be expensed immediately.
Categories of investments
A. Trading securities or financial assets at fair vale through profit and loss
B. Financial assets at fair value through other comprehensive income
C. Investment in associate
D. Investment in subsidiary
E. Investment in unquoted equity instruments
Between the date of record and date of payment - eg. Dividend, original shareholders can be entitled to
the dividends.
Pas 18, paragraph 29, provides that dividends shall be recognized as revenue when the shareholders’
right to receive payment is established”. It is date of declaration.
Property dividends or dividends in kind or dividends in form of property or noncash assets.
Recorded at fair value.
Entry: investment in equity securities xx
Dividend income xx
Liquidating dividends – represents return on invested capital, not income. Payment may be in cash or
noncash assets. It is normally paid when the corporation is dissolved or liquidated. Except for mining
industries where it may be paid the liquidating dividend even before dissolution and liquidation
Entry:
Cash or other appropriate account xx
Investment in equity securities xx
Stock dividends – issuing entity’s own shares. It is bonus issue. Stock of another corporation is not stock
dividends but property dividends. It is not income, because no distribution of assets. It’s transfer of
retained earnings to share capital. Accounting for stock dividends
Stock dividends with same class – memorandum entry. It does not affect the total cost of investment
but reduce the cost of the investment per share.
Example
Cost/shar
Shares e Total cost
Original shares 10,000 120.00 1,200,000.00
Stock dividends 2,000 - -
Total 12,000 100.00 1,200,000.00
Stock dividends difference from those held. It is not income
10,000 ordinary shares with cost of p800,000. Receives 10% stock dividend in form of preference share.
Market value of ordinary share is 150, and preference share is 100.
mv Ratio Allo cost
Ordinary shares
(10000*150) 1,500,000.00 0.9375 750,000.00
Preference share(10%)
(1000 *100) 100,000.00 0.0625 50,000.00
Total 1,600,000.00 1.00 800,000.00
Entry to record stock dividends
Investment in preference shares 50,000
Investment in ordinary shares 50,000
Share received in lieu of cash dividends – income at fair value. If not determinable, income shall be
equaled to the cash dividends that would be received.
10000 shares cost p1000,000. Shareholders received 1000 shares in lieu of cash dividends of p10 per
share. Market value per share is p150.
Entry:
Investment in equity securities 150,000
Dividend income 150,000
If no market value:
Investment in equity securities 100,000
Dividend income 100,000
Cash received in lieu of stock dividends – “as if” the stock dividends are assumed to be received and
subsequently sold at cash. Gain or loss shall be recognized
As bir all cash received whether originally designated as cash or stock dividend is income on the part of
shareholders.
Share split – restructure its capital by effecting a change in the number of shares without capitalizing
retained earnings or changing the amount of its legal capital.
Ex. Split up. Shareholders own 10,000 shares and share split of 5 for 1. The shareholders receives 50,000
shares in exchange for 10,000 original shares
Split down – is the reverse of split up. 5 for 1, 10,000 shares change be change to 2,000 new shares.
Note: share split does not affect the amount. A memorandum entry shall be made.
Special assessment – additional contribution of the shareholders
Investment in equity xx
Cash xx
Redemption shares – preference share may be called in for redemption and cancellation by the issuing
entity.
Stock right “preemptive right”– when corporation issue additional shares, shareholders of record are
given the legal right to subscribe for the same before the new shares are offered for sale to the public.
One right for every share owned.
Stock rights are valuable to shareholders because the price at which the new shares are sold is generally
low the prevailing market price. Purpose of stock is to preserve their equity interest in the corporation.
Evidence – share warrants or certificates or instruments.
Accounting for stock rights (pfrs 9) stock rights is financial assets.
Stock rights(independent with original shares) - accounted for separately
Measurement – initial at fair value + transaction costs
Stock rights - classified as current assets
Stock rights -not accounted for separately pas 39 paragraph 10 as amended by pfrs 9 “ embedded
derivative” ”hybrid contract”
Theoretical or parity value of stock right
10,000 shares cost p2,500,000
Subscribed p150 per share for every 5 rights
Market value of stock right p210
Right on
value of one right = mv of share right on – subscription price / number of right to purchase one
share + 1
210 – 150 / 5+1 = p10/right
cost of investment 2,500,000
theoretical value of stock rights (10,000 @10) 100,000
remaining cost of original investment 2,400,000
Ex-right
Value of one right = mv – sp / no. Right to purchase one share
Value of one right = 210-150/5 or p12.00 per right
Cost of original investment 2,500,000
Theoretical value of rights (10000@12 120,000
Remaining cost of original investment 2,380,000
End of topic