Topic #1: IIA

FAR:
Notes

Financial Assets @FV

> FVPL
> FVOCI
> Amortized Cost
Financial Assets shall be measured at profit or loss
a.​ Trading securities (current assets)
b.​ Other investments in quoted equity instruments (publicly traded)
c.​ Irrevocably designated (or by option) on initial recognition
d.​ All debt investments (don’t satisfy as FV at amortized cost and OCI)

Equity instrument @ FV through OCI

> make an irrevocable election to present OCI
> amount recognized in OCI is not reclassified to P/L
> Derecognition, transferred to retained earnings
●​ @ FVPL
In order to realized fair value changes
●​ Debt Investment @ Amortized Cost
Business model (hold financial asset to collect contractual cash flows)
●​ Debt Investment @ FVOCI
Business model (hold financial asset to collect contractual cash flows & sell the INV.
> Derecognition, cumulative gain or loss shall be classified to profit or loss

SUMMARY of MEASUREMENT RULES

Equity Investments
a.​ Held for Trading - @FVPL
b.​ Not held for trading - Rule: @FVPL
c.​ Not held for trading - @FVOCI by irrevocable election
d.​ Quoted equity instruments - @FVPL
e.​ Unquoted - at cost
f.​ Associate (20% - 50%) - Equity method
g.​ Subsidiary of more than 50% - Consolidation method

Debt Investments
a.​ Held for Trading - @FVPL
b.​ Held for collection of contractual cash flows @amortized cost
c.​ Held for collection of contractual cash flows @FVPL by irrevocable
designation or FV option
d.​ Held for collection of contractual cash flows and for sale of financial asset
@FVOCI
e.​ Held for collection of contractual cash flows and for sale of financial asset
 @FVPLby irrevocable designation or FV option
QUOTED PRICE
●​ Share or Equity Security (PEsos Per Share)
●​ Bond or debt Security (% percent of the Face Amount of the bond)

Gain and Loss (Financial Asset at FV)

Unrealized gain or loss on held for trading are reported in P/L
FV>CA = Unrealized Gain (other income)
FV< CA = Unrealized Loss (other expense)

Gain and Loss (Financial Asset at Amortized Cost)

Unrealized gain or loss are unrecognized ‘cause investments are not @FV
Gain and Loss be recognized in P/L when a financial asset is sold, derecognized,
impaired, reclassified, etc.

Additional Information:
Equity Investment @FVOCI by irrevocable election
: Financial Asset - FVOCI is noncurrent asset
●​ Unrealized gain is presented as component of OCI in statement of
comprehensive income
●​ Cumulative unrealized gain, only the unrealized gain of the CY shall be
presented in the statement of comprehensive income. However, the
cumulative amount shall be presented in statement of changes in equity

Sale of Equity Investment - FVOCI

●​ Gain or loss on disposal of equity investment measured at FVOCI is
recognized directly in Retained Earnings
●​ Moreover, the cumulative gain or loss previously recognized in OCI is also
transferred to Retained Earnings.
●​ Actually, the cumulative credit to retained earnings is the difference between
the Sales Price and Historical Cost.

2
Equity Investments (Dividends, Share Split and Share Right)
Equity Investments
a.​ FA@ FVPL
b.​ FA@FVOCI
c.​ Investment in associate
d.​ Investment in Subsidiary
e.​ Investment in Unquoted Equity Investments

Acquisition of Exchange
a.​ FV of asset given
b.​ FV of asset received
c.​ CA of asset given
(Order of Priority)

Sale of Equity Investments

If daghan kang equity shares, then namaligya ka, and u can’t anymore recognized
kung asa did2 ang gi sell (use FIFO method or Average Cost Approach)

“Cash Dividends”
: Income; FVPL/FVOCI/Cost

Dividends (Cash, Properties, Liquidating, Shares)

Sa Corporation Accounting (POV nato is the corporation)
Date of Declaration
Dr. Retained Earnings
Cr Dividends Payable
Date of Payments
Dr. Dividends Payable
Cr. Cash

But, this time (POV nato is mo receive og dividends)

Date of Declaration (not yet received)
Dr. Dividends Receivable
Cr. Dividend Income
The date we receive the dividends
Dr. Cash
Cr,Dividends Receivable

3
When are Dividends considered earned?
a.​ Date of declaration
-​ The liability of the corporation arises and nag rise napud atong asset
or right to receive dividends
b.​ Date of Record
Kung kinsay tag iya anang mga shares as of this date, sila moy ma ka
receive of actual dividends on the payment date
c.​ Date of Payment

> Pag nagbenta ka ng share in the middle of the date of declaration and date of
record, that is Dividend On.
So, kasali sa babayaran ng buyer the supposedly dividends u received.

> If between date of record and date of payment, Ex-Dividend

If gi sells nako after the date of record but before the date of payment, wlay
dividends ma receive ang buyer, only the FV of investment.

Property Dividends
: Income ; Recorded at FV

Si Company A nipalit og shares in Company B. Now, the shares it bought will be

given to its own shareholders as dividends.
Those shares are called property dividends. Kasi, that investment shares are not
its own shares but to some other company, which in this case is the Company B
(Property ni B).
Now, the shareholder will now be a partial owner of company B since he owns
shares from the same as given by company A as dividends.

Dr. Investment in shares

Cr. Dividend Income

Liquidating Dividends
Not an Income
Dividends that are given when in bankruptcy or magli liquidate na.
XP sa mga wasting asset corp.

Return of Investment not a return on investment

Dr Cash or other appropriate amount
Cr. Investment in Shares

Share Dividends
IAS term : Bonus Issue
Note: If same shares, no journal entry, changes in # of shares and cost per share
However, if magkaiba ang shares, naay JE

4
 Share Dividends of same class
❖​ Recorded only on the part of shareholder as a memorandum entry
❖​ Share dividends
Cost of Investment
1.​ Total (Do not affect)
2.​ Per share (Decrease)

Shares Cost Per Share Total Cost

Orig. Shares 10,000 120 1,200,000

Share Dividends 2,000 __ __

12,000 100 1,200,000

Share Dividends different from those held

❖​ Original Cost of the investment is apportioned between the original shares
and share dividends on the Market Value of each at the date of receipt

Market Value Fraction Allocated Cost

Ordinary Shares 1,500,000 15/16 750,000
(10,000 shares x 100)

Preference Shares 100,000 1/16 50,000

(1,000 shares x 100)

1,600,000 800,000

Preference Shares (share dividend) on the ordinary share investment is recorded as

NEW INVESTMENT
Dr. Investment in Preference Shares
Cr Investment in Ordinary Shares

Shares Issued in lieu of Cash Dividends (lieu means in exchange/substitute)

Priority #1 income at FV of shares received.
Priority #2 (absence of 1) cash dividends that would have been received.

Dr. Investment in Shares

Cr, Dividend Income
Cash Received in lieu of share dividends

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Apply “as if” approach (recognition of gain or loss)
As if na receive mo ang share dividends, then binenta mo “as if” for the cash
received.
Cash
Investment in Shares
Gain on Investment

Shares Split
Change in the number of shares w/out capitalizing RE/ changing the amount of its legal capital
●​ Split Up
Outstanding shares are called in —-> replaced by a larger number—-> reduced
the par or stated value of each share

●​ Split Down (Opposite of Spit Up)

—-> smaller # of shares —--> increase in par or stated value of each share

Special Assessments (Additional Cost of the investment)

Investment in Shares
Cash

Redemption of Preference Shares

Acquisition Redemption
Investment in Preference Shares Cash
Cash Inv. in Preference Shares
GAin on INv.
Share Right/ Stock Right/ Preemptive Right (right issue)
> Selling first the corp. shares to its own shareholders before being made to the
public (evidenced by share warrants).
> a form of financial asset
2 schools of thought
1.​ Share Rights are accounted for separately (Current Asset)
> form of equity instruments measured at FV

2.​ Share Rights are not accounted for separately

> embedded derivative but not a “stand-alone” derivative

6
Investment in Associate - NCA
—> Equity Method —> Cost Method/FVPL & FVOCI
Ordinary Shares Preference Shares

*Acq. @cost *Share in Loss

*Share in Profit * Excess of Cost over FV (over
*Net FV over cost useful life)

*Revaluation Surplus *Dividends

*Investment in Associate
Cash
* Investment in Associate * Loss on Investment
Investment Income Investment in Associate
*Investment in Associate * Investment Income
Revaluation Surplus - Investee Investment in Associate
* Cash
Investment in Associate

Note: Can affect the Investment Income

> Share in Profit,
> Net FV over cost
> Excess of Cost over FV

Excess Net FV over Cost - nakamura si investor ( binayaran mo less than the total
worth ng nakuha mong assets

Excess of Cost over CA - mahal (bayad og dako kaysa sa naka-record, basin naay
undervalued nga properties or intangibles : if naay sobra ibutang sa goodwill)

Investee with heavy losses

Discontinues recognizing further losses when the investor’s share of losses of an
associate equals or exceeds the CA of an investment.
The investment is reported at nil or zero value

Impairment Loss
Recognized whenever the CA > recoverable amount
Recoverable amount = higher between FV less cost of disposal and Value in use
Fair Value = Market Value
Value in Use = Present Value of estimated future cash flows

7
Investee with Preference Shares
●​ Associate (Outstanding Cumulative Preference Shares)
⇒ Compute its share of earnings or losses after deducting the preference
dividends, whether or not such dividends are declared.

●​ Associate (Outstanding Non Cumulative Preference Shares)

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

Other Changes in Equity

Arising from revaluation of PPE
Foreign Exchange Translation differences

Investment in Associate
Other Accounting Issues

Upstream and Downstream transactions

-​ transaction between investor and investee (sale of inventory/ property)

For upstream
Gikan sa ubos paingon sa taas, si associate (naa sa ubos) and nibaligya sya og
something kay investor (naa sa taas).
Unrealized Profit from these transactions must be eliminated in determining
the investor’s share in the P/L of the associate

For downstream
Si investor namaligya kay associate

NOTE: The Investor and investee are viewed as a single economic entity

*Net Income P2 M
(Unrealized Profit)_____ (100 k)
Adjusted Net Income 1.9 M
*Investor’s Share X equity interest x20% 380 k

Another Approach

Share in Net Income (20% x P2M) 400 k

Share in Unrealized Profit (20% x 100k) 20 k

8
FAR - Debt Investments
Note
Effective Rate = aka Yield Rate, Market Rate
Stated Rate = aka Nominal Rate, Coupon Rate

FVPL Amortized Cost FVOCI

Initial Fair Value Cost (FV + TC) Cost (FV + TC)

Measurement

Transaction Cost Expensed Capitalized Capitalized

@ Initial
recognition

Interest Income Face Amount X NR Carrying Value X Carrying Value X

ER ER

Interest Collected/ Face Amount X NR Face Amount X NR Face Amount X NR

to be collected

Year - End FV at Year End Carrying Value FV at Year End

Measurement under EIM

FV changes P/L N/A OCI

Disposals (SP - CA) P/L P/L OCI to P/L

FS Presentation Current Asset Non CA Non CA

Table Summary for FVPL, FVOCI, and Inv. in Associate

FVPL FVOCI Inv. in Assoc.

Initial Fair Value Cost (FV + TC) Cost (FV + TC)

Measurement

Transaction Cost Expensed Capitalized Capitalized

@ Initial
recognition

Cash Dividends Dividend Income Dividend Income Liquidating

from Investee at P/L at P/L Dividends
(reduction to FV)

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Share in P/L of the N/A N/A *Profit - Inv. Inc.
investee (P/L) addition to
CV
*Loss - Inv. Loss
(P/L) reduction to
CV

Year End FV at Year End FV at Year End GR: CV using

Measurement equity method
unless impaired
(CA > RA = IL)

FV changes P/L OCI N/A

(reported at)

Disposal (G/L on P/L Reclassification: P/L

Sale) OCI to RE

FS Presentation Current Asset Non CA Non CA

Subj. to NO NO YES
Impairment
Testing

Discontinuance of Equity Method - change from equity

Ceases to have significant influence
Consequently, account the INV. as any of the ff.
a.​ Financial asset @ FVPL
b.​ Financial asset @ FVOCI
c.​ Non Marketable Inv. @ cost or INV. in unquoted equity instrument

Measurement after loss of significant influence

⇒ retained investment in associate @ Fair Value

Included in Profit or Loss

⇒ [difference between] CA of retained investment at the date the significant
influence is loss & FV of the retained investment
⇒ [difference between] Net Proceeds from the disposal of part of the
investment & CA of the investment SOLD

10
Problems: 1
Problem #1: Investment in Associate
Czar company acquired a 40% interest in IIA: 2,420,000
FIlm company for P1.7M on Jan. 1, 2019. Inv. Inc.: 260k
The shareholder’s equity of film company
on Jan.1 and Dec. 31 as follows: Problem #2

Jan 1 Dec. 31
At the beginning of the current
year, Disgust company purchased 30k
Share Capital P3M P3M
shares of an investee’s 200k outstanding
Revaluation 1.3M
Surplus ordinary shares for P6M . On the date,

Retained Earnings
the carrying amount of the acquired
1M 1.5M
shares was P4M.
The entity attributed the excess of
On Jan. 1, 2O19, all the
cost over CA to patent with the
identifiable assets & liabilities of
remaining useful life of 10 yrs.
Film Company were recorded @FV
During the year, Disgust company’s
Film recorded profit of 650k after
officers gained a majority on the
tax expense of 350k and paid dividends
investee’s BOD. The investee’s reported
of 150k to shareholders during the
earnings of 5M for the year and paid a
current yr. (gibayran na ang tax)
dividend of 3M at year-end.
The revaluation surplus is the result
of the revaluation of land recognized by
Journal Entries
FIlm Company on Dec. 31, 2019
IIA 6M
Additionally, depreciation is provided
Cash 6M
by Film Company on the diminishing
Inv. Inc. 2OOK
balance method whereas Czar company uses
IIA 2OOK
straight line method.
IIA 75Ok
Had Film Company used the straight
Inv. Inc, 75Ok
line, the accumulated depreciation would
Cash 45Ok
have increased by P200k. The tax rate is
IIA 45Ok
30%.
Journal Entries:
Answer: Investment Income 55Ok
IIA 1.7M
IIA 6.1M
Cash 1.7M
IIA 260k
Inv, Inc. 260k
Cash 60k
IIA 60k
IIA 520k
RS - Film Comp. 520k
Problem #3 Problem #4
Alpha Company acquired 20,000 shares At the beginning of the current
of beta company on Jan. 1, 2019 at P120 yr, Cynosure Company purchased 40% of
per share. Beta company had 80,000 the ordinary shares of another entity
shares outstanding with a CA of for P3.5M when the net assets acquired
8.000,000.. amounted to P7M.
The difference between the CA and FV At acquisition date, the CA of the
of Beta company on Jan. 1, 2019 is identifiable asset and liabilities of
attributable to a broadcast license the investee were equal to their FV,
Intangible Asset. except for equipment for which the FV
Beta Company recorded earnings of was P1.5m greater than CA and Inventory
P3.6M and 3.9M for 2019 and 2020, whose FV was P500k greater than cost.
respectively, and paid per-share The equipment has a remaining life
dividends of P16 and P20, respectively. of 4yrs and the inventory was sold
Alpha Company has a 20-year during the current yr.
straight-line amortization policy for The investee reported net income of
the broadcast license. P4M and paid 1M dividends for the
current yr.
20k/80k = 25%
20k @120 = 2,400,000 Shr in Profit 1.6M
8M X 0.25 = 2,000,000 Excess of Cost over CA
400,000 Equipment (150k)
Investment Income for 2019: Inventory (200k)
(3.6M x 25%)-(400k/20) = 880k Excess of NEt FV/ Cost 100k
Investment Income for 2020: Net Investment Inc. 1,350,000
(3.9M x 25%)-(400k/20) = 955k
Compute Net FV over Cost:
Investment in Associate - NCA Cost 3.5M
CA 2.8M
2.4M
720k Excess of cost over CA 700k
1.875M 40k
Equipment (600k)

3,515,000 Inventory (200K)

Excess Net FV / Cost (100k)
Problem # 5 Investment in Associate:
On Jan. 1, 2016, Bypass Company Special Accounting Issues (Upstream &
acquired as a long term investment for Downstream)
7M a 40% interest in an investee when
the FV of the net assets was P17.5M. The
investee reported the ff net losses:
2016 5M
2017 7M
2018 8M
2019 4M
On Jan. 1, 2018, Bypass Company made
cash advances of P2M to the investee. On
Dec. 31, 2019, it is not expected that
Bypass Company will provide further
financial support for the investee

c. On Dec. 1, 2020, Alta Company sold an

2016
inventory to Glorious co. for P2.8M. The
IIA 7M
inv. had a cost of P2M and was still on
Cash 7M
hand on Dec. 31, 2020.
Loss on Inv. 2M
IIA 2M
2017
2019 Net Income 2M
Loss on Inv. 2.8M
Gain on Sale of Eqmt (300k)
IIA 2.8M
<Unreal. gain (elim)>
2018
Depreciation 30K
Advances to Asso. 2M
<Realized (add)>
Cash 2M
Adjusted Net Income 1.730M
Loss on Inv. 3.2M
40%
IIA 2.2M
Share in Profit 2019 692k
Advances to Asso. 1M
2019
Loss on Inv. 1M 2020 Net Income 3M
IIA 1M Depreciation from 2019 30k
Gain on Sale of Eqmt (400k)
Depreciation 40k
<Half of the yr (80k/2)>
Profit in Inv. (800k)
<still on hand (deduct)>
Adjusted NI 1.870M
 Note: The Revaluation Surplus is a debit
40% to IIA and credit to RS, (straight to
Share in Profit 2020 748k equity).

Journal Entries Cost. 3.2M

1/1/19 CA. 1.8M
IIA 5M Excess 1.4 M
CAsh 5M Undervalued eqpt. 900k
12/31/19 < FV>CA (3M x 30%) >
IIA 692k Goodwill. 500k
Inv. Inc. 692k
Cash 320k 2020 Net Income. 4M
IIA 320k Unrealized Profit-Inv. (600k)
12/31/20 Adjusted Net Income. 3.4M
IIA 748k
Inv. Inc. 748k 30%
Cash 400k Share in Profit. 1.020M
IIA 400k Amortization of
excess of cost (180k)
Investment Income. 840k

1/1/20
IIA. 3.2M
Cash. 3.2M
12/31/2020
Shr in Pr
IIA. 1.020M
Inv. Inc. 1.020M
Dividend
Cash. 450k
IIA. 450K
Amort
Inv. Inc. 180k
IIA 180k
RS
IIA. 600K
RS. 600K
Problem #3 10/01/2020
Change from Cash 375k
⇒ Equity MEthod ⇒ Fair Value Method Dividend Income 375k
From big interest to small 12/31/2020
Unrealized Loss - OCI 600k
FA- FVTOCI 600k

Another Problem #4
⇒ FVOCI ⇒ Equity Method
From small interest to big
On Jan. 1, 2019, Fame Company
acquired a 10% interest in an investee
for P5M. The INV. was accounted for
@FVOCI. The FV of the investment was
5.5M on Dec. 31, 2019 and 6m on Dec.
1/1/2019 31, 2020.
IIA. 8M On Jan. 1, 2021, the entity acquired
Cash. 8M
a further 20% interest in the investee
IIA. 1.5M
for P11M. On such date, the CA of the
Inv. Inc. 1.5M
net assets of the investee was P40M.
Cash. 600k
The FV of the net assets of the
IIA. 600k
investee is equal to CA, except for an
6/30/2020 equipment whose FV exceeds CA by 5M.
IIA. 1.8M Equipment uselife life of 5 yrs.
Inv. Inc. 1.8M
The investee reported net income of
7/1/2020
P9M for 2021 and paid dividend of P4M
Cash. 6M
on Dec.31,2021. No dividends were paid
IIA. 5.350M
by investee in 2019 & 2020.
Gain on Sale of Inv. 650k

1/1/19
IIA 1.15M
FA-FVOCI 5M
Gain from remeasurement 1.15M
Cash 5M
FA-FVOCI 6.5M
IIA 6.5M
12/31/19
10.7M / 2 = 5.35M
FA-FVOCI 5OOk
Unreal. Gain - OCI 5OOk​
CA = 5.35M
12/31/20
FV = 6.5M
FA-FVOCI 5OOk
= 1.15M increase in FV
Unreal. Gain - OCI 5OOk
1/1/21 Another Problem; From FVOCI to Equity
Unreal. Gain - OCI 1M Method
Retained Earnings 1M On Jan. 1, 2019, Mega Company
acquired 10% of the outstanding ordinary
The Unrealized gain should be shares of Penny Company for P4M. The
transferred to retained earnings the investment was appropriately accounted
moment it reclassifies to the equity for under cost method
method. But wlang transfer na mahitabo On Jan 1, 2020, Mega gained the
if FV through P/L. ability to exercise significant
influence over financial and operating
IIA 11M control of Penny by acquiring an
Cash 11M additional 20% of Penny’s outstanding
IIA 6M ordinary shares for 10M.
FA-FVOCI 6M The FV Penny’s net assets equaled
CA. The FV of the 10% interest on Jan.
12/31/2020 1, 2020 was P6M.
IIA 2.7M For the yrs ended Dec. 31, 2019 and
Inv. Inc. 2.7M 2020, the investee reported the ff:
Cash 1.2M
IIA 1.2M ​ 2019 2020
Inv. Inc. 300k Dividend Paid 2m 3m
IIA 300k Net Income 6m 6.5m
Computation:
Cost (11M plus 6M) 17M 2020
CA ( 40M x .3 ) 12M Cost (10M plus 6M) = 16M
Excess of Cost over CA = 5M Share in Profit 1.95M
Equipment (5m x .3) 1.5M Dividends (900k
Goodwill 3.5M CA 12/31/2020 17.05M

CA of IIA 18,200,000
 Acclaim Company purchases 2.4k 100k
shares of another entity as 600 33k
permanent investment. 3.0k 133k
01/02/21
2k shares @ 50 100k Selling Price 180k
12/20/21 CA (133k)
3k shares @ 66 198k Gain on Sale 47k
Average approach
Transactions for 2022 Cash 180k
July 15 Received cash dividend of Investment in Shrs 149k
P5 per share Gain on sale of Inv. 31k
Dec. 15 Received 2O% share
dividend SP 180K
Dec. 28 Sold 3k shares @60 per CA (3k x 49.67) (149K
share. Gain on Sale 31K
(Use FIFO & Ave.)
Journal Entries
07/15/22
Cash 25k
Div. Inc. 25k
12/15/22
2.4k @[41.67] 100k
3.6k @[55] 198k
6.0k @49.67 298k
Memo Entry:
Received 1k shares from 20%
share dividend of shares held, a
total of 5k shares.
12/28/22 (FIFO Approach)
Cash 180k
Inv. in shrs 133k
Gain on Sale of Inv. 47k
A. At the beginning of current yr, IIA

an entity purchased 40% of the 9.5M 300k

outstanding ordinary shares of another 4M. 800k
1.6M
entity for P9.5M when the net assets of
the investee amounted to P15M. 10.8M

At acquisition date, the CA of the

identifiable assets and liabilities of Investment Income
the investee were equal to their FV, 4M - 300k - 800k = 2.9M
except for Equipment whose FV was 3M Land wla sya giapil sa IIA because it’s
greater than CA, Land whose FV was P2.5M not yet SOLD
greater than cost and Inventory whose FV
was P2M greater than cost. B. Problem 16-2 (ACP) Distraught
The equipment had a remaining life of Company provided the following
4 yrs. The land was unsold and the chronological transactions:
inventory was sold during the current 1. Distraught Company acquired 40,000
year. ordinary shares of Aye Company at P50
The investee reported Net Income of per share.
P10M, paid P4M Cash Dividend and issued 2. The Aye Company shares are exchanged
10% share dividend during the current in a 5-for 1 split.
year. 3. Received a preference share dividend
of 1 share for every 10 ordinary shares
a.​ The excess of cost attributable held. Ordinary share is selling
to depreciable assets is ex-dividend at 15 and preference share
amortized over the remaining life is selling at 10.
of the asset. 4. Received a dividend in kind of 1
b.​ The excess of cost attributable ordinary share of Bee Company, market
to land & inventory are sold. price, P6, for every four Aye ordinary
shares held.
Initial Cost 9.5M 5. Sold 80,000 ordinary shares of Aye
CA of NA acquired (6.0M Company at P15 per share.
Excess Cost 3.5M
Equipment (3.4M x 40%) (1.2M)
Land (2.5M x 40%) (1.0M)
Inventory (2.0M x 40%) (800K)
Goodwill 500k
Topic #2: Inv. in Bonds
Investment in bonds

Main source of benefit: INTEREST

Tab 4