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INVESTMENT IN EQUITY SECURITIES
Technical Knowledge
_- To recognized the acquisition of equity investments
- To determine the forms of equity investments.
- To understand the recognition of cash dividends, property dividends, stock dividends,_ _and liquidating dividends.
- To understand the issues related to equity investments, such as share split, special_ assessment, redemption of shares and share rights. A. Introduction 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 enterprise. The account "investment in stock" may also be used to describe the purchase of equity securities. Equity securities represent ownership shares such as ordinary shares, preference share, and other share capital. A capital share is the ownership interest or right of a shareholder in an enterprise. This right pertains to the share earnings, election of directors, subscription for additional shares and share in net assets upon liquidation. B. Acquisition of Equity Investments When a financial asset is recognized initially, an entity shall measure it a fair value plus transaction costs that are directly attributable to the acquisition. The fair value is usually the transaction price, meaning, the fair value of the consideration given. As a rule, the transaction costs that are directly attributable to the acquisition of the financial asset shall be capitalized as cost of the financial asset. However, transaction costs directly attributable to the acquisition of financial asset held for trading or financial asset at fair value through profit and loss shall be expensed immediately. C. Acquisition by Exchange If the equity securities are acquired in an exchange, the acquisition cost is determined by reference to the following in the order of priority: a. Fair value of asset given b. Fair value of asset received
c. Carrying amount of asset given D. Lump Sum Acquisition If two or more equity securities are acquired at a single cost or lump sum, the single cost is allocated to t securities acquired on the basis of their fair value. If only one security has a known market value, an amount is allocated to the security with a know market value equal to its market value. The remainder of the single cost is the allocated to the other security with no known market value. E. Investment Categories Investment in equity securities are accounted for as one of the following categories: a. Trading securities or financial assets at fair value through profit or loss. b. Financial assets at fair value through other comprehensive income. c. Investment in associate. d. Investment in subsidiary. e. Investment in unquoted equity instrument. F. Sale of Equity Securities Ordinarily, on disposal of an investment, the difference between the consideration received and the carrying amount of the financial asset shall be recognized in profit and loss. When equity securities are of the same class acquired on different dates at different costs, a problem will arise as to the determination of cost of securities sold when only a portion of securities is subsequently sold. In such a case, the entity shall determine the cost of the securities sold using either the FIFO or average cost approach. G. Cash Dividend If the equity securities are measured at fair value through profit or loss, or at fair value through other comprehensive income or at cost, dividends earned are considered as income. a. When the cash dividends are earned but not received: Dividends receivable xx Dividend income b. When the cash dividends are subsequently received: Cash xx
Dividend income Gain on sale of investment J. Property Dividend Property dividends or dividends in kind are dividends in the form of property or noncash assets. Property dividends are also considered as income and recorded at fair value. Entry: Noncash assets xx Dividend income Illustration 1: X company distributes its holding of 10,000 shares in Y Company as property dividend. The shares of Y company have a market value of $100 per share. A shareholder receives 500 shares of Y Company as property dividend from X Company. The property dividend is recorded as follows: Investment in equity securities (500 x 100) $ 50, Dividend income $ Illustration 2: An entity declares $100 worth of merchandise for every one share. If a shareholder owns 500 shares, the dividend in the form of merchandise would be $50,000. Entry: Merchandise inventory $ 50, Dividend income $ K. Liquidating Dividend Liquidating dividends represent return of invested capital, and therefore, are not income. The payment may be in the form of cash or noncash assets. The liquidating dividend is recognized as follows: Cash or other appropriate account xx Investment in equity securities Normally, liquidating dividends are paid when the corporation is dissolved and liquidated. L. Share Dividends or Stock Dividend Share dividends are in the form of the issuing entity's own shares.
Share dividends may be the same as those held or different from those held. Share dividends whether of the same class or different are not income. The reason is that there is no distribution of the assets of the entity. Share dividends of the same class are recorded only by means of a memorandum entry on the part of the shareholder. An example of a memorandum entry for the receipt of share dividend is: "Received 2,000 shares representing 20% share dividend on 10,000 original shares held. Shares now held, 12,000 shares." Share dividends do not affect the total cost of the investment but reduce the cost of the investment per share. Illustration: A shareholder owns 10,000 shares costing $120 each or a total cost of $1,200,000. Subsequently, the shareholder receives 20% share dividend or 2,000 shares. The effect of this share dividend may be shown as follows: Cost per Shares share Original shares 10,000 $ 120 $ Share dividends 2,000 0 12,000 100 M. Share Dividends Different from Those Held A shareholder may receive a share dividend which is different from the original shares. Illustration: A shareholder owns 10,000 ordinary shares costing $800,000. Subsequently, the shareholder receives 10% share dividend in the form of preference share. The market value of ordinary share is $150, and the market value of preference share is $100. The original cost of $800,000 is allocated as follows: Market Value Fraction Ordinary shares (10,000 shares x 150) $ 1,500,000 15/16 $ Preference share (1,000 shares x 100) 100,000 1/ 1,600, The receipt of the preference shares as share dividend on the ordinary share investment is recorded as follows:
P. Share Split A corporation may restructure its capital by effecting a change in the number of shares without capitalizing retained earnings or changing the amount of its legal capital. This restructuring is known as share split. Share split may be split up or split down. Split up is a transaction whereby the outstanding shares are called in and replaced by a larger number accompanied by a reduction in the par or stated value of each share. Illustration: A shareholder owns 10,000 shares and the share is split up 5-for-1. In this case, the shareholder receives 50,000 new shares in exchange for the 10,000 original shares. Split down is the reverse of split up. Using the above illustration. If the share is split down 5-for-1, the shareholder will receive 2,000 new shares in exchange for the 10,000 old shares. Share split 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 larger or smaller number of shares. Only a memorandum entry is made to record the receipt of new shares by virtue of share split. S. Redemption of Share Shares, particularly preference shares may be called in for redemption and cancellation by the entity issuing them. On the part of the shareholder, the redemption of share is recorded in the same manner as sale of share. The redemption price is treated as the sales price. Illustration: For example, if a shareholder acquires 10,000 preference shares for $100 per share, the entry is: Investment in preference share $ 1,000, Cash $ If subsequently, the preference shares are called in by the issuing entity at $110 per share, the entry to record the redemption is: Cash (10,000 x 110) $ 1,100, Investment in equity securities $ Gain on redemption of investment T. Stock Right or Share Right A stock right or preemptive right is a legal right granted to shareholders to subscribe for new shares issu
by a corporation at a specific price during a definite period. The IAS term for stock right is "right issue" The ownership of stock rights is evidenced by instruments or certificate called share warrants. Stock rights can be accounted for separately or not separately. In the absence of any rule, the stock rights can be accounted not separately. When stock rights are announced or declared there are three important dates just like dividends. a. Date of declaration b. Date of record (also the date of issuing the warrants) c. Expiration date Example: "The Board of Directors in their meeting on December 15, 2017 approved to issue stock rights to shareholders of record on January 15, 2018, entitling the shareholders to acquire one shar at $100 par for every five shares held, the right to expire on March 31, 2018". This means that the share and the right are inseparable and treated as one. In the event of subsequent sale prior to the record date, the difference between the sales price and the carrying amount of the investment is simply considered as gain or loss on sale of investment. Illustration: A shareholder owns 5,000 shares costing $500,000. Subsequently, the shareholder receives notice of stock rights to subscribe for 1,000 shares at par value of $100 per share. Prior to the issuance of the share warrants, the shareholder sells the investment for $750,000. Entry: Cash $ 750, Investment in equity securities $ Gain on sale of investment Between the date of record and expiration date, the share are said to be selling ex-right since the date o record is also issuance date of the warrants. This means that the share can now be sold separate from the right and vice versa. Illustration: A shareholder acquired 10,000 shares costing $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. Entries:
1. Original investment Investment in equity securities $ 1,800, Between the date of declaration and date of record the shares are considered to be selling right-on.
When the share is selling Ex-right Market value of share ex-right minus subscription price Number of rights to purchase one share Illustration: A shareholder acquired 10,000 shares costing $2,500. Subsequently, the shareholder received stock rights to subscribe for new shares at $150 per share for every five rights held. The market value of the share is $210 per share. The right has no known market value. I this case, in the absence of the market value of the stock right, the theoretical or parity value is determined to approximate the fair value of the stock right the time of acquisition.
1. If the market value of the share of $210 is right-on: 210 - 150 = VALUE OF 1 RIGHT 5 + 1 =
= $10 per right Thus: Allocation cost is Cost of original investment (10,000 x $250) Theoretical value of rights (10,000 x $10) Remaining cost of original investment
2. If the market value of the share of $210 is ex-right: 210 - 150 = VALUE OF 1 RIGHT 5 =
= $12 per right Thus: Allocation cost is Cost of original investment (10,000 x $250) Theoretical value of rights (10,000 x $12) Remaining cost of original investment
Illustration - Not accounted for separately: A shareholder acquired 10,000 shares for $1,500,000. Subsequently, the shareholder received 10, stock rights to subscribed 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 the 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, Cash $ b. To record the receipt of the stock 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, Cash If the stock rights are not exercise but sold for $150,000 the sale the sale is simply recorded as: Cash 150, Investment in equity securities Note: No gain or loss is recognized from the sale. If the stock rights are not exercised bur expired, only a memorandum is necessary to record the expiratio Any subsequent transaction affecting the shares shall be accounted for using either FIFO or average method.
m, the single cost is allocated to the as a known market value, an market value. h no known market value. categories: rofit or loss. sideration received fit and loss. at different costs, en only a portion of using either the FIFO or at fair value through d as income. earned but not received dividend receivable (D) xx dividend income (K) SUBSEQUENTLY RECEIVED cah(D) dividend receivable (K)
xx elling "dividends-on". rior to record date, ing "ex-dividend" er has the right o received payment f declaration. The acquired the right ice normally includes ally included in the nd should be credited d as basis for shareholder receives which includes the 100, of dividends is approved ansfer book of the corporation eclared shall be paid.
held. Share dividends at there is no dividen saham dalam bentuk entitas penerbit saham sendiri berupa penambahan juml morandum entry on receipt of share n 10,000 original shares the cost of the $1,200,000. ares. The effect of this Total Cost 1,200, 0 1,200, original shares. uently, the shareholder et value of ordinary Allocated Cost 750, 50, 800, hare investment is
e income at fair value of ty dividends. In the cash dividends that would he shareholder receives 1, share is $150. 150, 100, he shareholder receives re dividend are assumed to ain or loss maybe recognized. to 11,000 shares which is the eceived as share dividends. for the cash received. 100, 50,
m for stock right is "right issue" called share warrants. Stock e of any rule, the stock rights dates just like dividends. 17 approved to issue stock rights hareholders to acquire one share March 31, 2018". etween the sales price and the n sale of investment. shareholder receives notice are. Prior to the issuance of 500, 250, selling ex-right since the date of can now be sold separate from ly, the shareholder received ery five rights held. The market dered to be selling right-on.
and recorded at fair value udes the subscription price or can acquire one new share 0 per share 200, 100, Accordingly, the stock rights y would be: 100, 50, ock rights becomes worthless. 100, s derived from the market y value of the stock right. = VALUE OF 1 RIGHT
