Chapter 7 Investments

Investments assets not directly identified with the central revenue producing activities of the
enterprise but are acquired for any of the following:
1) Earn a return on idle cash balance
2) Establish long-term relationship with suppliers and customers
3) Exercise significant influence/ control over another entity
4) Accumulate funds for future use
5) Capital appreciation
6) Future protection

Investments include:
- Investment in securities (equity / debt securities)
- Fund for long term use (plant expansion fund, equipment acquisition fund, stock
redemption fund and sinking fund)
- Investment property and cash surrender value of life insurance policies

INVESTMENTS in SECURITIES
Security interest/share in a debt/equity of another entity that is represented in a financial instrument
and is one that is being dealt in capital markets.

Equity Securities represent ownership in company/rights to acquire ownership interest at an agreed
upon/determinable price.
- Preference shares (Preferred stock)
- Ordinary shares (Common stock)
- Share warrants/Stock rights
- Call options
- Put options

Debt Securities instruments representing a creditor relationship with an enterprise
Typically have the following characteristics:
1. Maturity value
2. Periodic interest payments at fixed/variable interest rate
3. Maturity date
- Government securities (Philippine treasury bills and warrants)
- Corporate bonds
- Convertible debt and commercial paper

Substance rather than its legal form govern whether an instrument is an equity or debt
security
20% 50%

Less than 20% 20% - 50% More than 50%

INVESTMENTS in EQUITY SECURITIES
Share capital (capital stock) of other companies may be purchased by an enterprise for no. of reasons:
1. Temporary placements of excess cash and held primarily for sale in the near term to
generate income on short-term price fluctuations.
2. Obtain long term customer/supplier/ creditor relationship to secure
operating/financing arrangements with these companies.
3. Exercise significant influence or even control over the operating policies of another
entity

Convertible debt and redeemable preference shares equity securities
The extent of ownership in common stock by an investor in an investee determines the
accounting treatment for equity securities
Classification of Equity Securities



Financial Assets @ FVPL
(Trading Securities)

AFS
- Investor does not have significant
influence over the investee co.
Investment in Associate
-
- - Power to participate
- - Investor has significant
influence over the investee co.
Investment in Subsidiaries

- Power to govern
- Investor has control over the
investee co.

Available for Sale Securities
Initial recognition:
purchase price + transaction cost
Transaction subsequent to initial recognition:
Share split reduction in the par/stated value of share capital accompanied by a proportionate increase
in the no. of shares outstanding
- Does not affect equity of shareholder in the issuing corporation nor its total SHE
- No formal entry needed (memo entry only indicating change in no. of shares)

Dividends corporate distributions to its shareholders proportionate to the nos. of shares held by the
latter
a) Cash dividends
- Recognized as income/receivable
3 significant dates:
1. Declaration date BOD declares distribution of dividends
2. Record date Co. draw a list naming the shareholders who are entitled to dividends
3. Payment date dividends are distributed to shareholders
Declaration date Record date
- Shares sell dividends-on
- Market price of a share includes amount of dividend
After Record date
- Shares sell ex-dividend
- Market price does not include the amount of dividend
b) Bonus Issue/Share Dividend
- Increases no. of shares held by each shareholder without any change in the total SHE/net assets of
distributing corporation
- Memo entry only
- Merely adjust the carrying value/ share held by the investor
If the bonus issue is in the form of another class of share capital, a part of the carrying value of the
original investment will be transferred to the new shares received in another class. The allocation
based on the relative FMV.
c) Property Dividends
- Dividends distributable in the form of the investees NCA
- Recorded as Dividend revenue at the assets FMV

Stock rights
Pre-emptive right right of shareholder to maintain his proportionate ownership in the co.
Share warrant - certificate that evidence a shareholders pre-emptive right
3 significant dates:
1. Declaration/Announcement of warrants Date
2. Issuance Date
3. Expiration Date
Declaration date Issuance date
- Share and right cannot be separately bought/sold (selling rights-on)
Issuance Declaration date Expiration
- Shares and rights may be bought/sold separately (selling ex-rights)
Share warrant received by the investor qualifies as a derivate as defined by PAS
39:
1. The value of the warrant depends on the movement of the value of the issuing
corporations share capital.
2. It requires no investment for the holder, as the same is received as a result of the
original shares held by the investor.
3. The warrant is settled at a future date through exercise by the holder or through
expiration.
o Rule on measurement of derivates shall apply to stock rights
measured at Fair Value except for those derivates that are linked to
equity securities whose fair value cannot be reliably measured.
o Derivates are classified as Financial Assets at FVPL.
Theoretical Market Value of Stock Rights
- May be use as initial measurement basis in the absence of an actual market value of the stock
right at the ___ of distribution

Ex -rights
TMV =



Rights-on
TMV =




Presentation and Measurement in SFP:
- Non-current asset measured at Fair Market Value
- Only charge in Market Value recognized as other comprehensive income outside of P/L in SCI
- Market adjustment AFS if debit addition to AFS balance
if credit deduction
- Net Unrealized Gain/Loss on AFS cumulative bal part of SHE forming part of reserves
credit addition, debit deduction

Disposal of AFS:
Net selling price recorded cost of securities - amount of Realized Gain/Loss
- Balance in both market adjustment and net unrealized gain and losses account pertaining to the
securities sold are eliminated
- SP > Cost of AFS
Cash (Net SP)
Gain on Sale of AFS
AFS
- Prior to sale CV (FMV as of end of last b/s date) > Cost (entry for elimination of Unrealized G/L)
Net Unrealized G/L on AFS
Market Adjustment AFS
Exception to the rule on measurement at Fair Value:
AFS without active market are measured, after initial recognition at cost.

Impairment of AFS:
Entity shall asses at each reporting date whether there is any objective evidence that a financial asset is
impaired.
Objective evidence that there is impairment in AFS includes observable data that come to the
attention of the holder of the securities about the following events:
a) Significant financial difficulty of the issuer.
b) Disappearance of an active market for the securities because of financial difficulties of the issuer of
the securities.
c) Significant changes that adversely affect the technological, economic or legal environment in
which the issuer operates.
d) Prolonged decline in the fair value of the securities.
Amount of any previous decline in market value of the securities that has been recognized
directly in equity (balance of Net Unrealized G/L on AFS) shall be removed from equity
and shall be recognized in P/L/
Market Adjustment AFS
Net Unrealized G/L on AFS
original cost current fair value any impairment loss previously recognized
Reversal of Impairment:
Market Adjustment AFS
Unrealized Gain/Loss on AFS

Trading Securities
Initial recognition:
purchase price = FMV at date of acquisition
transaction cost directly attributable to acquisition = expense
Dividends, Share Split and Stock rights on Trading Securities
Similar procedures applied when dividends and share splits relate too TS.
However when stock rights are received on shares classified as Financial Assets at FVPL, there is no need
to value the stock rights separately.
Presentation and Measurement in SFP:
- Current asset measured at Fair Value
- Financial Asset at FVPL
- Any change in the Fair value reported as Gain/Loss in P/L section of SCI
- Unrealized Gains/Losses on TS if credit balance part of income from continuing operation
in P/L section of SCI

Disposal of TS:
Net SP CV of securities
Purchased in prior period CV = Market value at the end of most recent b/s date
Purchased in same year of disposal CV = Initial amount recorded

Investment in Associate
- Shares of stock give the investor significant influence over the investee, the investee is called associate

Existence of significant influence evidenced in 1 or more of the following ways:
a) Representation in BOD/ equivalent governing body of the investee
b) Participation in policy making processes, including participation in decision about dividends/other
distributions
c) Material transactions between the investor and investee
d) Interchange of managerial personnel
e) Provision of essential technical info.
Judgment is frequently required in determining whether an investment of 20% or more results in
significance influence.
- Accounted for using equity method when not held exclusively for disposal within 12 mos. from
acquisition date
Initially recorded at cost
Investments CV increased by investors proportionate share of earnings
Investments CV decreased by investors proportionate share of losses and dividends declared by
investee
Presentation in FS:
Investment in Associate
- Non-current Asset
- Separate line item
Share in Profit in Associate
- Separate line item on SCI in P/L section

Other Issues:
Difference in Reporting Dates
- Maximum difference for the 2 entities reporting date is 3 mos.
Difference in Accounting Policies
- Investors FS shall be prepared using uniform accounting policies for like transactions and events
in similar circumstances
Associate has Preference shares
- When the associate has Outstanding P/S, the measurement of the investors share of profit from
associate shall be based on the associates profit after making adjustments for the dividends on
preference shares.
- If it has outstanding cumulative P/S, the profit shall be adjusted by deducting the required
current preference dividends whether/ or not declared.
- If it has an outstanding non-cumulative P/S, the associates profit shall be reduced by the amount
of preference dividends declared during the period.

INVESTMENTS in DEBT SECURITIES
Financial instruments issued by a company and typically have the following characteristics:
a) Maturity Value (MV)
b) Interest rate that specifies the periodic interest payments
c) Maturity Date
Ex. Bond certificates certificates of indebtedness issued by a corporation/government agency
guaranteeing payment of a principal amount at a specified future date plus periodic interest.
- May sell at a price different from the face value of the instruments

Bonds Market Value
- Result of an interaction of variety of forces such as the current interest rates, expected future
interest rates and stated rate of interest on the investment.

Rate of interest
Stated on bond
= Rate of return desired by investors
(effective, yield/market rate)
will sell at face value
Stated rate > Market rate will pay more than face value
(bond premium)
Stated rate < Market rate purchaser will pay less than
face value (bond discount)

Bond Price Computation/Present Value
1)
Present Value of Maturity Value (Face Value x PVF )
+ Present Value of Interest Payment (Interest per period x PVAF)
Total Present Value/ Bond Price

PVF =

PVAF =
()

2) Bond Price = Face Value Discount/+Premium
Discount/Premium = Difference in interest rates x Face Value x PVAF

Classification of Debt Securities
1) Trading Securities (Financial Assets at FVPL)
2) AFS
3) HTM

Held to Maturity
- Non derivative financial assets with fixed/determinable payments and fixed maturity that the entity
has positive intention and ability to hold to maturity other than those that the entity upon initial
recognition designates as at Fair Value through P/L or as AFS.
- Positive intent to hold the securities until maturity date
- Ability to hold the until maturity date
Entity shall not classify an investment as HTM if the entity has during the current financial
year, sold/reclassified more than an insignificant amount of HTM investments before
maturity except:
a) The sale/reclassification is so close to maturity that changes in market interest rate would not have
significant effects on the instruments fair value.
b) The sale occurs after the entity has collected substantially all of the financial assets original
principal through scheduled payments, or the sale is attributable to an isolated event that is
beyond the entitys control, is non-recurring and could not have been reasonably anticipated by
the entity.

Initial recognition:
purchase price + transaction cost
- Periodically amortize the difference between COI and its face value over the term of debt instruments
Amortization gradually adjust the original cost of the instrument, such that on maturity date,
its carrying value equals its face value
PAS 39 requires the use of effective interest method for the amortization of
discount/premium on HTM

Interest income during
interest period
= CV of instrument x Actual interest rate/ Effective
interest rate/ Yield

- Bonds purchased at more/less than face value premium/discount not shown separately but included as
part of COI/netted against investment cost
If the bond year does not coincide with accounting period, the amortization of
premium/discount must be updated at each reporting date.
If bond investment is purchased between interest payment dates, buyer should pay, in
addition to the purchase price of the bonds, amount of accrued interest from the last
interest payment date.

Disposal of HTM
Sold before maturity, investor shall update the amount of premium/discount amortization. Amortization
should be taken up until date of sale up to date the CV of investment sold.
Gain/Loss sale of investment
- P/L (other operating income/expense)
When an enterprise sells more than an insignificant amount of HTM before maturity date,
the ability of the company to hold any securities until maturity is tainted. Any remaining
HTM shall be reclassified as AFS. In addition, the enterprise cannot designate during the
current financial year and the next 2 years, any acquired debt securities as HTM.
However the following sale of HTM will not taint the enterprises ability to hold the
securities as HTM.
a) Sale of HTM that is so close to maturity or financial assets call date (for example, less than 3
mos. before maturity date) that changes in the market rate of interest would not have a
significant effect on the financial assets fair value
b) Sale that occurs after the entity has collected substantially all of the financial assets original
principal through scheduled payments/prepayments.
c) Sale that is attributable to an isolated event that is beyond the entitys control is non-recurring
and could not have been reasonably anticipated.

Impairment of HTM
- Recorded either directly crediting HTM or using allowance account
Asset CV (amortized cost)
- PV of estimated future cash flows
discounted at the financial assets original
effective interest rate at initial recognition
Impairment Loss

- Amount of loss shall be recognized in P/L
If in subsequent period, the amount of impairment loss is recovered and the recovery can
be related objectively to an event occurring after the impairment was recognized, the
previously recovered impairment loss shall be reserved either directly or by adjusting the
allowance method.
The reversal shall not result in a carrying amount that exceeds what the amortized cost
could have been had the impairment loss not been recognized at the date the impairment
is reversed.
HTM (Allowance)
Recovery in Market Value of HTM

Financial Assets at FVPL
Initial recognition:
purchase price = FMV at date of acquisition
transaction cost directly attributable to acquisition = expense
Interest income instruments stated interest rate
- Adjusted to market value at b/s date
- Change in Market Value taken to P/L
Available For Sale
Initial recognition:
purchase price + transaction cost
- Similar to HTM any discount (net of transaction cost) or premium (inclusive of transaction cost
incurred upon initial recognition) are amortized using effective interest method
At each reporting date, debt securities classified as AFS are measured at Fair value, with
change in faire value taken to comprehensive income.
Cumulative credit balance in Unrealized Gains/Losses on AFS account is presented as
component of SHE
Disposal of AFS:
- Any premium/discount shall be updated up to date of sale
selling price amortized cost = gain/loss on sale
- Same with derecognition of AFS equity security the accounts market adjustment (if used) and
unrealized gain/loss on AFS carried in the equity shall be cancelled.
Impairment of AFS:
- Cumulative loss that had been recognized directly in equity shall be removed from equity and
recognized in P/L
- Market value after impairment shall be replaced cost of the securities
- The accounting procedures same as its equity securities.
If in a subsequent period, the fair value increases and the increase can be objectives related
to an event occurring after the impairment loss was recognized in profit/loss, the
impairment loss shall be reversed with the amount of reversal recognized in P/L
The amount of reversal taken to profit/loss shall not bring the amortized cost of the
securities to that amount had no impairment loss been previously recorded.

BIFURCATING A COMPUND FINANCIAL INSTRUMENT
Compound Financial Instrument one that possesses a debt and equity characteristics
Ex. Bonds with non-detachable share warrants
Convertible bonds
- Those that would be exchanged with the issuing entitys O/S at the option of the bondholders

Bifurcation the process of splitting the purchase price of a compound financial instrument into equity
and debt component

Equity component (share warrant/____) - derivative recognized at fair value
Debt component purchase price fair value of derivative