INVESTMENTS IFRS 9, PAS 32, 39, 28

Definition Investments are assets held by an enterprise for the accretion of wealth through distribution such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise such as those obtained through trading relationships. Reasons for Investment 1. For accretion of wealth interest, dividends, royalties 2. For capital appreciation land and real estate investment 3. For ownership control investments in subsidiaries 4. For meeting business requirements sinking fund, preferred stock redemption 5. For protection cash surrender value. Classification of Investments 1. Current readily realizable and are intended to be held for not more than one year. 2. Non-current intended to be held for more than one year or are not expected to be realized within twelve months after the balance sheet date. Forms of Investments 1. Debt Securities 2. Equity Securities Debt Securities 1. Financial instruments issued by a company to raise funds 2. Represent creditor relationship with an enterprise 3. Has a maturity value representing the amount to be repaid to the debt holder at maturity 4. Has an interest rate and specifies periodic interest payments 5. Has a maturity date indicating when the debt obligation will be redeemed. Equity Securities 1. Represent ownership interest in a company 2. Shares of stock that typically carry with them the right to collect dividends and to vote on corporate matters 3. Include shares, rights, warrants or options to acquire or dispose of ownership shares at a fixed or determinable price 4. Do not include redeemable preference share, treasury share and

convertible debt. Classification of Investment in Equity Securities 1. Trading securities or financial assets at fair value through profit or loss - equity securities purchased with the intent of selling them in the near future. These are acquired for the purpose of generating profit from short-term fluctuations in price. Acquired principally for the purpose of selling or repurchasing it in the near term. On initial recognition, it is part of a portfolio of identified financial assets that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. 2. Investment in equity securities or financial assets at fair value through other comprehensive income (OCI) equity securities that are not considered trading securities and are not accounted for using the equity method. Generally, these equity securities are held indefinitely and will be available for sale when the need for liquid funds arises during the operating cycle. 3. Investment in associate equity securities purchased with the intent of being able to control or significantly influence the operations of the investee. 4. Investment in unquoted equity instruments equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured. Measurement of Equity Securities Investment Initial Measurement An entity shall measure a financial asset at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. Subsequent Measurement 1. After initial recognition, an entity shall measure a financial asset either at fair value or amortized cost depending on the entitys business model for managing financial assets. 2. The business model for managing financial assets may be: To hold investments in order to realize fair value changes. To hold investments in order to collect contractual cash flows. 3. A financial asset shall be measured at amortized cost if both of the following conditions are met:

 The business model is to hold the financial asset in order to collect contractual cash flows on specified dates. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding. In summary, the measurement bases are: 1. Trading securities or financial assets at fair value through profit or loss at fair value 2. Investment in equity securities or financial assets at fair value through other comprehensive income at fair value 3. Investment in associate at historical cost adjusted for changes in the net assets of the business. 4. Investment in unquoted equity instruments at cost Different Modes of Acquisition 1. Cash basis record at fair value which is the purchase price Note: Transaction costs such as fees and commissions paid to brokers and dealers, transfer taxes and duties are expensed if for trading securities; are capitalized if for investment n equity securities. 2. By exchanges a. Fair value of the asset given; b. Fair value of the securities received c. Carrying amount of the asset given 3. Lump-sum purchase allocate single cost using fair market values. Fair Value the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arms length transaction. The fair value of securities may be determined by one or several generally accepted methods. These include: 1. Published price quotations in an active public securities market (e.g. Philippine Stock Exchange) quoted price in the stock market. For securities listed or traded in the stock exchange, the close price is usually used for valuation purposes. For securities not listed in the stock exchange, the over the counter price may be used for determining fair value. Over the counter means broker to broker transaction. 2. Ratings by independent rating agencies;

3. Other valuation model using data inputs from active markets. IFRS 9 - Fair Value Measurement a. The best evidence of fair value is an active market. b. If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique. The valuation technique is to establish what the transaction price would have been on the measurement date in an arms length exchange motivated by normal business considerations. Valuation techniques include Using recent arms length transactions between knowledgeable, willing parties Reference to current fair value of another instrument that is substantially the same Discounted cash flow analysis Option pricing models Pro-forma Entries Acquisition of Trading securities Financial Commission Assets expense at Fair Value Cash through Profit or Loss Year-End Valuation Temporary decline Use portfolio approach Trading securities Unrealized gain on trading securities Unrealized loss on trading securities Trading xxx xxx xxx xxx xxx

Cost<FMV

Cost>FMV

xxx xxx

securities Sale of trading securities Cash Loss on sale of trading securities Trading securities Gain on sale of trading securities Investment in equity securities Cash xxx xxx xxx xxx

Acquisition of Financial Assets at Fair Value through OCI Year-End Valuation Cost<FMV

xxx xxx

Cost>FMV

Temporary decline Use portfolio approach Investment in equity securities (IES) Unrealized loss or gain in value of IES Unrealized loss or gain in value of IES Investment in equity securities Cash Loss on sale of IES Investment in equity securities Gain on sale of IES

xxx xxx xxx xxx

Sales of Investment In Equity Securities

xxx xxx xxx xxx

Unrealized loss or gain in value of IES Retained earnings Retained earnings Unrealized loss or gain in value of IES

xxx xxx xxx xxx

Note: In determining the cost of the securities sold, the following methods will be applied: FIFO and average cost. Impairment Financial assets at fair value 1. It is not necessary to assess financial assets measured at fair value for impairment. 2. There is no more impairment loss in financial asset measured at fair value. 3. If the decline in value of financial assets measured at fair value through other comprehensive income is judged to be non temporary, the unrealized loss will continue to be reported as component of other comprehensive income rather than as impairment loss. Impairment Financial assets at amortized cost 1. An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset measured at amortized cost is impaired. 2. The amount of the loss is measured as the difference between the carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. Reclassification 1. An entity shall reclassify financial assets only when it changes its business model for managing financial assets. 2. An entity shall apply the reclassification prospectively from the reclassification date. 3. The reclassification date is the first day of the reporting period following

the change in business model that results in an entity reclassifying financial asset. 4. Change in an entitys business model is expected to be infrequent. 5. When an entity reclassifies a financial asset at fair value to financial at amortized cost, the fair value at the reclassification date becomes the new carrying amount of the financial asset at amortized cost. 6. The difference between the new carrying amount of the financial asset at amortized cost and the face value of the financial asset shall be amortized through profit or loss over the remaining life of the financial asset using the effective interest method.

Financial Statement Presentation Trading Securities Current asset Investment in equity securities Non - current asset Unrealized loss on trading Other expense income securities statement Unrealized gain on trading Other income income statement securities Unrealized loss/gain in value of IES OCI - Shareholders equity (-) (debit balance) Unrealized loss/gain in value of IES OCI - Shareholders equity (+) (credit balance) Loss on sale of trading Other expense income securities/IES statement Gain on sale of trading Other income income statement securities/IES Methods of Accounting for Equity Securities Investment Level of Control Control Joint Control Significant Influence Others % 51% -100% 50% 20% - 49% Below 20% Accounting Method Consolidation Method Proportionate Consolidation or Equity Method Equity Method Fair Value Method

Control the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

Indications of Control a. Power over more than half of the voting rights by virtue of agreement with investors. b. Power to govern financial and operating policies under a statute or agreement c. Power to appoint/remove majority of directors d. Power to cast majority of votes at directors meetings or other governing body. Significant Influence the power to participate in the financial and operating policy decisions of the investee but not to control them. Indications of Significant Influence a. Representation on the board of directors b. Participation in policy making process c. Material transactions between investor and investee d. Interchange of managerial personnel e. Provision of essential technical information Fair Value Method (Investor holds less than 20% of the voting stock of the Investee.) a. Investor and investee are considered as two separate entities. a. Investment is carried at fair value. b. Investment is not affected by the operations of the investee corporation. c. A dividend declared by the investee is treated as income by the investor. Pro-forma Entries Special Concerns Receipt of Cash Cash Dividends Dividends income Accrual of Cash Dividends Dividends receivable Dividends income Asset (at fair value) Dividends income Cash xxx xxx xxx xxx

Receipt of Property Dividends Receipt of

xxx xxx xxx

Liquidating Dividends

Investment in Equity Securities (IES) *When liquidating dividends exceed the cost of investment, the excess is credited to Gain on Investment. If the investment cost is not fully recovered, the balance is written off as a loss.

xxx

Receipt of Bonus Received xxx shares representing xx %. Issue of the bonus issue on Same xxx original shares Class held. Shares now held, xxx shares. Receipt of Bonus Investment in equity securities Preference Issue of Another Investment in equity securities Ordinary Class *Allocate using fair market values. Split-Up/Split Received xxx xxx

xxx

Down

shares as a result of a xxx split up/down of xxx original shares. Stock rights Investment in equity securities *Allocate using market values. xxx xxx

Receipt of Stock Rights / Right Issue (Journal Entry Method) Exercise of Stock Rights / Rights Issue Sale of Stock Rights / Rights Issue

Investment in equity securities Cash Stock rights Cash Loss on sale of stock rights Stock rights Gain on sale of stock rights Loss due to expired stock rights Stock rights

xxx xxx xxx xxx xxx xxx xxx xxx xxx

Expiration of Stock Rights / Rights Issue

Financial Statement Preparation Stock Rights / Rights Issue Loss on sale of stock rights Gain on sale of stock rights Loss due to expired stock rights Current Assets Other expense Other income Other expense

Equity Method (Investor holds 20% to 49% of the Voting Stock of the Investee.)

a. b. c. d.

The investor and the investee is viewed as a single economic unit. Investment is initially recorded at cost Investment is increased by the net income of the investee. Investment is decreased by the net loss of the investee and by cash dividends payment of the investee. Equity Method xxx

Pro-forma Entries Fair Value Method Purchase Investm xxx of ent in Equity Securiti es Investme Cash xxx nt Receipt of Cash Cash Divide nds income xxx xxx

Investm ent in associat e Cash Cash Invest ment in associat e

xxx xxx xxx

Dividend s Receipt of Bonus Issue Net Income of investee Memo entry Memo entry

No entry

Investm ent in associat e Incom e from invest ment Loss from investm ent Invest ment in associat

xxx

xxx

Net Loss of Investee

No entry

xxx

xxx

e Amortiza tion of Excess of Cost Over Book Value Year-End Valuatio n Unrealiz ed gain/los s in value of IES Inve stment in Equity Sec OR Investm xxx ent in Equity Sec Unreal ized loss/gai n in value of IES xxx No entry No entry Income from investm ent Invest ment in associat e xxx

xxx

xxx

xxx

Excess of Cost Over Book Value 1. If the investor pays more than the book value of the net assets acquired the difference may be attributed as a. Undervaluation of depreciable assets

b. Undervaluation of non-depreciable asset c. Implied goodwill represents unquantified earning potential of the company 2. If the difference is due to an undervaluation of a depreciable asset, the difference is amortized over the remaining life of the asset. Computation of Goodwill Amount Paid (cost) Less: Book value of net assets acquired Excess of cost over book value Less: Fair market value of depreciable assets Fair market value of nondepreciable assets Implied goodwill Financial Statement Presentation Investment in Associate Income from Investment Loss from Investment Non Current Asset Other income Other expense Pxxx xxx Pxxx (xxx) (xxx) Pxxx