#17 Dividends and Stock Rights
#17 Dividends and Stock Rights
#17 Dividends and Stock Rights
5,000,000
Assume that, 10,000 preference shares are received with a fair value of 60 per share and
the fair value of the 20,000 ordinary shares that originally cost 250 each is 270.
Ordinary (20,000 x 270)
Preference (10,000 x 60)
Total
Fraction / Ratio
5.4/6 (90%)
.6/6 (10%)
500,000
500,000
If the fair value of the ordinary shares is not provided, the preference share investment shall
be recorded at 600,000
2. Stock dividends will also reduce the cost per share as a result of the same or original cost
being allocated to a larger number of shares. This will of course be a factor in subsequent
sale transactions related to the investment.
If an investment of 50,000 shares is acquired at a total cost of 5,000,000 receives a 20%
share dividend distribution or a total of 10,000 additional shares, the before and after cost
per share is computed as follows:
Cost per share before share dividends (5,000,000 divided by 50,000)
Cost per share after share dividends (5,000,000 divided by 60,000)
100 / share
83.33 / share
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Ex-Dividend Date
Record Date
Payable Date
Thursday, 9/1/2016
Tuesday, 10/4/2016
Thursday, 10/6/2016
Tuesday, 10/25/2016
If shares cost the investor 1,000,000 and a dividend receivable of 100,000 is recorded on the declaration
date, selling the shares for example 1,500,000 will result in a gain of only 400,000 if sold between
9/1/2016 and 10/3/2016 because it is dividend on and 500,000 if sold between 10/4/2016 and
10/24/2016 since it is ex-dividend.
500,000
500,000
Journal Entry:
Investment in Stock Rights
Investment in Stocks
500,000
1,400,000
500,000
1,900,000
1,400,000
Journal Entry:
Investment in Stocks
Cash
1,400,000
1,400,000
Journal Entry:
Investment in Stocks
Cash
Investment in Stocks
1,900,000
1,400,000
500,000
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Accounting for stock rights separately has been the traditional approach followed for several
decades already although unlike before where the total cost of the investment is multiplied by the
fraction that can be developed by adding the fair value of the share and the stock right (example:
5,000,000 x 10/170) depending whether the shares are quoted right-on or ex-right. The fair
value is simply used as the value to be allocated as the separate investment of the stock rights
based on the theoretical basis under PFRS 9 that all investments and contracts on those
instruments must be measured at fair value
If stock rights are not accounted for separately, this is in line with another instrument described
in PFRS 9 known as embedded derivatives where the stock rights can be rightfully classified.
Embedded derivatives shall not be separated from the host contract if the host contract is a
financial asset. Of course the investment in stocks is a financial asset.
Thats why it will be wise to proceed with caution and identify the requirements specifically
mentioned in the problem on how to treat stock rights since both treatments are acceptable under
PFRS 9.
RIGHT-ON
EX-RIGHT
The formulas are identical except for one little detail, the denominator for the right-on formula shall
have a plus 1 factor to represent the market value of the stock right that is included in the market value of
the share since it is quoted right-on.
Lets assume that 50,000 shares are acquired for 5,000,0000 and 50,000 rights are issued to purchase
12,500 shares or 4 rights to purchase on share at an exercise price of 100. The shares are quoted at
125 and stock rights shall be accounted for separately.
The market value of the stock rights if right-on is 5 (125 100) / (4 + 1) and 6.25 is ex-right (125
100) / 4. The cost of the new investment shall be
RIGHT-ON
Exercise price (12,500 x 100)
Cost of stock rights (5 x 50,000)
Total cost of new investment
EX-RIGHT
1,250,000
250,00
0
1,500,000
1,250,000
312,50
0
1,562,500
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