MODULE 5

INVESTMENTS
Learning Objectives:
At the end of this module the student will be able to:

• Identify financial assets.

• State the classifications of financial assets and their initial and subsequent
measurement
• Explain how fair value is measured.
• Account for investment in equity securities.
• Account for financial assets measured at amortized cost.
• Account for financial assets measured at FVOCI.
• Account for regular way purchase or sale of financial assets.
• Account for dividends received from investments.
• Account for stock rights.
• Analyze and solve the investment property.
• Account for long-term investments
• Account for other investments.

Pauline R. Dela Cruz, CPA

Instructor
INVESTMENTS
Definition: Investments are assets held by an entity for the accretion of wealth through distribution of
such as interest, royalties, dividends, and rentals for capital appreciation or for other benefits to the
investing entity such as those obtained through trading relationships.

FINANCIAL ASSETS AT FAIR VALUE

Classification of financial assets under PFRS 9, paragraph 4.1.1, financial assets are classified into three,
namely:
1. Financial assets at fair value through profit or loss – include both equity securities and debt
securities.
2. Financial assets at fair value through other comprehensive income -- include both equity
securities and debt securities.
3. Financial assets at amortized cost - include only debt securities.

The classification depends on the business model for managing financial assets which may be:
a. To hold investments in order to realize fair value changes.
b. To hold investments in order to collect contractual cash flows.

What is an equity security?

The term "equity security" encompasses any instrument to acquire or dispose of ownership shares at a
fixed or representing ownership shares and right, warrants or options determinable price In simple
language, equity securities represent an interest in an entity ownership. Ownership shares include
ordinary share, preference share and other share capital. Equity securities do not include redeemable
preference share, treasury shares and convertible debt.

What is a debt security?

A debt security is any security that represents a creditor relationship with an entity A debt security has a
maturity date and a maturity value.

Examples of debt securities include the following:

a. Corporate bonds
b. BSP treasury bills
c. Government securities
d. Commercial papers
e. Preference shares with mandatory redemption date or are redeemable at the option of the holder

Initial measurement of financial assets

PFRS 9, paragraph 5.1.1, provides that at initial recognition, an entity shall measure a financial asset at
fair value plus, in the case of financial asset at fair value through profit or loss, transaction costs that are
directly attributable to the acquisition of the financial asset.

The fair value of a financial asset at initial recognition is normally the transaction price, meaning, the fair
value of the consideration given. In other words, a financial asset is recognized initially at fair value.

As a rule, transaction costs that are directly attributable to the acquisition of the financial asset shall be
capitalized as cost of the financial asset.
However, if the financial asset is held for trading or if the financial asset is measured at fair value through
profit or loss, transaction costs are expensed outright.

Transaction costs include fees and commissions paid to agents, advisers, brokers and dealers, levies by
regulatory agencies and securities exchanges, and transfer taxes and duties.
Transaction costs do not include debt premiums or discounts, financing costs and internal administrative
or holding costs.

Subsequent measurement
PFRS 9, paragraph 5.2.1, provides that after initial recognition, an entity shall measure a financial asset at:
a. Fair value through profit or loss (FVPL)
b. Pair value through other comprehensive income (FVOCI)
c. Amortized cost

Financial assets at fair value through profit or loss

The following financial assets shall be measured at "fair value through profit or loss":
1. Financial assets held for trading or popularly known as "trading securities".
- These financial assets are measured at fair value through profit or loss "by requirement,"
meaning, required by the standard.
2. All other investments in quoted equity instruments. These financial assets are measured at fair
value through profit or loss "by consequence" in accordance with Application Guidance B5.1.14
of PFRS 9.
3. Financial assets that are irrevocably designated on initial recognition as at fair value through profit
or loss
- These financial assets are measured at fair value through profit or loss "by irrevocable
designation" or "by option",
- This fair value option is applicable to investments in bonds and other debt instruments which can
be irrevocably designated as at fair value through profit or loss even if the financial assets satisfy
the amortized cost measurement.
- This irrevocable designation is the fair value option allowed in accordance with Paragraph 4.1.5
of PFRS 9.
4. All debt investments that do not satisfy the requirements for measurement at amortized cost and
at fair value through other comprehensive income.
- These financial assets are measured at fair value through profit or loss "by default” in
accordance with PFRS 9, paragraph 4.1.4

Financial asset held for trading

Appendix A of PFRS 9 provides that a financial asset is held for trading:
a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. 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
c. It is a derivative, except for a derivative that is a financial guarantee contract or a designated and
an effective hedging instrument. In other words, trading securities are debt and equity securities
that are purchased with the intent of selling them in the "near term" or very soon.

Trading securities are normally classified as current assets. Equity investment at fair value through OCI.
At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an irrevocable election
to present in other comprehensive income or OCI subsequent changes in fair value of an investment in
equity instrument that is not held for trading.

This irrevocable approach is designed to impose discipline in accounting for nontrading equity investment.
The amount recognized in other comprehensive income is not reclassified to profit or loss under any
circumstances. However, on derecognition, the amount may be transferred to equity or retained earnings.
If the investment in equity instrument is "held for trading", the election to present gain and loss in other
comprehensive income is not allowed.

If the investment in equity instrument is held for trading, subsequent changes in fair value are always
included in profit or loss.

Debt investment at amortized cost

PFRS 9. paragraph 4.1.2, provides that a financial asset shall be measured at amortized cost if both of the
following conditions are met:
a. The business model is to hold the financial asset in order to collect contractual cash flows on
specified date.
b. The contractual cash flows are solely payments of principal and interest on the principal amount
outstanding.
- In other words, the business model is to collect contractual cash flows if the contractual cash flows
are solely payments of principal and interest.
- In such a case, the financial asset shall be measured at amortized cost.

Debt investment at fair value through OCI

PFRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
a. The business model is achieved both by collecting contractual cash flows and by selling the
financial asset.
b. The contractual cash flows are solely payments of principal and interest on the principal
outstanding.
- Note that the business model includes selling the financial asset in addition to collecting
contractual cash flows.
- In this case, interest income is recognized using the effective interest method as in amortized cost
measurement.
- On derecognition, the cumulative gain and loss recognized in other comprehensive income shall
be reclassified to profit or loss at fair value through other comprehensive income.

SUMMARY OF MEASUREMENT RULES

Measurement of equity investments:
1. Held for trading - at fair value through profit or loss
2. Not held for trading - as a rule, at fair value through profit or loss
3. Not held for trading - at fair value through other comprehensive income by irrevocable election
4. All other investments in quoted equity instruments – at fair value through profit or loss
5. Investments in unquoted equity instruments -- at cost
Measurement of debt investments
 1. Held for trading - at fair value through or loss
2. Held for collection of contractual cash flows – at amortized cost
3. Held for collection of contractual cash flows - at fair value through profit or loss by irrevocable
designation or fair value option.
4. Held for collection of contractual cash flows and for sale of the financial asset - at fair value
through other comprehensive income
5. Held for collection of contractual cash flows and for sale of the financial asset at fair value through
profit or loss by irrevocable designation or fair value option.

INVESTMENT IN EQUITY SECURITIES

Investment in equity securities are investments held by the entity in the form of equity instruments. Equity
instrument is any contract that evidences a residual interest in the assets of an entity after deducting all
its liabilities.

Examples of equity instruments are ordinary shares, certain preference shares and warrants or written
call options.

CLASSIFICATION OF INVESTMENT IN EQUITY SECURITIES

Percent of Ordinary Shares Preference Shares
Ownership*
< 20% FVPL or FVOCI FVPL or FVOCI
20% to 50% Investment in Associate FVPL or FVOCI

> 50% to 100% Investment in Subsidiary FVPL or FVOCI

* Note: The rates and the related classification are only presumptions and if there is no contradictory
information. The nature of the relationship between the investor and investee will still be the primary
consideration on classifying the investments.

STANDARDS APPLICABLE FOR INVESTMENTS IN PREFERENCE SHARES

Type of Purpose Method Applicable
Investment Standards
Financial Dividend/Speculation Fair Value PAS 32
Asset PFRS 7
PFRS 9

STANDARDS APPLICABLE FOR INVESTMENTS IN ORDINARY SHARES

Type of Purpose Method Applicable
Investment Standards
Financial Dividend/Speculation Fair Value PAS 32
Asset PFRS 7
PFRS 9
Investment in Significant Influence Equity Method PAS 28
Associate PFRS 7
 Investment in Joint Control Equity Method PAS 28
Joint Venture PFRS 11
PFRS 7
Investment in Control a. Separate FS - PAS 27
Subsidiary Cost or Equity Method PAS 28
b. Consolidated FS PFRS 10
PFRS 7

A. INITIAL RECOGNITION AND MEASUREMENT OF INVESTMENTS IN EQUITY SECURITIES AT FAIR VALUE

Initial Recognition
Under PFRS 9, financial assets are recognized when, and only when the entity becomes party to the
contractual provisions of the instrument.

Measurement
Under PFRS 9, investment in equity securities are initially measured:
1. FVPL – at fair value excluding transaction costs
a. Financial assets held for trading
b. All other investments in quoted equity instruments
c. Financial assets that are irrevocably designated on initial recognition at FVPL
2. FVOCI – fair value including transaction costs
1. Financial assets not held for trading by irrevocable election on initial recognition at FVOCI
3. Unquoted equity securities recorded at cost

Acquisitions in between dates of declaration and record of dividends (dividends-on)

If the investment is acquired in in between dates of declaration and record of dividends, the dividends
that have accrued on such investment shall be deducted from the total consideration given to arrive at
the adjusted cost of the investment. To record such acquisition would be:

1. To record the acquisition:

Investment in equity securities xxx
Dividend receivable xxx
Cash xxx

2. To record receipt of dividends

Cash xxx
Dividend receivable xxx

Presentation in the Financial Statements

1. Financial assets at FVPL – current assets
2. Financial assets at FVOCI – generally as noncurrent assets, except when they are due within
12 months from the reporting date.
B. SUBSEQUENT RECOGNITION AND MEASUREMENT OF INVESTMENTS IN EQUITY SECURITIES AT FAIR
VALUE

Investment in equity securities with fair value may subsequently be classified to either financial assets at
FVPL or FVOCI
SUBSEQUENT MEASUREMENT: FVPL FVOCI
Measurement at reporting date Fair value Fair value
Change in fair values (Unrealized gain or loss) P/L OCI

Computation of Unrealized Gain or Loss:

FVPL FVOCI
Fair value (measurement date) xxx Fair value (measurement date) xxx
Less: Carrying value (FV previous Less: Carrying value (FV previous
reporting date) xxx reporting date) xxx
Unrealized gain (loss) – P/L xxx Unrealized gain (loss) – P/L xxx
OR
Fair value (measurement date) Less: Cost
Unrealized gain (loss) – SFP xxx
xxx
xxx

The journal entry to record the unrealized gain or loss is:

Unrealized gain Investments in equity securities – FVPL/FVOCI xxx
Unrealized gain – FVPL/FVOCI xxx

Unrealized loss Unrealized loss – FVPL/FVOCI xxx

Investments in debt securities – FVPL/FVOCI xxx

C. OTHER TRANSACTIONS SUBSEQUENT TO ACQUSITION

1. DIVIDENDS
- Distribution of corporate income to its shareholders on a prorate basis. It is distributed out of
accumulated earnings of corporation except for liquidating dividend which represents return to the
shareholders of their investments.

Three Different Dates Related to Dividends:

I. Date of Declaration – date when the Board of Directors announces the distribution of dividends.
On the point of view of the investor, dividend income may or may not be recorded.
II. Date of Record – is the cut-off date that determines who among the shareholders is entitled to
dividend per listing as to record date. No journal entry is required on this date.
III. Date of Payment – is the date when the dividend is received.

Dividends Out of Earnings

I. Cash Dividends
- Cash dividends are payment of cash to shareholders in proportion to number of shares owned. Cash
dividend maybe a certain amount of pesos per share or a certain percent of par or stated value.
Journal Entries:
Date of declaration Dividend receivable xxx
Dividend Income xxx
Date of record NO ENTRY

Date of payment Cash xxx

Dividend receivable xxx

II. Property Dividends

- Dividends paid in the form of some asset other than cash. Property dividends, regardless of type of asset,
should always be recorded at fair value at the date of declaration irrespective of the date of payment.

Journal Entries:
Date of declaration Dividend receivable xxx
Dividend Income xxx
Date of record NO ENTRY

Date of payment Noncash asset xxx

Dividend receivable xxx

III. Scrip Dividends

- Dividend in the form of issuance of scrip or promissory notes that is payable in a future date.

Journal Entries:
Date of declaration Scrip dividend receivable xxx
Dividend Income xxx
Date of record NO ENTRY

Date of payment Cash xxx

Interest income Dividend receivable xxx

IV. Share Dividends/Bonus Issue

- Dividend paid in the form of the issuing entity’s own share.
- Distribution of share dividends in the same class of share capital increases the number of shares held by
each stockholder, without any change in total shareholders’ equity balance. The equity of each
stockholder after the receipt of bonus is also unchanged. Thus, on the point of view of the investor who
receives the share dividends only prepare a memorandum entry. The receipt of share dividends merely
adjusts the carrying value per share held by the investor.

However, if a share dividend in the form of another class of share capital (special bonus issue), there are
several interpretations to account for the share dividends different from those held:

1. The receipt of share dividends will be treated as follows:

a. Unquoted securities – allocate the original cost using the aggregate par value method. Journal entry,
assuming investments in preference shares are received:
 Investment in equity securities – preference shares xxx
Investment in equity securities – ordinary shares xxx

b. For FVPL and FVOCI – recognize share dividends as an increase in the amount of investment and an
unrealized gain. Journal entry is:
Investment in equity securities xxx
Unrealized gain – FVPL/FVOCI xxx

2. The receipt of share dividends will be treated as property dividends. The share dividends received is
recognized at fair value with a credit to dividend income.

Journal entry is:

Investment in equity securities xxx
Dividend income xxx

V. Cash Received In Lieu of Share Dividends

- When share dividends are declared and received, they are not considered as dividend, although a
previously recognized share dividends may be settled by cash in lieu of share dividends.
- Cash received in lieu of share dividends “as if” the stocks were received and subsequently sold at the
amount of cash received. This is not a dividend income, however, gain or loss shall be recognized.

Journal Entries:
Date of declaration MEMORANDUM ENTRY

Date of record NO ENTRY

Date of payment Cash xxx

Investment in equity securities Gain on sale (if any) xxx

VI. Shares Received In Lieu of Cash Dividends

- When cash dividends are declared and received, they are initially considered as dividend income,
although a previously recognized cash dividends may be settled by shares in lieu of cash dividends.
- Shares received in lieu of cash dividends are recognized as income at the fair value of the stock received,
except for unquoted securities (at cost).
Date of declaration Dividend receivable xxx
Dividend Income xxx
Date of record NO ENTRY

Date of payment Investment in equity securities xxx

Dividend receivable xxx
Dividend income (if any) xxx

VII. Liquidating Dividends

- Liquidating dividends, also dividends out of capital or return of investment are not considered as
dividend income but as a credit to the investment account. Partial liquidation can be done only if the
entity is a wasting asset corporation, otherwise the entity can only perform one-time liquidation.
 Cash xxx
Partial liquidation Investment in equity securities xxx

To record full Cash xxx

liquidation Loss on liquidation (if any) xxx
Investment in equity securities xxx
Gain on liquidation (if any) xxx

2. STOCK SPLIT
Stock split or share split is a decision by the company’s board of directors to change the number of shares
that are outstanding with a corresponding change in the par value or stated value of shares. Stock split
may either be split up or split down.
I. Split up – this is a transaction whereby the original shares are called in for cancellation and
replaced by a larger number of shares accompanied by a reduction in the par value or stated value
of shares.
II. Split down or reverse share split – this is a transaction whereby the original shares are called in
for cancellation and replaced by a smaller number of shares accompanied by an increase in the
par value or stated value of shares.

Accounting for share split, on the point of view of the investor will initially be recorded as a memorandum
entry because only the number of shares will be affected by the share split. However, for FVPL and FVOCI,
since they are measured at fair value, the shares must be also measured at fair value, thus any changes in
connection to change in shares must be reflected at fair value.

3. SPECIAL ASSESSMENTS
Special assessments are additional contributions required by an entity to its shareholders especially during
financial difficulties. This is treated as additional cost of investment and recorded as:
Investment in equity securities xxx
Cash xxx

4. STOCK RIGHTS
A stock right/rights issue or preemptive right is a privilege giving current shareholders the first right to
buy shares in a new offering, thus maintaining their proportionate ownership interest. This is normally
evidenced by a certificate of ownership of stock right or called as share warrants.

Stock rights are valuable to a shareholder because the exercise price or price to purchase a share is
generally below the prevailing market price of stock.

PFRS 9 does not address the accounting issue for stock rights but stock rights are also form of financial
assets. In accounting for stock rights, they are designated as:

1.Stock rights are not accounted for separately

- Share rights as an embedded derivative (a component of a hybrid or combined contract with the effect
that some of the cash flows of the combined contract vary in a way similar to a stand-alone derivative) is
not accounted for separately because the host contract – investment in equity securities is a financial
asset.
Debt Securities/Bonds Transaction Gain or Loss Gain or Loss Interest
Acct. Title Business Model Measurement Cost from FV Changes from Disposal Income
Trading Trading FV through Profit and Loss Expense Profit or Loss Profit or Loss Nominal
Investment in Held for collection of contractual Amortized Cost Capitalized Not Recognized Profit or Loss Effective
Bonds cash flows
FA-FVPL - Option May irrevocably designate at Fair Value/FV Option Expense Profit or Loss Profit or Loss Nominal
Held for collection of contractual
FA-FVOCI cash flows and for sale Fair Value through OCI Capitalized OCI to P&L Profit or Loss Effective

Equity Securities/Ordinary and Preference

Type of Investment
Trading Trading FV through Profit and Loss Expense Profit or Loss Profit or Loss
FA-FVPL Not held for trading As a rule FV through Profit and Loss Expense Profit or Loss Profit or Loss
FA-FVOCI - Option May irrevocably elect at Fair Value through OCI Capitalized OCI to RE RE
All other quoted equity instruments FV through Profit and Loss Expense Profit or Loss Profit or Loss
Unqouted equity instruments Cost Model Capitalized Not Recognized Profit or Loss
Investment in Associate Equity Model Capitalized Not Recognized Profit or Loss

Reclassification At the date of reclassification (FV - CV)

FVPL to Amortized Cost Remeasured at FV (FV becomes the new CV) Profit or Loss
FVPL to FVOCI Measured at FV subsequent changes in FV -->OCI Profit or Loss
Amortized Cost to FVPL Measured at FV Profit or Loss
Amortized Cost to FVOCI Measured at FV OCI
FVOCI to Amortized Cost Remeasured at FV and the Cumulative OCI is adjusted to FV OCI - most likely zero (0)
FVOCI to FVPL Measured at FV and the Cumulative OCI is adjusted to P&L Profit or Loss

Investment Property
Definition
PAS 40 prescribes the accounting treatment for investment property and related disclosure requirements.
Investment property is defined as property (land or building or part of a building or both) held by an owner
or by the lessee under a finance lease to earn rentals or for capital appreciation or both.

Only land and building can qualify as investment property. An equipment or any movable property cannot
qualify as investment property.
An investment property is not held:
a. For use in the production or supply of goods or services or for administrative purposes.
b. For sale in the ordinary course of business.
The property held by an owner or by the lessee under a finance lease for use in the production or supply
of goods or services or for administrative purposes is known as owner-occupied property.

Investment property versus owner-occupied

Investment property is held to earn rentals or for capital appreciation or both.
Therefore, an investment property generates cash flows that are largely independent of the other assets
of the entity. This is the characteristic that distinguishes investment property from owner-occupied
property.
Examples of investment property
a. Land held for long-term capital appreciation.
b. Land held for a currently undetermined use.For example, if an entity has not determined that
it will use the land either as owner-occupied property or for short-term sale in the ordinary course of
business, the land is considered to be held for capital appreciation and therefore investment property.
c. Building owned by the reporting entity, or held by the entity
under a finance lease, and leased out under an operating
lease.
d. Building that is vacant but is held to be leased out under an operating lease.
 e. Property that is being constructed or developed for future use as investment property. PAS 40
has been amended to bring property that is being constructed or developed for future use as investment
property within the scope of PAS 40. In other words, such property is now classified as investment
property. Previously, PAS 16 is applicable to such property until completion.

Items not considered investment property

a. Owner-occupied property or property held for use in the production or supply of goods or
services or for
administrative purposes.
b. Property held for future use as owner-occupied property
c. Property held for future development and subsequent use as owner-occupied property.
d Property occupied by employees, whether or not the employees pay rent at market rate.
e. Owner-occupied property awaiting disposal
f. Property held for sale in the ordinary course of business or in the process of construction or
development for such sale.
g. Property being constructed or developed on behalf of third parties.
h. Property that is leased to another entity under a finance lease.

Property interest held by lessee

A property interest that is held by a lessee under an operating lease may be classified and accounted for
as investment property provided:
a. The property meets the definition of investment property
b. The operating lease is accounted for as if it were a finance lease.
c. The lessee uses the fair value model in measuring the property interest.
This classification alternative is available on a property by property basis.
However, once this alternative is selected for one such property is to be accounted for consistently on a
fair value property interest, all property classified as investment basis.
Where a property held under a lease is classified as an investment property, the initial cost is the lower
amount between the fair value and the present value of the minimum lease payments

Partly investment and partly owner-occupied

Certain properties may include a portion that is held to earn rentals or for appreciation and another
portion that is held for manufacturing or administrative purposes.
• If these portions could be sold or leased out separately, an entity shall account the portions
separately as investment property and owner-occupied property.
If the portions could not be sold separately, the property is investment property if only an
insignificant portion is held for manufacturing or administrative purposes.
• When ancilliary services are provided by the entity to the occupants of the property and these
services are insignificant component of the arrangement, the property is treated as investment
property. An example would be where the owner of an office building provides security and
maintenance services to the lessees. The building being leased out as offices is investment
property.
• However, if the services provided are a more significant component of the arrangement, the
property is treated as owner-occupied property. For example, if an entity owns and manages a
hotel, services provided to guests are a significant component of the arrangement as a whole.
Therefore, the owner-managed hotel is treated as owner-occupied property, rather than
investment property.
Property leased to an affiliate
From the perspective of the individual entity that owns it, the property leased to another subsidiary or its
parents considered an investment property.
However, from the perspective of the group as a whole and for purposes of consolidated financial
statements, the treated as owner-occupied property.

Recognition of investment property

Investment property shall be recognized as an asset when and
only when:
a. It is probable that the future economic benefits that are associated with the investment
property will flow to the entity.
b. The cost of the investment property can be measured reliably.

Initial measurement of investment property

An investment property shall be measured initially at its cost. Transaction costs shall be included in the
initial measurement. The cost of a purchased investment property comprises the purchase price and any
directly attributable expenditure.

• Directly attributable expenditure includes professional fees for legal services, property transfer
taxes and other transaction costs.
• The cost of a self-constructed investment property is the cost at the date when the construction
or development is complete.
• If payment for an investment property is deferred, the cost is the cash price equivalent.
• The difference between this amount and the total payments is recognized as interest expense
over the credit period.
• An investment property may be acquired in exchange for a nonmonetary asset or a combination
of monetary and nonmonetary asset.
• The cost of such investment property is measured at fair value unless the exchange transaction
lacks commercial substance.
• If the fair value of neither the asset received nor the asset given up is reliably measurable, the
cost is equal to the carrying amount of the asset given up.
Costs excluded from cost of investment property
a. Start up costs, unless they are necessary to bring the property to the condition necessary for
its intended use.
b. Operating losses incurred before the investment property achieves the planned level of
occupancy.
c. Abnormal amounts of wasted material, labor or other resources incurred in constructing or
developing the property.
Subsequent measurement of investment property
An entity shall choose either of the following models as the accounting policy and shall apply that policy
to all of the investment property:

a. Fair value model

The investment property is carried at fair value. Any changes in fair value are included in profit or loss and
shown in the income statement of the current year.
b. Cost model
The investment property is carried at cost less any accumulated depreciation and any accumulated
impairment losses.

Fair value of the investment property shall be disclosed. However, when a property interest held by a
lessee under an operating lease is classified as an investment property, the fair value model shall be
applied.

Fair value of investment property

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The price in the principal market used to measure fair value shall not be adjusted for transaction costs.
Transaction costs are directly attributable to the disposal of an asset and would not have been incurred
had the decision to sell the asset not been made.
Equipment such as lift or air-conditioning is often an
integral part of a building and is generally included in the fair value of the investment property.
If an office is leased on a furnished basis, the fair value of the office generally includes the fair
value of the furniture because the rental income relates to the furnished office.

The fair value of investment property excludes prepaid or accrued operating lease income.
Fair value hierarchy
PFRS 13, paragraph 72, enumerates the fair value hierarchy or best evidence of fair value as follows:
1. Level 1 inputs are the quoted prices in an active market for identical assets.
2. Level 2 inputs include quoted prices for similar assets in an active market and quoted prices for identical
or similar assets in a market that is not active.
3. Level 3 inputs are unobservable inputs for the asset. Unobservable inputs are usually developed by the
entity using the best available information from the entity's own data.

Active market and principal market

An active market is a market in which transactions for the asset or liability take place with sufficient
regularity and volume to provide pricing information on an ongoing basis.
A principal market is the market with the greatest volume and level of activity for the asset or liability.
The market participants are the buyers and sellers in the
principal market who are:
a. Independent or unrelated parties
b. Knowledgeable or having a reasonable understanding
of the transaction
c. Willing or motivated but not forced and compelled
Transfers of investment property
Transfers to and from investment property shall made when and only when there is a change of use
evidenced by:
a. Commencement of owner occupation investment property to owner-occupied property.
b. Commencement of development with a view to sale transfer from investment property to
inventory.
c. End of owner occupation - transfer from owner-occupied property to investment property.
d. Commencement of an operating lease to another entity transfer from owner-occupied
property to investment property.

Measurement of transfers
1. When the entity uses the cost model, transfers between investment property owner-occupied
property and inventory shall be made at carrying amount.
2. A transfer from investment property carried at fair value to owner-occupied property or
inventory shall be accounted for at fair value which becomes the deemed cost for subsequent accounting
3. If owner-occupied property is transferred to investment property that is to be carried at fair
value, the difference between the fair value and the carrying amount of the property shall be accounted
for as revaluation of property, plant and equipment
4. If an inventory is transferred to investment property that is to be carried at fair value, the
remeasurement to fair value shall be included in profit or loss.
5. When an investment property under construction is completed and to be carried at fair value,
the difference between fair value and carrying amount shall be included in profit or loss.

Derecognition of investment property

An investment property shall be derecognized:
a. On disposal
b. When the investment property is permanently withdrawn from use.
c. When no future economic benefits are expected from the investment property.

Disposal of investment property

Gain or loss from disposal of investment property shall be determined as the difference between the net
disposal proceeds and the carrying amount of the asset and shall be recognized in profit or loss.

Disclosures related to investment property

The general disclosures are:
1. Whether the entity uses the cost model or fair value model of measuring investment property.
2. The amount of rental income for the period along with the related expense.
3 Restrictions on the investment property either through rentals or sale proceeds.
4. Contractual obligations to purchase or construct investment property.

When the fair value model is used, the disclosures are:

1. Detailed reconciliation, showing all movements, between carrying amount of investment
property at the beginning and end of the period.
2. The method of determining the fair value of investment property and whether the valuation is
carried out by an independent qualified valuer.
3. Net gains or losses from fair value adjustments.
4. Whether significant fixtures, such as lift and office furniture within an investment property,
have been separately recognized.
When the cost model is used, the disclosures are:
1. The depreciation method or rate and useful life.
2. Detailed reconciliation of the gross cost of investment property and the related accumulated
depreciation shown all movements during the year.
3. Fair value of the investment property where possible: If it is not possible, such fact shall be
explained.

Other investments

Long term fund

Definition. Cash and other assets set aside for a specific purposes either by reason of the action
of management or by virtue of a contract or legal requirement.
Measurement. Long term fund shall be carried at the amount of cash plus the cost of securities
adjusted for discount or premium amortization, and other assets in the fund.

Sinking Fund or redemption fund

Definition. Fund set aside for the liquidation of long term debt, more particularly long-term
bonds payable.
Classification of sinking fund
• Fund under the administration of the entity
• Fund under the administration of a trustee
Preference share redemption fund
Definition. The terms of the preference share issue may provide that preference share may be
called in for redemption by the issuing entity.

Fund for acquisition of separate property

Definition. The future acquisition of property, plant, and equipment may involve the setting
aside of certain amount of cash. Such fund may be called “replacement plant” or “plant expansion
fund”.

Contingency fund
Definition. A contingency fund is a cash set aside for the purpose of meeting obligations that
may arise from contingencies like pending lawsuits or taxes in dispute.

Insurance fund
Definition. Insurance fund is cash set aside for the purpose of meeting obligations that may
arise from certain risk not insured against, such as fire, typhoon, explosion and other similar casualties.

Cash surrender value

Theory on the cash surrender value
The cash surrender value of a life policy arises from the fact that the fixed annual premium is much in
excess of the annual risk during the earlier years of the policy.

The excess is necessary in order to balance the deficiency of the same premium to meet the annual risk
during the later years of the policy. Such excess in the premium paid over the annual cost of insurance,
with accumulated interest, constitutes the cash surrender value.
Accounting procedures
The accounting procedures concerning the cash surrender value are as follows:
a. Payment of the insurance premium
Life insurance expense XXX
Cash XXX
b. Adjustment of the unexpired premium at the end of the period:
Prepaid life insurance XXX
Life insurance expense XXX
c. Dividends received on the life policy are not income but a reduction of life insurance expense.
Cash XXX
Life insurance expense XXX
d. Initial recognition of the cash surrender value at the end of the third year:
Cash surrender value XXX
Life insurance expense XXX
Retained earnings XXX
The initial cash surrender value is regarded as applicable to three years of the life policy. That portion of
the cash surrender value applicable to the current year is credited to life insurance expense and that
portion applicable to the prior years is credited to retained earnings.

e. Recognition of cash surrender value subsequent to the third year:

Cash surrender value XXX
Life insurance expense XXX
f. Receipt of the proceeds of the life policy
Cash XXX
Cash surrender value XXX
Life insurance expense XXX
Gain on life insurance settlement
The amount to be credited to the cash surrender value should be the adjusted balance at the time of
death of the insured. The life insurance expense account is credited for the
unexpired premium at the time of death. The gain on life insurance settlement is determined as follows:

Face of policy XXX

Less: Cash surrender value xxx
Unexpired premium xxx XXX
Gain on life insurance settlement XXX
Illustrations:
(Answer key will be discussed in the class)

INVESTMENTS

PROBLEM 1
On January 1, 2022, Alexa company purchased marketable equity securities to be held as "trading" for
P5,000,000. The entity also paid transactions cost amounting to P200,000.

The securities had a market value of P5,500,000 on December 31, 2022 and the transaction cost that
would be incurred on sale is estimated at P100,000. No securities were sold during 2022.

What amount of unrealized gain or loss on theses securities should be reported in the 2015 income
statement?

PROBLEM 2
Inspiration Company had trading and nontrading equity investments held throughout 2021 and 2022.
The nontrading investments are measured at fair value through other comprehensive income. The
investments had a cost of P3,000,000 for trading and P3,000,000 for nontrading. The investments had
the following fair value at year-end:

12/31/2021 12/31/2022

Trading 4,000,000.00 3,800,000.00

Nontrading 3,200,000.00 3,700,000.00

1. What amount of unrealized gain or loss should be reported in the income statement for 2022?
2. What amount of cumulative unrealized gain or loss should be reported as component of other
comprehensive income in the statement of changes in equity on December 31, 2022?

PROBLEM 3
On January 1, 2022, ABC company purchased 40,000 shares at P100 per share to be held for trading.
Brokerage fees amounted to P120,000. A P5 dividend per share had been declared on December 15,
2022, to be paid on March 31, 2022 to shareholders of records on January 31, 2022. No other
transactions occurred in 2022 affecting the investment.

What is the initial measurement of the investments?

PROBLEM 4

During 2022, Lawan company bought the shares of burwood company as follows:

1-Jun 20,000 shares @100 2,000,000.00

1-Dec 30,000 shares @120 3,600,000.00
5,600,000.00
Transactions for 2023
Received cash dividend at P10 per
Jan. 10 share
Jan. 20 Received 20% stock dividend
Dec. 10 Sold 30,000 shares ar P125 per share.

1. If the FIFO approach is used, what is the gain on the sale of the shares?
2. If average approach was used, what is the gain on the sale of the shares?

PROBLEM 5

On January 1, 2015, Dryer company acquired as long-term investment a 20% ordinary share interest in
Eason Company. Dyer paid P7,000,000 for this investment when the fair value of Eason's net assets was
P35,000,000. For the year ended December 31, 2015, the investee reported net income of P4,000,000
and declared and paid cash dividends of P1,600,000.

What amount of revenue from the investment should be reported for 2015?

PROBLEM 6

Sage company bought 40% of Eve's company's outstanding ordinary shares on January 1,2015 for
P4,000,000.

The carrying amount of Eve's net assets at the purchased date totaled P9,000,000.

Fair values and carrying amounts were the same for all items except for plant and inventory, for which
fair value exceeded their carrying amounts by P900,000 and P100,000, respectively. The plant has an 18
year life. All inventory was sold during 2015.

During 2015, the investee reported net income of P1,200,000 and paid a P200,000 cash dividend.

What amount should be reported as investment income for 2015?

PROBLEM 7

On January 1, 2015, Pearl company purchased as a long-term investment P5,000,000 face value of Shaw
company's 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest. The bonds
mature on January 1, 2020 and pay intterest annually on December 31. The interest method of
amortization is used.

1. What is the interest income for 2016?

2. What is the carrying amount of the bond investment on December 31, 2016?

PROBLEM 8

On January 1, 2015, Russia company purchased 5-year bonds with face amount of P8,000,000 and
stated interest of 10% per year payable semiannually on June 30 and December 31.
The bonds were acquired to yield 8%.

Present value of an annuity of 1 for 10 periods at 5% 7.72

Present value of an annuity of 1 for 10 periods at 4% 8.11
Present value of 1 for 10 periods at 4% 0.6756

What is the market price or purchase price of the bonds?

What is the carrying amount of the bond investment on December 31, 2015?

PROBLEM 9(IFRS)
Galore Company ventured into construction of a condominium in Makati which is rated as the largest
state-of-the-art structure. The entity's board of directors decided that instead of selling the
condominium, the entity would hold this property for purposes of earning rentals by letting out
space to business executives in the area.
The construction of the condominium was completed and the property was placed in service on January
1, 2015. The cost of the construction was P50,000,000. The useful life of the condominium is 25 years
and its residual value is P5,000,000.

An independent valuation expert provided the following fair value at each subsequent year-end:
December 31, 2015 55,000,000
December 31, 2016 53,000,000
December 31, 2017 60,000,000
1. Under the cost model, what amount should be reported as depreciation of investment property for
2015?
2. Under the fair value model, what amount should be recognized as gain from change in fair value in
2015?
PROBLEM 10

Bona Company purchased an investment property on 2013 for P2,200,000. The property had a useful
life of 40 years and on December 31, 2015 had a fair value of P3,000,000.

On December 31, 2015, the property was sold for net proceeds of P2,900,000. The entity used the cost
model to account for the investment property.

1. What is the carrying amount of the investment property on December 31, 2015?

2. What is the gain or loss to be recognized for the year ended December 31, 2015 regarding the
disposal of the property?

PROBLEM 11

On January 1,2015, Duripan Company invested P1,000,000 in 5-year certificate of deposit at 8% interest.

The market interest rate at maturity is 10%. The entity does not elecy

the fair value option in reporting financial asset.

Future amount of 1 at 5% for 5 periods 1.469

Future amount of 1 at l0% for 5 periods 1.611

Future amount of an ordinary annuity of 1 at 8% for 5 periods 5.867

Future amount of an ordinary annuity of 1 at 10% for 5 periods 6.105

What is the maturity value of the certificate of deposit?

Investment in certificate of deposit

PROBLEM 12

Mactan Company made investment for 5 years at 12% per annum compounded semiannually to equal
P7,160,000 on the date of maturity. Round off future value factor to two decimal places.

What amount must be deposited now at the compound interest to provide the desired sum?

PROBLEM 13

Chain Company purchased a P1,000,000 life insurance policy on its president, of which Chain Company is
the beneficiary. The entity provided the following information regarding the policy for the year ended
December 31, 2015:

Cash surrender value, January 1 87,000

Cash surrender value, December 31 108,000

Annual advance premium paid January 1 40,000

During 2015, dividend of P6,000 was applied to increase the cash surrender value of the policy.

What amount should be reported as life insurance expense for 2015?

CLASSWORK

PROBLEM 1

On January 1, 2019, Everlasting Company purchased serial bonds with a face value of P4,000,000 and a
stated interest rate of 10% to be held to maturity. The stated interest is payable annually on December
31. The bonds are acquired to have an effective yield at 12%. The bonds mature at annual installments of
P1,000,000 every January 1, beginning in January 1, 2020 and every January 1 thereafter. What is the
market price of the bond investment on January 1, 2019? (Round off present value factors to 2 decimal
places)

PROBLEM 2

On January 1, 2019, Katherine Company purchased 20% of the outstanding ordinary share capital of David
Company for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000 payable with 12% annual
interest on December 31, 2020. Katherine also paid P500,000 to a business broker who helped find a
suitable business and negotiated to purchase.
At the time of the acquisition, the fair value of David’s identifiable assets and liabilities were equal to their
carrying value except for an office building which has a fair value in excess of book value of P2,000,000
and an estimated life of 4 years. David’s shareholder’s equity on January 1, 2019 was P13,000,000.

During 2019, David reported net income of P6,000,000 and paid dividends of P4,000,000. What amount
should Katherine Company report as investment in associate on December 31, 2019?

PROBLEM 3

On June 30, 2020, Cape Company purchased 25% of the outstanding ordinary shares of Bit Co. at a total
cost of P2,100,000. The book value of Bit Co.’s net assets on acquisition date was P7,200,000. For the
following reasons, Cape was willing to pay more than book value for Bit Co. stock:

- Bit Co. has depreciable assets with a current fair value of P180,000 more than their book
value. These assets have a remaining useful life of 10 years.
- Bit co. owns a tract of land with a current fair value of P900,000 more than its carrying
amount.
- All other identifiable tangible and intangible assets of Bit Co. have current fair values that are
equal to their carrying amounts.
Bit reported net income of P1,620,000, earned evenly during the current year ended December 31,
2020. Also in the current year, it declared and paid cash dividends of P315,000 to its ordinary
shareholders. Market value of Bit Co.’s ordinary shares at December 31, 2019 is P9 million. Cape
Company’s financial year-end is December 31.
1. What is the total amount of goodwill of Bit Co. based on the price paid by Cape Company?

2. What amount of investment revenue should Cape report on its income statement for the year ended
December 31, 2020 under the equity method?

PROBLEM 4

In January 2019, Farley Corp. acquired 20% of the outstanding common stock of Davis Co. for P800,000.
This investment gave Farley the ability to exercise significant influence over Davis.

The book value of the acquired shares was P600,000. The excess of cost over book value was attributed
to an identifiable intangible asset which was undervalued on Davis’ balance sheet and which had a
remaining useful life of ten years.

For the year ended December 31, 2019, Davis reported net income of P180,000 and paid cash dividends
of P40,000 on its common stock.

What is the proper carrying value of Farley’s investment in Davis at December 31, 2019?

PROBLEM 5

On January 1, 2019, Pie Company purchased available-for-sale debt securities with face value of
P2,000,000 for P1,900,500 including transaction costs of P100,500. The bonds mature on December 31,
2021 and pay interest of 8% annually every December 31 with a 10% effective yield. On December 31,
2019, the bonds are quoted at 105. What amount of unrealized gain on these bonds should be reported
on the 2009 statement of changes in equity?

PROBLEM 6

On January 1, 2009, Sweet Company purchased 5-year bonds with face value of P8,000,000 and stated
interest of 10% per year payable semi-annually January 1 and July 1. The bonds acquired to yield 8%.
What is the purchase price of the bonds?
Classwork:
(Arial 12, MS Teams, PDF)

Problem 1: On January 1, 2018, Piso Company acquired the following equity investments:
Purchase Transaction Fair Value- Fair Value
Price Cost 12/31/2018 12/31/2019
Trading Investment-A 1,000,000 100,000 1,200,000 800,000
Trading Investment B 2,000,000 200,000 1,500,000 1,300,000
Trading Investment C 3,000,000 300,000 3,100,000 3,200,000
Non-trading investment A 1,000,000 100,000 1,200,000 1,000,000
Non-trading Investment B 2,000,000 200,000 1,500,000 1,800,000
Non-trading investment C 3,000,000 300,000 3,100,000 -
On July 1, 2019, the entity sold half of the Trading Investment A for 950,000. At the same date, it also
sold the all the Non-trading investment-C for 3,600,000.
1. What is the initial measurement of all the investments?
2. What amount should be reported as gain or loss on sale of trading securities to be reported in
2019 income statement?
3. What amount should be credited to retained earnings as a result of the sale of non-trading
investment C?
4. On December 31, 2019, what is the total adjustment of fair value to be reported in statement of
profit or loss and statement of other comprehensive income, respectively?
Problem 2: On January 1, 2017, JB Company purchased non-trading equity investment for 2,000,000 plus
a transaction cost of 500,000. The entity irrevocably designated this investment at FVOCI. On December
31, 2017, the market value of the investment is 1,800,000. On December 31, 2018, the issuer of the
equity instrument was in severe financial difficulty and the fair value of the equity investment had fallen
to 1,000,000. The decline is judged to be nontemporary.
5. What amount should be reported as unrealized loss in the statement of other comprehensive
income on December 31, 2017?
6. What amount of cumulative loss should be reported in the statement of changes in equity for
2018 as component of OCI.
Problem 3: Rhian Company received dividends from ordinary share investments during the current year:
• A stock dividend of 10,000 shares from A Company when the market price of the share was
P10.
• A cash dividend of P1,500,000 from B Company in which the entity owned a 15% interest.
• 5,000 shares of C Company in lieu of cash dividend of P20 per share. The market price of the
share was 150. The entity had 50,000 shares of C Company and owned 5% interest in
Company C.
• A liquidating dividend from D Company amounting to 600,000. The entity owned a 10%
interest in D Company.
• The entity owned a 20% interest in E Company which declared and paid a 4,000,000 cash
dividend to shareholders on December 31.
• The company owns 10,000 shares costing 1,100,000 from F Company. Subsequently, the
company receives 150,000 in lieu of 1,000 shares originally declared as 10% stock dividend.
• The entity received from G Company a dividend in kind of one share of H Company for every 4
G Company shares held. The entity had 100,000 G Company shares which have a market price
of 50 per share. The market price of H Company share was 10.
7. What amount should be reported as dividend income for the current year?
Problem 4: Denise Company owned 50,000 shares of another entity. These 50,000 shares were originally
purchased for 100 per share. On October 1, 2017, the investee distributed 50,000 rights to the entity.
The entity was entitled to buy one new share for 140 and five of these rights. On October 1, 2017, each
share had a market value of 150 and each right had a market value of 10. On December 31, 2017 the
entity exercised half of the rights. The stock rights are accounted for separately and measured initially at
fair value. Half of the stock rights not exercised were expired.
8. What is the total loss for the expired stock rights?
9. What total cost should be recorded for the new shares that are acquired by exercising the
rights?
Problem 5: Mallari issued rights to subscribe to its stock, the ownership of 4 shares entitling the
shareholders to subscribe 1 share for 100. An investor owned 50,000 shares with total cost of 5,000,000.
The share is quoted right-on at 125. The stock rights are accounted for separately and measured initially
at fair value.
10. What is the cost of the new investment assuming half of the stock rights were exercised by the
investor?
Problem 6: On January 1, 2017, RR Company acquired a 10% interest in an investee for 3,000,000. The
investment was accounted under the cost method. During 2017, the investee reported net income of
4,000,000 and paid dividend of 1,000,000. On July 1, 2018, the entity acquired a further 15% interest in
the investee for 7,500,000. On such date, the carrying amount of the net assets of the investee was
36,000,000 and the fair value of the 10% existing interest was 2,500,000. The fair value of the net assets
of the investee is equal to the carrying amount except for equipment whose fair value was 8,000,000
greater than the carrying amount. The equipment had a remaining useful life of 5 years. The investee
reported net income of 6,000,000 for 2018 of which 4,000,000 was for the last six months of the year
and paid cash dividend of 1,000,000 on December 31,2018. On October 1, 2018, the investee sold
inventory costing 2,000,000 to the investor for 2,500,000. The inventory remains unsold at year end of
2018. Also on October 1, 2018, the investor sold equipment to investee with a carrying amount of
2,500,000 for 3,000,000. The remaining life of the equipment is 5 years.
11. Total investment income or loss in 2017 to be reported in P/L
12. Carrying amount of investment as of December 31, 2017
13. Total investment income or loss in 2018 to be reported in P/L
14. Carrying amount of investment as of December 31, 2018
Problem 7: Chris Company owned 100% of another’s entity preference shares and 30% of ordinary
shares. The investee’s share capital outstanding on December 31, 2017 included 5,000,000 of 10%
cumulative preference shares and 10,000,000 of ordinary shares. The investee reported net income of
8,000,000 for 2017. No dividend was declared for both preference and ordinary shares in 2017.
15. What amount should be reported as investment income for 2017?
References:

Chapters from Non-OER Books:

• Valix, C., Peralta, J. & Valix, C., (2020). Financial Asset at Fair Value, Investment in Equity Securities,
Investment in Associate, Financial Asset at Amortized Cost, Effective Interest Method, in
Intermediate Accounting Volume 1 (pp.402-577). Manila, Philippines: GIC Enterprises & Co., Inc.
• Millan, Z. (2019). Investments, Investments in Debt securities, Investments-additional concepts,
other long-term investments, & Basic Derivatives in Intermediate Accounting IA (pp.378-479).
Baguio City, Philippines: Nation’s Foremost CPA Review Inc. (NCPAR)
• Valix, C., Peralta, J. & Valix, C., (2015). Financial Asset at Fair Value, Investment in Equity Securities,
Investment in Associate, Financial Asset at Amortized Cost, Effective Interest Method in Financial
Accounting Volume 1 (pp. 477-662). Manila, Philippines: GIC Enterprises & Co., Inc.
 OFFICIAL MCC MODULE DISCLAIMER

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Prepared by:

Pauline R. Dela Cruz, CPA