Accounting for Investments

Investments, an introduction

Investments are financial instruments which are revenue-generating assets. Returns on investments can
come from various ways, such as dividends, interest payments, changes in fair value, or gains from
eventual sale. For BA 99.2, two (2) classes of investments will be discussed, Equity and Debt investments.

Equity investments are investments in the stocks of another company. These can either be common or
preferred shares. This type of investment signifies ownership in another company. There are various
motivations for holding equity investments:
• Take advantage in the fluctuations in fair value of a stock
• Earn returns thru dividends
• To be able to exert significant influence in a certain company
• To control the operating and financial decisions of a company

In summary, an investor in equity instruments can either profit thru fair value changes and selling, or thru
active management of a company.

(BA 99.2 2nd Semester, A.Y. 2018-2019, Calso)

For BA 99.2, only accounting for FVTPL, FVOCI, and basic accounting for investment in associate will be
discussed.

Course Notes BA 99.2 - Midyear 2019 mbmagana

Passive equity investments can be classified and accounted for either FVTPL or FVOCI.

(BA 99.2 2nd Semester, A.Y. 2018-2019, Calso)

Investment in Associate (IAS 28)

• An associate is an entity over which the investor has significant influence.

• Significant influence is the power to participate in the financial and operating policy decisions of
the investee, but is not in joint control or joint control of those policies.
• In accounting for investments in associates, the equity method is used:
o Equity method is the method of accounting whereby the investment is initially recognized
at cost and adjusted thereafter for the post-acquisition change in the investor’s share of
the investee’s net assets.
• For BA 99.2, only accounting for investor’s share in net income and dividend is discussed.
• To account for share in net income:
o Dr. Investment in associate (IIA)
o Cr. Share in associate’s net income (SIANI)
o Amount: Associate’s net income x Investor’s ownership %
o Note: If the associate has net loss, it is Dr. SIANL (Loss), Cr. IIA
• To account for share/receipt if dividends
o Dr. Cash/Dividends receivable
o Cr. IIA
o Amount: Total dividends declared x Investor’s ownership %

Course Notes BA 99.2 - Midyear 2019 mbmagana

 EQUITY INVESTMENTS
Fair Value through Fair Value through Investment in
Profit or Loss (FVPL) Other Comprehensive Associate
Income (FVOCI)
Management Passive (profit through Passive (profit through Active (profit through
trading of stocks) trading of stocks) exercise of significant
influence)
Investor has the option
to designate / elect
equity investment as
FVOCI
Ownership Less than 20% of Less than 20% of 20% to Less than 50%
ordinary shares ordinary shares of ordinary shares

Any % of preferred Any % of preferred

shares shares
Transaction Costs Expensed Capitalized Out of scope of BA 99.2
Mark-to-Market Unrealized Gains / Unrealized Gains / No mark-to-market
Adjustment Losses are presented Losses are reported as adjustment
in the income Other Comprehensive
statement Income, presented in
the equity section of
balance sheet

UGL-FVPL is a UGL-OCI is a permanent

temporary account, account (to be closed to
and is closed out to Retained Earnings only
retained earnings at upon sale of
the end of each year investment—recycling
of UGL-OCI for equity
investments is NOT
allowed by IFRS 9)
Balance of Investment Fair market value Acquisition cost In accordance with
Account at Year-End Equity Method
Carrying Value of Fair market value Fair market value In accordance with
Investment at Year- (Investment ± Equity Method
End Allowance)
Total Income Reported Dividend Income, Dividend Income, Gain / Share in Associate’s
in the Income Unrealized Gains / Loss from Sale Net Income / Net Loss
Statement Losses, Gain / Loss
from Sale
Unrealized Gains / Difference between Adjustment to arrive at None
Losses for the Current fair values this year required ending balance
Period and last year of Allowance for
Valuation

Course Notes BA 99.2 - Midyear 2019 mbmagana

 Dividend Income Reported as “Dividend Reported as “Dividend Credited to Investment
Income” in income Income” in income in Associate Account
statement statement (reduction in the
carrying value of
investment because
dividend is treated as
return of investment);
no dividend income
recorded
Total Effect on Net Gain / Loss from Sale Gain / Loss from Sale Gain / Loss from Sale
Income / Net Loss of arising from the arising from the arising from the
Sale of Investment difference between difference between difference between
selling price and selling price and selling price and
carrying value of carrying value of carrying value of
investment investment investment
(BA 99.2 2nd Semester, A.Y. 2018-2019, Calso)

Course Notes BA 99.2 - Midyear 2019 mbmagana

Debt Investments

Meanwhile, debt investments are basically lending transactions, usually in the form of bonds, which are
interest bearing, and principal payment if made at maturity. Accounting for debt investments can either
be FVTPL, FVOCI, or Amortized Cost. Classification and measurement is determined thru the cash flow
test and business model test:

(BA 99.2 2nd Semester, A.Y. 2018-2019, Calso)

DEBT INVESTMENTS
Fair Value through Fair Value through Financial Asset at
Profit or Loss (FVPL) Other Comprehensive Amortized Cost (FAAC)
Income (FVOCI)
Business Model To generate cash flow To generate cash flow To generate cash flow
from sale of from interest and from interest and
investment or to take principal payments as principal payments
advantage of capital well as from sale of (intention to hold the
gains (investment is investment or profit investment until
primarily held for from capital gains maturity)
trading)
Transaction Costs Expensed Capitalized Capitalized
Mark-to-Market Unrealized Gains / Unrealized Gains / No mark-to-market
Adjustment Losses are presented Losses are reported as adjustment
in the income Other Comprehensive
statement Income, presented in

Course Notes BA 99.2 - Midyear 2019 mbmagana

 the equity section of
balance sheet
UGL-FVPL is a
temporary account UGL-OCI is a permanent
account (to be closed to
Realized Gain / Loss
only upon sale of
investment—recycling
of UGL-OCI for debt
investments is
permitted by IFRS 9)
With Amortization? No Yes Yes
Balance of Investment Fair market value Based on amortization Based on amortization
Account at Year-End table table
Carrying Value of Fair market value Fair market value Based on amortization
Investment at Year- (Investment ± table
End Allowance)
Total Income Reported Interest Income, Interest Income, Gain / Interest Income,
in Income Statement Unrealized Gains / Loss from Sale, Realized Gain/Loss from Sale
Losses, and Gain / Loss Gain / Loss
from Sale
Interest Income Face value multiplied Based on amortization Based on amortization
by stated rate table (market rate is table (market rate is
applied) applied)
Unrealized Gains / Difference between Adjustment to arrive at None
Losses for the Current fair values this year required ending balance
Period and last year of Allowance for
Valuation
Total Effect on Net Gain / Loss from Sale Gain / Loss from Sale Gain / Loss from Sale
Income / Net Loss of arising from the arising from the arising from the
Sale of Investment difference between difference between difference between
selling price and selling price and selling price and
carrying value of carrying value of carrying value of
investment investment investment

AND

Realized Gain / Loss

from recycling of UGL-
OCI
(BA 99.2 2nd Semester, A.Y. 2018-2019, Calso)

Course Notes BA 99.2 - Midyear 2019 mbmagana