Lecture Notes on Financial Accounting
Investments are assets not directly identified with the entity’s normal operating activities but are nonetheless acquired to: 1) generate income on idle cash; 2) exercise significant influence or control over another entity; 3) establish long-term relationships with suppliers and creditors; 4) accumulate funds for future use; 5) benefit from capital appreciation; or 6) protect from possible future risks.
I. Investments in Securities are interests or shares in the debt or equity instrument of another entity. These are covered by IFRS 9 and IAS 28.
Types of Securities: 1) Equity securities represent ownership interests in an entity in the form of preference shares, ordinary shares, share warrants, call options and put options. 2) Debt securities represent a creditor relationship with an entity in the form of Philippine treasury bills, corporate bonds and convertible debts.
A. Investment in Equity Securities are classified as: 1) Financial assets at FV thru PL - ownership of less than 20% with 2) Financial assets at FV thru OCI no significant influence; at FV 3) Investment in associate - ownership of 20% to 50% with significant influence; use equity method 4) Investment in subsidiaries – ownership of more than 50% with control over the investee; consolidated FS (to be discussed in FINACC 3)
Financial Assets at Fair Value:
1) Financial assets at FV thru PL or Trading securities Initially, these are measured at cost and transaction costs are treated as outright expenses. Subsequently at reporting date, these are adjusted to FV and the corresponding gain or loss is recognized in profit or loss.
Sample Problem 1: On January 1, 2013, NARS Corp. purchased 2,000, P100 par ordinary shares of VMV Company for P125 per share plus 1% broker’s commission. The