INVESTMENTS

NOTES

FOR INVESTMENT IN EQUITY SECURITIES
a) Control Exist(> 50% equity in voting shares, that is ordinary shares) –
Investment in Subsidiary
b) Significant influence exists(20 – 50% in voting shares, that is ordinary
shares) – Investment in Associate (Equity Method)
c) No control nor significant influence exist (PAS 39 or PFRS 9, effective
January 1, 2018)
i. Financial asset at fair value through profit or losses (trading
securities)
ii. Financial asset at fair value through other comprehensive income or
losses (AFS)

Investment in Associate/Equity Method

Cost of Acquisition including transaction cost X

Share form Dividends (XX)
**Share in net income or loss XX(XX)
Share in the OCI if the Associate XX(XX)
Ending balance XX

**Share in net income or loss

Associates Net income or Net loss XX
Multiply by % of interest % XX
Adjusted for Excess of acquisition over
book value depreciable assets/remaining UL (XX)
Adjusted share in net income XX

• Excess of acquisition cost over the fair value of identifiable

asset(Goodwill shall not be included in the computation of share in net
income/loss, except there is an impairment.
• Excess of fair value over book value of non-depreciable asset (e.g. land)
shall not be be included in the computation of share in net income/loss,
except there is an impairment.
• If the acquisition cost is lover than the fair market value of the of
identifiable assets, the negative excess shall be included in the share in
net income in the year of acquisition.
• If the investment acquired other than at the beginning of the year, share
from net income should be proportionate over the number of months the
investment had been held.

Measurement after loss of significant influence

The investor shall measure the any retained investment in associate at fair value.

The difference between carrying amount of the investment at the date of

significant influence is lost, and the fair value of the retained investment plus
any proceeds received from disposal of any part of the interest in the associate,
shall be included in the profit/loss.

The fair value of the investment at the date it ceases to be an associate shall
be regarded as its fair value on initial recognition as a financial asset.

Step acquisition of Investment in Associate

If as a result of acquiring additional shares of stocks, the entity acquired

significant influence in the investee company, the transition from investment in
financial asset at fair value (no significant influence) to investment in
associate (with significant influence) shall be accounted for any under the
following methods.

APPLIED AUDITING PART I

 INVESTMENTS NOTES

a. COST BASED APPROACH WITH CATCH UP ADJUSTMENT(RETROSPECTIVE TO RETAINED
EARNINGS). As if Equity method had been used from the date of the original
investment had been acquired. The difference between investment income that
should have been recognized in the equity method and the investment income
recognized under fair market value approach shall be retrospectively
adjusted to the retained earnings.
b. COST BASED APPROACH WITHOUT CATCH UP ADJUSTMENT. The initial cost of the
investment in associate shall be the sum of the original cost of the new
investment (original investment shall be reverted back to its original cost)
and the cost of the new investment.
c. FAIR MARKET VALUE APPROACH (PFRS 3 BUSINESS COMBINATION APPROACH. The
initial cost of the investment in associate shall be the sum of the current
market value of the original investment and the cost of the new investment.

Financial assets at fair value (P/L or OCI) under PAS 39 were recycling is allowed)
Investment at Fair Value Investment at Fair Value
through profit or loss through OCI (Available for
(trading securities) Sale)

1.Initial At fair value (fair value At fair value (fair value of

recognition of consideration given up, consideration given up, plus
transactions costs shall be transactions costs.
expensed as incurred.)

2.Balance sheet Fair Value Balance Sheet Fair Value Balance Sheet
valuation Date Date
(temporary changes Less: Carrying Value Less: Carrying Value
in market value) Unrealized gain/loss – P/L Unrealized gain/loss – OCI

Fair Value Balance Sheet

Date
Less: Original Cost
Unrealized gain/loss – SHE
of SPF

3.Disposal Proceeds Proceeds

Less:Carrying Value Less:Original Cost
Realized gain/loss – P/L Realized gain/loss – P/L

4.Impairment Loss Decreases in FMV whether Fair Value Balance Sheet

(permanent permanent or temporary are Date
decline) recognized in the Less: Original Cost
profit/loss Impairment Loss – P/L

5.Recovery of Subsequent increases in FMV No recovery recognized in

Impairment loss shall be recognized in the
profit or loss.
the income statement, thus:
Fair Value Balance Sheet
Date
Less: Impaired Value/New
Cost
Unrealized gain/loss – SHE
of SFP

6.Transfer AFS to TS – not allowed Transfer from AFS –

TS to AFS – generally not
allowed under RARE
CIRCUMSTANCES; treated
currently and
prospectively.
ASSOCIATE
See step acquisition of
investment in Associate.
Transfer form Associate. See
cessation in Investment in
Associate.

APPLIED AUDITING PART I

 INVESTMENTS NOTES

Financial assets at fair value (P/L or OCI) under PFRS 9 were recycling is not
allowed for equity securities categorized as FA@FMV through OCI.
Investment at Fair Value Investment at Fair Value
through profit or loss through OCI

1.Initial Same with PAS 39 Same with PAS 39

recognition

2.Balance sheet Same with PAS 39 Same with PAS 39

valuation
(temporary changes
in market value)
3.Disposal Same with PAS 39 Upon disposal:

a)before the disposal the

financial asset is
remeasured to its fair value
with the gain or loss
recognized in the OCI/L.
Thus, as a result, the
FMV/CV shall be equal to the
sale price.

b)the financial asset shall

be derecognized without
gain/loss form the disposal
(Sales Price = CV/FMV)

c)Any unrealized holding

gain or loss in the SHE
shall be transferred to RE
(optional)

4.Impairment Loss Same with PAS 39 Decreases in FMV whether

(permanent permanent or temporary are
decline) recognized in the OCL/SHE.

5.Recovery of Same with PAS 39 Subsequent increases after

Impairment loss permanent decline shall be
recognized in the OCI/SHE.

6.Transfer At initial recognition, an entity may make an irrevocable

election to present in other comprehensive income. PFRS
9, par 4.4.4) thus, the transfer into and out of
Investment at FMV through P/L (out of and into Investment
at FMV through OCI is not allowed.

Notes:
1. If shares are acquired dividend on(between declaration and record date of
dividends), the purchase price shall be debited to dividends receivable
first before debiting the investment account for the balance.
2. Cash dividends shall be credited to dividend income upon declaration at
face value.
3. Property dividends shall be credited to dividend income at fair value on
declaration date.
4. Stock dividend shall be recorded only through memo (update carrying value
of the share.
5. Stock in lieu of cash shall be recorded as dividend income at the fair
value of the shares received or the supposed cash dividends (in order of
priority)

APPLIED AUDITING PART I

 INVESTMENTS NOTES

6. Cash in lieu of stock shall be accounted for under the “as if” approach,
that as if shares were received and sold at the cash received. Gain or
loss shall be recorded accordingly.
7. Special dividends (preference shares received as dividend on ordinary
shares held) shall be accounted for by allocating the carrying value of
the original shares held (if trading) or the original cost of the shares
held if AFS to the preference dividends received and to the original
investment based on aggregate fair values on a PRORATA basis.
8. Special assessment shall be debited to the investment account and credited
to cash.

FOR INVESTMENT IN DEBT SECURITIES(BONDS)

Under PAS 39, the category of the debt security shall be based on the
following.

a. There is an intention and ability to hold investment until maturity – HTM

(Amortized Cost)
b. Either no intention or ability
i. Fair Market Value Method
1. Trading Securities – if held for short term profit
intention
2. Available for Sale – if no short term profit intention

Financial Asset at Fair Value Method and at Amortized Cost : PAS 39

**Debt Security categorized as Investment in Fair Value through P/L shall

follow the same principles with that of Equity Investment categorized at
Trading (PAS 39 – see previous table)
Available for Sale Investment at Amortized Cost
(held to maturity)

1.Initial At fair value (fair value At fair value (fair value of

recognition of consideration given up, consideration given up, plus
plus transactions costs, transactions costs, net of
net of any accrued any accrued interest.
interest.

2.Balance sheet Fair Value @ Balance Sheet At Amortized Cost

measurement. Date
Less: Amortized Cost
Unrealized gain/loss – SHE
of SPF

Fair Value Balance Sheet

Date
Less: Carrying Value
Unrealized gain/loss – OCI
in SCI

3.Disposal Proceeds net of transaction Proceeds net of transaction

cost, net of accrued cost, net of accrued
interest interest
Less:Amortized Cost Less:Amortized Cost
Realized gain/loss – P/L Gain/Loss on sale

*Partial disposal of HTM –

the remaining investment is
“tainted” and reclassified
to AFS.

APPLIED AUDITING PART I

 INVESTMENTS NOTES

4.Impairment Fair Value @ Balance Sheet PV of remaining future cash
Date flows at original effective
Less: Amortized Cost interest
Impairment Loss – P/L Less: Carrying Value of HTM
Impairment Loss – P/L

5.Recovery Amortized cost had there Amortized cost had there

been no impairment been no impairment
Less: Amortized cost based Less: Amortized cost based
on the prior year impaired on the remaining future cash
value flows at original effective
Gain on Recovery – P/L interest
Gain on Recovery – P/L
Fair Value @ Balance Sheet
date
Less: Amortized Cost had
there been no impairment
Unrealized gain/loss - B/S

Computation of impairment loss on investment in HTM is actually the same with

the computation of impairment of loans and receivables.

Under PFRS 9, the category of the debt security shall be based on the BUSINESS
MODEL.

1. The business model of the company has an objective of holding debt

security investment primarily to collect contractual cash flows and cash
flows are in the form of principal and interest with fixed maturity date.
– Investment at Amortized Cost
2. The business model of the company has an objective of holding debt
security investment primarily to collect contractual cash flows but also
has an objective of holding the debt security available for sale to take
advantage of business opportunities. – at Fair Market Value through OCI/L
3. The business model has an objective of holding debt securities for short
term profits. – at Fair Market Value through Profit or Loss.

Financial assets at fair value (P/L or OCI) under PFRS 9 were recycling is
allowed for debt security categorized as FA@FMV through OCI.

Investment at Investment at Investment at

Fair Value Fair Value Amortized Cost
through profit through OCI
or loss
1.Initial Same as PAS 39 Same as PAS 39 Same as PAS 39
recognition

2.Balance sheet Same as PAS 39 Same as PAS 39 Same as PAS 39

measurement

3.Disposal Same as PAS 39 Same as PAS 39 Same as PAS 39

Partial disposal of
Investment at
Amortized Cost – the
remaining investment
shall be retained as
Investment at
Amortized Cost (no
more tainting
provision under PFRS
9)

APPLIED AUDITING PART I

 INVESTMENTS NOTES

4.Impairment Same as PAS 39 Same as PAS 39 Same as PAS 39

5.Recovery of Same as PAS 39 Same as PAS 39 Same as PAS 39

Impairment loss

6.Reclassification -Reclassification from one category to another is

allowed when and only when the entity changes in its
business model in holding debt security investment.

-The transfer should be made at the beginning of the

following reporting period from the date of business
model has been change.

-Transfers are accounted for currently and

prospectively. An entity should not restate any
previously recognized gains, losses (including
impairment gains/losses or interest. The following table
summarizes the different reclassification scenarios and
their accounting consequences.

From To Accounting Treatment

Measure fair value at reclassification date
and recognize difference between fair value
Amortized Cost FVPL
and Amortized Cost in profit and loss.

Fair value at the reclassification date

becomes the new gross carrying amount.
Effective rate is determined on the basis
FVPL Amortized Cost
of the fair value on the reclassification
date.

Measure fair value at reclassification date

and recognize any difference in OCI.
Amortized Cost FVOCI Effective interest rate is not adjusted as
a result of the reclassification.

Cumulative gain or loss previously

recognized in OCI is removed from equity
and applied against the fair value of the
FVOCI Amortized Cost
financial asset at the reclassification
date.

Asset continues to be measured at fair

value but subsequent gains and losses are
FVPL FVOCI recognized in OCI rather than profit and
loss

Asset continues to be recognized at fair

value and the cumulative gain or loss
previously recognized in other
FVOCI FVPL
comprehensive income is reclassified from
equity to profit and loss

Sources: RESA, Valix and PWC

APPLIED AUDITING PART I