INVESTMENTS: AN OVERVIEW

THREE TYPES OF BUSINESSES

1`. SINGLE PROPRIETORSHIP

- Owned by one, called OWNER

- Invests cash or PPE to the business as a capital in its operation.
- ASSETS = LIABILITIES + OWNER’S CAPITAL

2. PARTNERSHIP

- Owned by at least two persons called partners

- Contributes money, property, or industry to the business as a capital in its operations
- ASSETS = LIABILITIES + PARTNERS’ CAPITAL

3. CORPORATIONS

- Issues shares and bonds

- Owned by Investors
a. SHAREHOLDERS – Those who purchase shares of the corporation.
b. BONDHOLDERS – Those who purchase bonds of the corporations
- ASSET = LIABILITIES + SHAREHOLDERS’ EQUITY

NOTE: A SOLE PROPRIETORSHIP OR A PARTNERSHIP MAY INVEST IN A CORPORATION BUT A

CORPORATION CANNOT BE A PARTNER.

HOW DOES INVESTMENT WORK?

INVESTOR INVESTS MONEY INVESTEE (CORPORATION)

SHAREHOLDER is Shares classified as

EQUITY SECURITIES the Investor
SHAREHOLDERS’ EQUITY
- Shares of stocks DIVIDENDS
Ownership DIVIDENDS recorded as
- Share certificate recorded as
Interest ORDINARY/PREFERENCE
- Dividend Income INVESTMENT IN
EQUITY SHARES

BONDHOLDER is
DEBT SECURITIES the Investor Bonds classified as

- Bonds INTEREST INCOME Creditor NONCURRENT LIABILITIES

- Bonds certificate recorded as Relationship
INTEREST INCOME recorded
- Interest Income INVESTMENT IN as BONDS PAYABLE
BONDS
INVESTMENTS (BOOK OF INVESTORS)

CLASSIFICATIONS OF INVESTMENTS DEPENDING ON PURPOSE

INVESTMENT IN EQUITY (EQUITY SECURITIES)

 For Buying and Selling Securities in a Short Period

- Financial Asset held for Trade/Trading Securities
- Financial Asset at Fair Value through Profit or Loss (FVPL)

 For Hold in a Longer Period

- Financial Asset at Fair Value through Other Comprehensive Income (FVOCI)

 Others
- Investment in Associates
- Investment in Subsidiary
- Investment in Quoted Equity Securities

NOTE: IN EQUITY SECURITIES, THE INVESTOR HAS OWNERSHIP INTEREST IN THE CORPORATION.

Example: If a corporation is authorized to issue 1,000,000 shares and an investor purchased 10,000 of it,
he has 1% ownership interest in the corporation

If the ownership interest is below 20%, the accounting treatment should be:

- Financial Asset held for trading

- Financial Asset – FVPL
- Financial Asset – FVOCI

If the ownership interest is 20%-50%, the accounting treatment should be INVESTMENT IN ASSOCIATES

If the ownership interest exceeds 50%, the accounting treatment should be INVESTMENT IN
SUBSIDIARY

INVESTMENT IN BONDS (DEBT SECURITIES) – has contractual right to receive cash

 For Buying and Selling in a Short Period

- Financial Asset held for Trade/Trading Securities
- Financial Asset through Fair Value at Profit or Loss (FVPL)

 For Hold in a Longer Period

- Financial Asset through Fair Value of Other Comprehensive Income (FVOCI)

 Others
 - Financial Asset at Amortized Cost

INVESTMENTS

- Are assets held by an entity for the accretion of wealth through distributions 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.
- Are assets not directly identified with the operating activities of an entity and occupy only an
auxiliary relationship to the central revenue producing activities of the entity.

PURPOSES OF INVESTMENTS

1. Accretion of Wealth – dagdag yaman

2. Capital Appreciation – not just the fruits but also the appreciation of the investment itself.
3. Ownership Control – Control is owned by the one having the highest number of shares.
4. Meeting Business Requirements – Satisfaction of the business requirement.
5. Protection – Insurance

TYPES OF INVESTMENTS

1. Trading Securities of Financial Asset at Fair Value through Profit of Loss

2. Financial Asset at FV through other comprehensive income
3. Investment in non-trading equity securities
4. Investment in bonds of Financial Asset as amortized cost
5. Investment in associates
6. Investment in Subsidiary
7. Investment in Property
8. Investment in Funds
9. Investment in Joint Venture

FINANCIAL INSTRUMENTS

- Any contract that gives rise to both financial asset of one entity and a financial liability or equity
instrument of another entity.

CHARACTERISTICS

1. There must be a contract

2. There must be at least two parties
3. It shall give rise to a financial asset of one entity and financial liability or equity instrument to
another entity
FINANCIAL ASSET is any asset that is

1. Cash
2. A contractual right to receive cash or another asset from another entity
3. A contractual right to exchange financial instrument with another entity under conditions that
are potentially favorable. (e.g., Purchasing an asset at a price lower than the market price)
4. An equity instrument of another entity

NOTE: ASSETS THAT ARE NOT FINANCIAL ASSETS ARE THOSE INTANGIBLE (E.G., COPYRIGHT, PATENT)
PHYSICAL ASSETS SUCH AS BUILDING AND MACHINERIES. THE ASSURANCE OF RECEIVING CASH FROM
THOSE ASSETS ARE NOT GUARANTEED.

FINANCIAL LIABILITY is any liability that is a contractual obligation

a. To deliver cash or other financial asset to another entity

b. To exchange financial asset to another entity under conditions that are potentially unfavorable.

NOTE: LIABILITIES THAT ARE NOT FINANCIAL LIABILITIES ARE UNEARNED INCOME BECAUSE THERE IS
DELIVERY OF SERVICE INSTEAD OF CASH OR OTHER FINANCIAL ASSETS. INCOME TAXES ARE LIABILITIES
IMPOSED BY THE GOVERNMENT AND DID NOT ARISE FROM A CONTRACT. CONSTRUCTIVE
OBLIGATIONS ARE OBLIGATIONS AROSE BECAUSE OF THE ENTITY ITSELF, AND NOT CONTRACTUAL.

EQUITY INSTRUMENTS are any contract that evidences a residual interest in the assets of an entity after
deducting all of the liabilities. Its components are either ordinary or preference shares. The exe

ASSET – LIABILITIES = EQUITY.

CLASSIFICATIONS OF FINANCIAL ASSETS

1. At fair value through profit or loss

2. At fair value through other comprehensive income
3. At Amortized cost

NOTE: FINANCIAL ASSETS ARE INITIALLY MEASURED AT FAIR VALUE + TRANSACTIONS COSTS. THE
CLASSIFICATION OF FINANCIAL ASSETS DEPENDS ON THE BUSINESS MODEL OF THE ENTITY

TYPES OF BUSINESS MODELS

1. To hold instrument in order to realize fair value changes

2. To hold investment in order to collect contractual cash flows
 3. To hold investment in order to collect contractual cash flows and sell the investment

INVESTMENT: FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS/TRADING SECURITIES

WHAT QUALIFIES AN INVESTMENT AS T.S./FA-FVPL?

- “By Requirement” or “By Consequence” (Buying and Selling of Securities in a Short Period)
- “By Irrevocable Designation” or “By Option” (The investor elected the securities to be trading
securities irrevocably)
- “By Default” (The securities cannot be classified as either FA-FVOCI or FA-AC)

CONCEPTS TO REMEMBER

 The initial recognition of Trading Securities is at Fair Value or Acquisition Cost.

 Transaction costs, direct or indirect are expensed outright and not capitalized
 The subsequent measurement of Trading Securities is at Fair Value
 Unrealized Gain or Loss happens when there are changes in Fair Value. It is presented as other
income (expense) in the income statement.
 FORMULA: UNREALIZED GAIN OR LOSS = FAIR VALUE – CARRYING AMOUNT
 Selling of securities result to realized gain or loss reported in the income statement
 FORMULA: REALIZED GAIN OR LOSS = SELLING PRICE – CARRYING AMOUNT
 Trading Securities are classified in the balance sheet as current assets (held in a short period)

1. INITIAL RECOGNITION – Acquisition Cost

FA-FVPL 7,000,000
CASH 7,000,000

2. SUBSEQUENT MEASUREMENT – FAIR VALUE (NEW CARRYING AMOUNT)

UNREALIZED LOSS P/L 100,000
FA-FVPL 100,000

3. SELLING
CASH 7,700,000
FA-FVPL 6,900,000
 GAIN ON SALE OF FA-FVPL 800,000

INVESTMENT: FINANCIAL ASSET – FAIR VALUE THROUGH OTHER COMPREHESIVE INCOME (FVOCI)

WHAT QUALIFIES AN INVESTMENT AS FA-FVOCI?

UNDER EQUITY SECURITIES

1. “By Irrevocable Designation”

UNDER DEBT SECURITIES

1. BUSINESS MEODEL:
A. Collecting contractual cash flows and by SELLING the financial assets
B. The contractual cash flows and are solely payments of principal and interest on the Principal
Outstanding.

CONCEPTS TO REMEMBER:

1. The initial recognition is at FAIR VALUE or ACQUISITION COST plus DIRECT TRANSACTION COSTS.
2. Direct transaction costs are capitalized while indirect transaction costs are expensed outright.
3. The subsequent measurement is at FAIR VALUE.
4. Unrealized gain/loss is a component of OCI in Statement of Comprehensive Income
5. FORMULA: UNREALIZED GAIN (LOSS) = FAIR VALUE – CARRYING AMOUNT
6. Realized gain/loss is incurred when the security was sold. It is recognized in RETAINED EARNING.
Any cumulative gain/loss is also transferred to RE.
7. FORMULA: REALIZED GAIN (LOSS) = SELLING PRICE – CARRYING AMOUNT
8. The classification of FA-FVOCI is NONCCURRENT ASSET because it is being held for a longer time.

NOTES:

THE CARRYING AMOUNT FOR THE YEAR IS EQUAL TO THE FAIR VALUE OF THE INVESTMENT FOR THAT
SAME YEAR.

THE UNREALIZED GAIN /LOSS IS COMPUTED BY DEDUCTING THE CARRYING AMOUNT OF THE
PREVIOUS YEAR FROM THE FAIR VALUE OF THE PRESENT YEAR.

THE REALIZED GAIN /LOSS IS COMPUTED BY DEDUCTING THE CARRYING AMOUNT OF THE PREVIOUS
YEAR FROM THE SELLING PRICE OF THE PRESENT YEAR.

CUMMULATIVE GAIN OR LOSS IS THE NET GAIN OR LOSS FROM THE ORIGINAL COST TO THE PRESENT
YEAR or by DEDUCTING THE FAIR VALUE FROM THE ORIGINAL COST.
 1. INITIAL RECOGNITION
FA-FVOCI 9,000,000
CASH 9,000,000

2. SUBSEQUENT MEASUREMENT, DEC 31, Y1

UNREALIZED LOSS – OCI 600,000
FA-FVOCI 600,000

SUBSEQUENT MEASUREMENT, DEC 31, Y2

FA-FVOCI 100,000
UNREALIZED GAIN - OCI 100,000

SUBSEQUENT MEASUREMENT, DEC 31, Y3

UNREALIZED LOSS – OCI 1,500,000
FA-FVOCI 1.500.000

3. SELLING
`CASH 8,400,000
FA-FVOCI 7,000,000
RETAINED EARNINGS FROM 1,400,000

4. CLOSING OF CUMMULATIVE UNREALIZED GAIN/LOSS WHEN SOLD

RETAINED EARNINGS 2,000,000
UNREALIZED LOSS – OCI 2,000,000

NOTE: WHEN GAIN, DEBIT UNREALIZED GAIN AND CREDIT RETAINED EARNINGS.