COMPOUND FINANCIAL INSTRUMENT

Financial instrument that contains both a liability and equity element from the issuers perspective Definition Share Warrants gives the holder a right to acquire shares at specified price at a specified period Accounting Consideration received is allocated first to the liability component; amount credited to SWO is residual Journal Entries
Cash xx Disc on B/P xx B/P Share Warrants O/S xx xx

Financial Instrument Bonds issued with share warrants

a) If exercised
Cash SWO @strike price xx Share Capital xx Share Premium (SP) xx

b) If expired
SWO

Convertible Debt

Gives bondholders the right to convert their bondholding into share capital

xx Share Premium-unexercised warrants Cash xx Disc on B/P xx B/P Share Premium Conversion Privilege

xx

xx xx

a) No gain or loss on conversion

B/P SP Conversion Privilege Share Capital Disc on B/P SP Issuance a.1) Cash is paid Interest Expense Cash a.2) Interest accrued but not paid Interest Expense Share Premium - issuance Share Premium issuance Cash xx xx xx xx xx xx xx xx xx xx xx

Additional Entry (a.1 or a.2) if conversion is between interest payment dates

b) Other costs incurred deducted from SP

INVESTMENT IN EQUITY SECURITIES

Definition: acquisition of equity for the purpose of: 1) Acquiring income through: a. Dividends b. Capital appreciation (increase in market value) 2) Controlling another entity Initial Measurement: According to investment category: FVTPL at fair value FVTOCI at fair value + transaction cost *Fair value = transaction price Special Cases Acquired in an exchange 1) Fair value 2) Carrying amount Acquired at lump sum 1) All MV are known allocated prorata 2) One security with known MV that value allocated to that security, residual allocated to security with unknown MV *All investment holdings are assumed to below 20% ownership Transaction Accounting JE Investor Date of Declaration: Cash Dividends
Dividend-on Declaration Date Record Date Ex-dividend Payment Date Dividends Receivable Dividend Income Cash Dividends Receivable Dividend-on sale: Cash Loss* Investment in equity sec (IES) Dividend Income Gain* Ex-dividend sale: Cash Loss* IES Gain* xx xx xx xx xx xx xx xx xx xx xx xx xx No entry.

JE - Investee
Retained Earnings Dividend Payable Dividend Payable Cash No entry. xx xx xx xx

Transaction Property Dividends

Accounting - Recorded at fair value

JE Investor
Noncash Asset Dividend Income xx xx

JE - Investee
Retained Earnings Dividend Payable Dividend Payable Noncash Asset Capital Liquidated Cash/Noncash Asset Retained Earnings Capital Liquidated Cash xx xx xx xx xx xx xx xx xx

Liquidating Dividends

Stock Dividends

- Equivalent to return of invested capital and therefore not recognized as income - Recognize Gain/Loss from Investment for any difference between liquidating value and IES balance - No income is recognized because there is no distribution of assets - Results in decreased market value per stock

Cash/Noncash Asset xx IES xx Partly income and partly return of capital: Cash xx Dividend Income xx IES xx

Stocks dividends from the same class as held Memo Entry.

a) Small (< 25%) valued at market or par value whichever is higher Retained Earnings xx Share Div Dist. (SDD) xx Share Premium xx b) Large (> 25%) valued at par Retained Earnings xx SDD xx Retained Earnings SDD xx xx

Shares received in lieu of Cash Dividends

- Original cost of investment is apportioned between original shares and stock dividends on the basis of relative market values - Income @ fair value of shares - In the absence of fair value, amount of cash dividends that would have been received is used - Gain/Loss is recognized by the Investee for any difference between Cash dividend declared and fair value of

Stocks dividends from a different class as held IES new xx IES old xx

Approach 1: Accounted for as a property dividend IES xx Dividend Income xx Approach 2: Declaration of cash dividend but shares are distributed in settlement of the cash dividend Dividends Receivable xx Dividend Income xx IES xx Loss* xx Dividends Receivable xx Gain* xx

Retained Earnings Dividends Payable

xx xx

a) If Investees own shares were distributed Dividends Payable xx Loss* xx Paid-in Capital xx Share Premium xx

Transaction

Accounting distributed shares

JE Investor

JE - Investee
b) If shares distributed are from another company Dividend Payable xx Loss* xx Noncash Asset xx

Cash received in lieu of stock dividends

- Assume shares are received from stock dividend and subsequently sold for the cash received - Gain/loss recognized for any difference between cost of stocks declared as dividends and cash received - Happens when a company restructures its capital by effecting a change in number of shares without capitalizing retained earnings or changing amount of its legal capital - Additional capital contribution by shareholders (investor)

Share Split

Approach 1 Declaration of stock dividend: Memo Entry. Receipt of cash: Cash xx Loss* xx IES Gain* Approach 2: BIR Cash xx Dividend Income Memo Entry.

xx xx

xx Ordinary Shares old Ordinary Shares new xx xx

Special Assessment Redemption of Share

IES Cash Cash Loss IES Gain

xx xx xx xx xx xx

Cash Share Premium Treasury Shares Cash

xx xx xx xx

Stock Rights - Legal right to subscribe for the same before new shares are offered for sale to public - pre-emptive right - Two accounting approaches: Accounted for separately Not accounted for separately - Stock rights measured initially at fair value as a deduction to the - Stock right treated as an embedded derivative carrying amount of IES - If host contract is a financial asset measured through profit or loss, embedded derivative is not separated Receipt of Stock Rights
Stock Rights xx IES xx *in the absence of fair value, theoretical or parity value is used Memo Entry.

Exercise of stock rights

IES xx Cash xx Stock Rights xx *if investor is entitled only to a fraction of a share, investor may purchase additional stock rights. IES Cash xx xx

Sale of Stock Rights

Cash Loss* Stock Rights Gain* xx xx xx xx xx xx Memo Entry. Cash IES xx xx

Expiration of Stock Rights

Loss on stock rights Stock Rights

*Both approach results to equal final IES balance if all stock rights are exercised.

DEBT RESTRUCTURING
Dacion en Pago - Mortgaged property offered by debtor in full settlement of the debt - Asset swap - CA of property Balance of obligation (including unamortized premium/disc) + Accrued Interest + Other charge

Gain/Loss

Debt Restructuring - When a creditor grants to debtor concession that would not be granted in a normal business relationship - CA of Liability = Principal +/- Unamortized Premium/Discount + Accrued Interest Payable + Legal fees and other bank charges Kind of Debt Restructuring Accounting Journal Entries Asset Swap Phil GAAP N/P xx CA of liability Gain/Loss on Extinguishment of Debt Accrued Int Payable xx CA of asset
Bank Service Charge Land Gain on Extinguishment of Debt N/P Accrued Int Payable Bank Service Charge Land Gain on Exchange Gain on Debt Restructuring xx xx xx xx xx xx xx xx xx

US GAAP CA of asset FV of asset CA of liability

Gain/Loss on Exchange (as if the asset was sold) Gain on Debt Restructuring

Equity Swap - Liability extinguished by issuing equity instrument to creditor

Modification of Terms

*Gain/Loss in Extinguishment of Debt = Gain/Loss on Exchange + Gain/loss on Debt Restructuring Initial measurement of equity: 1) FV of equity instruments issued 2) If not measurable, FV of liability extinguished 3) If both are not measurable, CA of liability in this case, no gain/loss can be recognized Interest Concession - lowered interest rates/write-off unpaid interest Maturity Value Concession - extension of maturity date/reduction in amount due

1) FV of equity instrument issued and 2) FV of liability B/P Accrued Int Payable Share Capital Share Premium Gain on Extinguishment of Debt

Kind of Debt Restructuring

Accounting - recorded as extinguishment of old liability and birth of a new one - check for SUBSTANTIAL MODIFICATION at least 10% of old liability amounts to gain/loss Phil GAAP CA of old liability Gain/Loss on Extinguishment of Present Value of New Liability using Debt old effective rate

Journal Entries

Books of Creditor: N/R new Loss on Debt Restructure N/R old Accrued Int Receivable Unearned Int Income Books of Debtor: N/P old Accrued Int Payable Disc on N/P N/P new Gain on Debt Restructure N/P old Accrued Int Payable N/P new Gain on Debt Restructuring

xx xx xx xx xx xx xx xx xx xx xx xx xx xx

US GAAP CA of old liability New Liability in absolute amount

Gain on Debt Restructuring

New Liability recorded = Principal, new + future interest payments

NO SUBSTANTIAL MODIFICATION OF TERMS - no gain is recognized because the modification is not an extinguishment of old liability - any costs incurred in modifying the terms are adjusted to carrying amount of old liability and amortized - old liability is essentially continued but with modified interest charges so a new effective interest rate must be computed where: CA of old liab = PV of cash outflows of modified liability recorded in absolute terms and no gain/loss on debt restructuring is recognized