INVESTMENT

Lecture 3

Stock right / Warranty/ Investment property

STOCK RIGHT

What is a stock rights ? A stock rights are rights to buy new

shares for cash to existing shareholders by specific price on future day.

Why issue shares to existing shareholders?

Legally a rights issue must be made before a new issue to the public. This is because existing shareholders have the “right of first refusal” on the new shares.

One or more rights- stock warrantyRealizable Cost of rights < Stock market valueOtherwise,The price at which the new shares

are issued is generally much less than the prevailing market price for the shares.

3 special days to issue stock rights: Declared day Issued day Maturity date

Declared date Issued date

Stocks and Rights

Issued date Maturity date

Stocks and Rights

FOR EXAMPLE

Company “A” purchased 1000 units of common stocks “B’ company by $2 per share.

After 3 month “A” company received 200 stock rights to buy 1 share by $2.5 in future. On rights issue day :

- Market value of stock – $2.2- Market value of rights- $1.0

Market value Proportion TotalCost

Unit cost

Stock 2200 91.67 1833.4 1.8334

Stock rights 200 8.33 166.6 0.833

Total amount 2400 100 2000

Dt Stock investment 2000 Ct Cash 2000

Dt Stock rights investment 166.6 Ct Stock investment 166.6

After 2 months they realized 50 rights . They purchased 50 stocks by $2.5.

Dt Stock investment 125 Ct Stock rights investment 41.65 Ct Cash 83.35

They sold 30 stock rights by $1.2.

Dt Cash 36

Ct Stock rights investment 24.99

Ct Gain of stock rights investment sold 11.01

INVESTMENT PROPERTY

They are land and buildings held as investments, and not for the consumption in the operation of business

MEASUREMENT AT RECOGNITION

An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement.

For Purchased Property:

For Self-Constructed Property:

For Finance Leased Asset:

Cost includes purchase price and directly attributable costs

Cost is the cost at the date when the development or construction is complete

Cost is the lower of the fair value of the property and the present value of the minimum lease payments

• An item of property, plant and equipment should be recognized as an asset and recorded at its cost

• Cost= Purchase Price + Other acquisition costs

INVESTMENT PROPERTY land held for long-term capital appreciation

land held for a currently undetermined future use

a building owned by the entity and leased out under one or more operating leases.

a building that is vacant but is held to be leased out under one or more operating leases.

It the subsequent expenditure only restores or maintains the future economic benefits to the originally assessed standard, it should be written off as an expense when it is incurred. Examples include repairing and maintenance

FOR MEASUREMENT AFTER RECOGNITIONENTITY MAY USE

COST MODEL FAIR VALUE MODEL

COST MODELAn entity using shall measure ALL of its investment

property in accordance with

IAS 16 Property, Plant & Equipment requirements for that model, or

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations for investment properties that meet the criteria to be classified as held for sale

EXCEPT

Investment property under operating lease shall be carried at the fair value

FAIR VALUE MODEL

An entity that chooses the fair value model shall measure ALL of its investment property at fair value EXCEPT where the fair value of the investment property is not reliably determinable on a continuing basis.

Investment property under operating lease shall be recognised at the fair value

A gain or loss arising from a change in the fair value of investment property shall be recognised in profit or loss for the period in which it arises

the fair value of investment property shall reflect market conditions at the balance sheet date.