Beruflich Dokumente
Kultur Dokumente
17-1
Investments
Investments
Debt Investments
Other Reporting
Issues
Amortized cost
Fair value
Impairment of value
Fair value
Equity method
Consolidation
Transfers between
categories
Summary of debt
investment accounting
17-2
Investments in
Equity Securities
Learning
Learning Objectives
Objectives
1.
2.
3.
4.
5.
6.
7.
8.
Explain the equity method of accounting and compare it to the fair value
method for equity investments.
9.
Financial
Financial Instruments
Instruments
Financial Instruments - definition on page 658
17-4
Accounting
Accounting for
for Financial
Financial Assets
Assets
Financial Asset
Cash.
Accounting
Accounting for
for Financial
Financial Assets
Assets
Measurement BasisA Closer Look
IFRS requires that companies measure their financial assets
based on two criteria:
Accounting
Accounting for
for Financial
Financial Assets
Assets
Measurement BasisA Closer Look
Equity investments are generally recorded and reported at
fair value.
Summary of Investment Accounting Approaches
17-7
Illustration 17-1
Investments
Investments
Investments definition, examples and purpose on page 656 657
Presentation:
Balance Sheet as current or non-current assets.
17-8
Equity
Equity Investments
Investments at
at Fair
Fair Value
Value
Equity investment represents ownership of ordinary, preference,
or other capital shares. (definition on page 662)
Designation of Equity Instrument:
- designate at initial recognition as investment at fair value
through profit or loss unless the entity made an irrevocable
election to designate the investment at fair value through other
comprehensive income (OCI).
- No transfer from other comprehensive income to profit or loss
(reclassification adjustment) once the equity investment has been
designated as fair value through profit or loss or fair value
through OCI.
17-9
Equity
Equity Investments
Investments at
at Fair
Fair Value
Value
Measurement of Equity Investments (PFRS 9)
Designation
Initial Measurement
Subsequent Measurement
Fair value*
FV through OCI
Initial Measurement
Subsequent
Measurement
Unrealized Holding
Gains or Losses
Trading Securities
Fair value
Recognized in net
income
Recognized in OCI
and as separate
component in
equity
Non-trading
Securities
17-10
Equity
Equity Investments
Investments at
at Fair
Fair Value
Value
Measurement of Equity Investments (PAS 39)
17-11
Category
Initial Measurement
Subsequent
Measurement
Unrealized Holding
Gains or Losses
Trading Securities
Fair value
Recognized in net
income
Recognized in OCI
and as separate
component in equity
Held to Maturity
Amortized cost
Amortized Cost
(carrying value)
NA
Equity
Equity Investments
Investments at
at Fair
Fair Value
Value
17-12
Impairment:
Equity
Equity Investments
Investments
Illustration 17-15
Levels of Influence
Determine Accounting Methods
17-13
Equity
Equity Investments
Investments
Illustration 17-16
Accounting and Reporting for
Equity Investments by Category
17-14
Equity
Equity Investments
Investments at
at Fair
Fair Value
Value
Under IFRS, the presumption is that equity investments
are held-for-trading.
General accounting and reporting rule:
17-15
Equity
Equity Investments
Investments at
at Fair
Fair Value
Value
IFRS allows companies to classify some equity
investments as non-trading.
General accounting and reporting rule:
17-16
Debt
Debt Investments
Investments
Debt investments are characterized by contractual
payments on specified dates of
principal and
17-17
amortized cost or
fair value.
Debt
Debt InvestmentsFair
InvestmentsFair Value
Value
Debt investments at fair value follow the same accounting
entries as debt investments held-for-collection during the
reporting period. That is, they are recorded at amortized
cost.
However, at each reporting date, companies
17-18
Fair
Fair Value
Value Option
Option
Companies have the option to report most financial assets at
fair value. This option
17-19
Fair
Fair Value
Value Option
Option
Illustration: Hardy Company purchases bonds issued by the
German Central Bank. Hardy plans to hold the debt investment
until it matures in five years. At December 31, 2011, the
amortized cost of this investment is 100,000; its fair value at
December 31, 2011, is 113,000. If Hardy chooses the fair value
option to account for this investment, it makes the following
entry at December 31, 2011.
Debt InvestmentGerman Bonds
4,537
17-20
4,537
Summary
Summary of
of Debt
Debt Investment
Investment Accounting
Accounting
Illustration 17-14
17-21
Equity
Equity Method
Method
An investment (direct or indirect) of 20 percent or more of the
voting shares of an investee should lead to a presumption that
in the absence of evidence to the contrary, an investor has the
ability to exercise significant influence over an investee.
In instances of significant influence, the investor must
account for the investment using the equity method.
17-22
Equity
Equity Method
Method
Equity Method
Record the investment at cost and subsequently adjust
the amount each period for
Equity
Equity Method
Method
Illustration 17-23
17-24
LO 6
Consolidation
Consolidation
Controlling Interest - When one corporation acquires a voting
interest of more than 50 percent in another corporation
17-25
Impairment
Impairment of
of Value
Value
Impairment of Value
For debt investments, a company uses the impairment test to
determine whether it is probable that the investor will be unable
to collect all amounts due according to the contractual terms.
This impairment loss is calculated as the difference between the
carrying amount plus accrued interest and the expected future
cash flows discounted at the investments historical effectiveinterest rate.
17-26
Impairment
Impairment of
of Value
Value
Illustration: At December 31, 2010, Mayhew Company has a
debt investment in Bellovary Inc., purchased at par for $200,000.
The investment has a term of four years, with annual interest
payments at 10 percent, paid at the end of each year (the
historical effective-interest rate is 10 percent). This debt
investment is classified as held-for-collection. Using the following
information record the loss on impairment.
17-27
Impairment
Impairment of
of Value
Value
Illustration 17-24 & 25
Loss on Impairment
Debt Investments
17-28
12,688
12,688
LO 7
Transfers
Transfers Between
Between Categories
Categories
Transferring an investment from one classification to another
17-29
Transfers
Transfers Between
Between Categories
Categories
Illustration: British Sky Broadcasting Group plc (GBR) has a
portfolio of debt investments that are classified as trading; that is,
the debt investments are not held-for-collection but managed to
profit from interest rate changes. As a result, it accounts for these
investments at fair value. At December 31, 2010, British Sky has
the following balances related to these securities.
17-30
Transfers
Transfers Between
Between Categories
Categories
Illustration: As part of its strategic planning process, completed
in the fourth quarter of 2010, British Sky management decides to
move from its prior strategywhich requires active management
to a held-for-collection strategy for these debt investments.
British Sky makes the following entry to transfer these securities
to the held-for-collection classification.
Debt Investments 125,000
Securities Fair Value Adjustment
17-31
125,000
Fair
Fair Value
Value Controversy
Controversy
17-32
Gains Trading
Reporting
Reporting Treatment
Treatment of
of Investments
Investments
Illustration 17-26
17-33
17-34
17-35
Both U.S. GAAP and IFRS use the same test to determine whether the
equity method of accounting should be usedthat is, significant
influence with a general guide of over 20 percent ownership.
The basis for consolidation under IFRS is control. Under U.S. GAAP, a
bipolar approach is used, which is a risk-and-reward model (often
referred to as a variable-entity approach) and a voting-interest
approach. However, under both systems, for consolidation to occur, the
investor company must generally own 50 percent of another company.
17-36
U.S. GAAP and IFRS are similar in the accounting for the fair value
option. That is, the option to use the fair value method must be made at
initial recognition, the selection is irrevocable, and gains and losses are
reported as part of income. One difference is that U.S. GAAP permits
the fair value option for equity method investments.