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Financial Accounting: A Managerial Perspective

Fourth Edition
Prepared by
R. Narayanaswamy Indian Institute of Management Bangalore

28 June 2011

© PHI Learning Private Limited New Delhi

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Chapter 8 Investments

28 June 2011

© PHI Learning Private Limited New Delhi

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Investments in Perspective What is an investment? Why do firms hold investments? Types of investments Accounting for investments 28 June 2011 © PHI Learning Private Limited New Delhi 3 .

Financial Instruments and Financial Assets What is a financial instrument? What is a financial asset? “Contractual claim” 28 June 2011 © PHI Learning Private Limited New Delhi 4 .

Equity and Debt Investments “Financial investments” Financial assets at fair value through profit and loss account Held-to-maturity investments Loans and receivables Available-for-sale financial assets 28 June 2011 © PHI Learning Private Limited New Delhi 5 .

Financial Assets at Fair Value through Profit and Loss Account What are financial assets at fair value through profit and loss account? “Held-for-trading” Fair value accounting Initial measurement Subsequent measurement Recognition of gains and losses Financial assets carried at cost 28 June 2011 © PHI Learning Private Limited New Delhi 6 .

Held-to-maturity Investments What are held-to-maturity investments? Exclusions Initial measurement Amortized cost Effective interest method Internal rate of return “Tainting” provisions 28 June 2011 © PHI Learning Private Limited New Delhi 7 .

Loans and Receivables What are loans and receivables? Exclusions Initial measurement Subsequent measurement Amortized cost 28 June 2011 © PHI Learning Private Limited New Delhi 8 .

Available-for-sale Financial Assets What are available-for-sale financial assets? Initial measurement Subsequent measurement Other comprehensive income 28 June 2011 © PHI Learning Private Limited New Delhi 9 .

Impairment of Financial Assets Categories of financial assets to be reviewed for impairment “Objective evidence” of impairment Measuring impairment Financial assets carried at amortized cost Financial assets carried at cost Available-for-sale financial assets 28 June 2011 © PHI Learning Private Limited New Delhi 10 .

“financial investments” Accounting considerations Subsidiaries Joint ventures Associates 28 June 2011 © PHI Learning Private Limited New Delhi 11 .Equity Investments for Business Purposes Reasons for equity investments for business purposes “Operating investments” vs.

Subsidiaries Subsidiary Parent Group Control Voting power Other means 28 June 2011 © PHI Learning Private Limited New Delhi 12 .

Consolidated Financial Statements Why do we need consolidated financial statements? Consolidation Steps in consolidation Non-controlling interests (or minority interests) Consolidation requirements Exemption from consolidation 28 June 2011 © PHI Learning Private Limited New Delhi 13 .

Business Combination What is a business combination? Acquirer Acquiree Acquisition Goodwill Acquisition method (or purchase method) Measuring non-controlling interests 28 June 2011 © PHI Learning Private Limited New Delhi 14 .

Consolidated Financial Statements and Business Combination Illustrated 28 June 2011 © PHI Learning Private Limited New Delhi 15 .

Consolidated Financial Statements and Business Combination Illustrated 28 June 2011 © PHI Learning Private Limited New Delhi 16 .

Consolidated Financial Statements and Business Combination Illustrated 28 June 2011 © PHI Learning Private Limited New Delhi 17 .

Consolidated Financial Statements and Business Combination Illustrated 28 June 2011 © PHI Learning Private Limited New Delhi 18 .

Consolidated Financial Statements and Business Combination Illustrated 28 June 2011 © PHI Learning Private Limited New Delhi 19 .

Consolidated Financial Statements and Business Combination Illustrated 28 June 2011 © PHI Learning Private Limited New Delhi 20 .

Joint Ventures What is a joint venture? Joint control Venturer Investor in a joint venture Jointly controlled operations Jointly controlled assets Jointly controlled entities Proportionate consolidation Proportionate consolidation requirements Exemption from proportionate consolidation 28 June 2011 © PHI Learning Private Limited New Delhi 21 .

Associates What is an associate? Significant influence Equity method Fair value adjustment Goodwill Exemption from the equity method 28 June 2011 © PHI Learning Private Limited New Delhi 22 .

Investments in Separate Financial Statements Separate financial statements Investment Dividend income 28 June 2011 © PHI Learning Private Limited New Delhi 23 .

Investment Property What is investment property? Fair value model Cost model 28 June 2011 © PHI Learning Private Limited New Delhi 24 .

End of Chapter 8 Investments 28 June 2011 © PHI Learning Private Limited New Delhi 25 .