by Rehan zaidi
Intercorporate Investment
Fair value through profit &
loss(FVPL) and held for
trading(HFT)
Held to Maturity (HTM)
Available for Sale (AFS)
Loans & Recievables
Reclassification
IFRS
• Initially recognized on the B/S at FV
•(Debt) Unrealized +/- resulting from
exchange rate movements are
recognized on I/S
• recognized at amortized cost (unless
designated as AFS or FVPL)
• Cannot be classified into & out of
designated at fair value(DFV) & out of
HFT
• not permited to classify security as
HTM if sold significant HTM investment
during current or preceeding 2 years
• from AFS(debt) to HTM, FV becomes
new CV on B/S & diff between FV &
maturity value(par value) & previously
recognized +/- in OCI is amorited over
security life to I/S
• HTM to AFS, with FV at B/S &
difference between FV & CV going in OCI
• Debt instruments from HFT or AFS to
Loans & recievables if firms expect to
hold them for forseeable future & the
definition is met
1
U.S. GAAP
• Initially recognized on B/S at initial
price paid
•All unrealized +/- are reported in OCI
• Accounting treatment is similar
• If meets the definition of debt security,
then classified as HFT, AFS or HTM
• From AFS ↔ HFT , Cummulative
unrealized +/- goes into I/S ( HFT TO AFS
unrealized +/- already in I/S-requires no
adjustment)
• AFS(debt) into HTM, Cummulative +/-
already in OCI is amortized over security
life
• HTM to AFS, Unrealized +/- goes to I/S
Similarities
• Securities classified as FVPL
include (1) Held for trading (2) those
designated by mgmt as carried at FV
• debt & equity securities bought
with the intention of selling them in
near term
• Initially recognized at FV and
remeasured at each reporting date
to reflect FV
• Realized +/-,unrealized +/-,
interest & dividend income all
reported in I/S
•Securities are subsequently
reported at amortized cost using the
effective interest method
• Interest income & realized +/- are
recognized on I/S
• Unrealized +/- are ignored
• realized +/-, interest & dividend
income are also recognized on I/S
• Initially recognized at FV &
remasured at each reporting date to
reflect FV
• Unrealized +/- are recognized in
OCI & when they are sold +/- are
reversed out of OCI & reported in
P&L as a reclassification adjustment
by Rehan zaidi
IFRS
• All financial assets not carried at FV are
tested for imairment
• debt security is impaired if at least one
loss event has occurred, equity security
is impaired if CV > FV
• HTM & loans & recievable investments
that have become impaired are written
down on B/S at PV of future discounted
at the initial effective interest rate. the
impairment loss is calculated as the
difference between CV and PV of FCF &
Impairment reported in I/S. Reversal is allowed
• if AFS security is impaired, unrealized
cummulated loss recognized in OCI is
transferred from OCI to I/S (as the
security is remeasured at FV at each
successive reporting date) as a
reclassification adjustment
• equity cannot be reversed but debt
can.
Disclosures
• Impaired when Carrying Value(CV) >
Recoverable ammount(RA)(higher of
value in use and net selling price)
Investment in Associates
• Three types of joint ventures: jointly •Refers only to jointly controlled
controlled operations, jointly controlled separate entities
assets, and jointly controlled entitites requires the use of equity method
• Identifies the following 2
characteristics:(1) contractual
aggreement between two or more
Joint ventures
ventures (2) contractual arrangement
establishes joint venture
• proportionate consolidation is the
preferred method
2
U.S. GAAP
• Evaluate HTM & AFS securities for
imairment
• both debt & equity security is impaired
if decline is not temporary
• written down to FV with impairment
loss reported as realized loss on I/S
• Reversal is not permitted, therefore
any subsequent increase in FV(in case of
AFS) is reported as unrealized gain in OCI
• Impaired when CV>FV
Similarities
Require disclosure of FV of all
classes of financial assets
Investment in associates is
accounted for using the equity
method.
FV option when using equity method
is allowed, the following differences
exist when using FV option:
• decision to use FV option must
be made at the time of initial
recognition & is irreversible
• Unrealized +/-, interest & dividend
income are recognized in investors
income (I/S)
• Investment Account on investors
B/S doesnt reflect investors
proportional share in investees
earnings, dividends & other
distributions
• excess of cost over investees net
identifiable assets is not amortized
• Goodwill is not created
Must be tested for impairment
periodically and reversal is not
permitted
•both now require the use of equity
method to account for joint venture
by Rehan zaidi
IFRS
• Does not differentiate between
bussiness combination based on
structure of surviving entity
• In the past used uniting of interest
method
Bussiness combinatiion
• At acquisition total amount of goodwill
is allocated to each of acquirers Cash
generating Unit(CGU)
• Both full goodwill & partial goodwill
methods are permitted
Goodwill
• Uses one step approach to goodwill
impairment testing
• Impaired when CV of (CGU) > R.A of
(CGU) with impairment loss = CV-R.A
• Impairment loss is first applied to
goodwill of CGU and once its reduced to unit - FV of net assets of reporting unit
zero, the remaining amount if any left is • Impairment Loss = Implied Goodwill -
Impairment of Goodwill allocated to other assets of CGU on a pro- Carrying amount of current Goodwill
rata basis
• Separate Purpose Entities
• SPE must be consolidated by Sponsor if
the substance of relationship indicates
Control
Investment in SPEs/VIEs
3
U.S. GAAP Similarities
• categorizes bussiness as: • acquisition method is required
Merger(A+B=A), Acquisition(A+B=A+b) & now.
Consolidation(A+B=C) • reports non controlling interest in
• Merger & Consolidation refers to 100% equity & I/S
acquisition by one company of another
where as Acquistion refers to less than
100% acquiring therefore Parent-
Subsidiary relation exist(parent
consolidates subsidiaries statements
with 100% of BV of subsidiaries assets,
liabilities, revenues & expenses but
equity accounts are ignored(initially))
• In the past used pooling of interest
method
• At acquisition total amount of goodwill • I/S is same under both methods
is allocated to each of acquirers • Does not discuss how goodwill is
reporting units allocated to each CGU
• Requires the use of Full goodwill • when purchase price(P.P) < FV of
mehtod net subsidiary assets than it is
referred to as "Bargain Purchase
Option" - the resulting Gain(FV-PP) is
recognized immediately in the I/S
• Uses 2 Step approach to goodwill Impairment Loss is reported as a
impairment testing single line item on the consolidated
• Impaired then CV of reporting unit > FV I/S
of reporting unit
• uses Implied Goodwill(FV of reporting
• Impairment loss is only applied to the
goodwill of reporting unit, once its
reduced to zero no adjustments are
made to the CV of units other
Assets/Liabilities
• Variable Interest entities • Require Sponsoring
• Primary beneficiary of VIE must Companies/primary beneficiary to
consolidate prepare consolidated financial
• Primary beneficiary is an entity that is Statement when party other than
expected to absorb majority of VIEs the holders of majority voting rights
losses or receive majority of VIEs residual exert financial control
returns or both(preferrance to entity
absorbing Losses)
• Primary beneficary also report Non
controlling interests
by Rehan zaidi
IFRS
• Contingent Assets are not recognized
while Contingent Liabilities are
recognized(at FV) seperately during the
cost allocation process
• Recognizes Contingent Liabilites if they
are arising from past events & can be
measured reliably
• Expected Costs(for example:
restructuring Costs) are not included
Contingent Assets/liabilities
U.S. GAAP
• Recognizes Contingent Liabilities only if
it is probable that they they can be
measured reliably
• ContractualContingent Assets/liabilities
are recognized at FV at acquistion
• NonContracutal Contingent
Asset/liabilites may also be recognized if
it is "more likely than not" that they
meet the difinition of Asset/liabilities at
the time of acquisition.
Similarities
• Recognizes Indemnification Assets
• Contingent Consideration should
initially be measured at FV and
classified as Liability or Equity(and
Asset in case of GAAP)
• Subsequent changes in FV of
contingent considerations are
recognnized in consolidated I/S
•Contingent Considerations
classified as equity are not
remeasured and any settlements are
accounted for within equity
• In-process R&D(IPR&D) Is
recognized as seperate intangible
asset & amortized(if successful) in
subsequent periods
• Restructuring costs are expensed
in the period in which they are
incurred(they are not included in
acquisition price)