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ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 9
Investments
Prepared by:
Dragan Stojanovic, CA
Rotman School of Management,
University of Toronto
CHAPTE
9:
R
INVESTMENTS
After studying this chapter you should be able to:
Understand the nature of investments including which types of companies have significant
investments.
Explain and apply the cost/amortized cost model of accounting for investments.
Explain and apply the fair value through net income model of accounting for investments.
Explain and apply the fair value through other comprehensive income model of accounting for
investments.
Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Explain the concept of significant influence and apply the equity method.
Explain the concept of control and when consolidation is appropriate.
Explain how investments are presented and disclosed in the financial statements noting how
this facilitates analysis.
Identify differences in accounting between IFRS and ASPE, and what changes are expected in
the near future.
Copyright John Wiley & Sons Canada,
Ltd.
Investments
Understanding
Investments
Measurement
Cost / amortized
cost model
Types of
investments
Fair value through
net income model
Types of companies
that have
Fair value through
investments
OCI model
Information for
Impairment models
decision-making
Presentatio
Strategic
Investments n,
Investments Disclosure,
in associates and
Investments Analysis
in
subsidiaries
Presentation
and
disclosure
Analysis
IFRS / ASPE
Comparison
Comparison
Looking
ahead
Type of Investments
Debt investments include investments in
government debt, corporate bonds,
convertible debt, and commercial paper
Equity instruments represent ownership
interests in companies (e.g., common stock,
preferred stock)
Motivations for investments include: to obtain
short-term returns or long-term returns on
investments, and for corporate strategy
Copyright John Wiley & Sons Canada,
Ltd.
Measurement
Method of accounting for a particular
investment can depend on:
Type of instrument (debt vs. equity)
Managements intent
Company strategy
Ability to reliably measure instruments fair
value, or
Accounting Models
There are three main models of
accounting for investments:
Cost/amortized cost model
Fair value through net income model (FV-NI)
Fair value through other comprehensive
income model (FV-OCI)
Accounting Models:
Summary
Cost/Amortized
Cost Model
At acquisition,
measure at:
FV-NI
FV-OCI
Fair value
Fair value
Fair value
Fair value
Unrealized
holding
gains/losses
reported in:
Net income
OCI
Realized holding
gains/losses
reported in:
Not applicable
Net income
income
Copyright John WileyNet
& Sons
Canada,
Ltd.
Transfer total
realized to net
income (recycling),
or to retained
earnings
7
10
92,278
92,278
11
Bond Discount
Amortization
12
$xx,xxx
Income Statement
Other revenue and gains
Interest income
$x,xxx
13
Sale of Investments
Discount (or premium) is amortized from last date of
amortization to the date of sale
New carrying amount calculated, which is the
amortized cost balance plus the discount (or minus
the premium) amortized from last date of amortization
Gain (or loss) calculated as the difference between
selling price and carrying amount
Any accrued interest income is calculated (and
received) over and above the selling price of the
investment
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Ltd.
14
15
FV-NI: An example
19,231
769
16
FV-NI: An example
A company reported on December 31, 2015:
Investments
Carrying Amount
In various shares
$192,990
Fair Value
$191,200
1,790
1,790
2015
Current assets:
FV-NI Investments
$191,200
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Ltd.
17
18
19
FV-OCI: An Example
Given share investment accounted for at FV-OCI:
Fair value at Dec. 31, 2013 $275,000
Carrying amt. at Dec. 31, 2013
259,700
Unrealized Holding Gain $ 15,300
Entry to Record:
FV-OCI Investments
15,300
Unrealized Gain or loss OCI
15,300
20
$ 15,300
FV-OCI: An example
On January 23, 2014 sell investment for $287,220
Entry to record adjustment to fair value:
FV-OCI Investments ($287,220 - 275,000)
12,220
Unrealized Gain or loss OCI
12,220
Entry to record sale and proceeds:
Cash
287,220
FV-OCI Investments
287,220
27,520
27,520
27,520
21
ASPE Classifications
ASPE generally relies on cost-based
model for equity investments, unless
active market prices are available
FV-NI model is allowed as an option for
any financial instrument
Under all models, interest earned and
dividends received are recognized in net
income
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Ltd.
22
IFRS Classifications
Amortized cost used only if both of following
conditions are satisfied:
Business model: investment managed on
contractual yield basis (and cash flows best
assessed relative to contractual cash flows
specified by instrument)
Contractual cash flow characteristics: cash flows
represent only payments of principal and interest on
principal outstanding, and occur at specified dates
23
IFRS Classifications
IFRS standard effective 2015 (with early
adoption possible) includes two additional
options:
Investments held for longer term strategic
reasons (without control or significant influence)
may be accounted for under FV-OCI without
recycling if such choice is made on acquisition
Fair value option provides an opportunity to use
FV-NI accounting from acquisition if it corrects
an accounting mismatch
Copyright John Wiley & Sons Canada,
Ltd.
24
IFRS Classifications
Reclassification from one category to
another is not allowed, except under very
limited situations
25
Impairment
Investments must be reviewed for possible
impairment to ensure that future benefit
justifies the valuation on the balance sheet
There are three different impairment
models:
1. Incurred loss model
2. Expected loss model
3. Full fair value model
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Ltd.
26
27
28
29
Impairment: Accounting
Standards
IFRS currently uses the following models:
For all financial asset investments accounted for at
cost or amortized cost: incurred loss model (with
original discount rate)
For FV-NI instruments: full fair value model
30
Impairment: Accounting
Standards
ASPE has following requirement:
For financial asset investments accounted for
at cost or amortized cost: incurred loss model
(using current market rate)
For equity instruments (with market values)
and derivative instruments, use fair value
model
31
Strategic Investments
As common shares carry voting rights,
extent of influence becomes a factor in
determining the appropriate accounting
treatment
There are three levels of influence, each
with its own accounting treatment:
1. Little or no influence
2. Significant influence
3. Control
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32
Equity Investments:
Common Shares
%
Ownership
0%
Level of Little or
Influence none
20%
Significant
50%
Control
Type of
Less than
Associate, or
Investment
significant
significant
influence
influence
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Ltd.
Subsidiary
33
100%
34
Investment in Associates
Equity method, or
Cost method (unless associate shares are quoted in
active market, in which case FV-NI model is used)
35
Equity Method
Investment recorded at cost of acquisition
Investor takes into income its respective share
of the investee net income for the year by
debiting the Investment account and crediting
Investment Income
Any dividends received are credited to the
Investment account
The accrual basis of accounting is applied
Consider the following example of Maxi Limited:
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Ltd.
36
37
38
Equity Method
Amounts paid in excess of (or less than) investees
book value becomes part of the cost of the
investment
These amounts must be accounted for appropriately
after the acquisition
For example, if the difference is due to long-lived
assets with fair values greater than book value, the
difference must be amortized
39
Equity Method:
Impairment
Investments with significant influence are assessed at
the end of each reporting period to determine if there
are indicators of impairment
If there are indicators of impairment, the impairment
test is carried out
Impairment loss is recognized in income and is
measured as carrying amount in excess of
investments recoverable amount
Investments recoverable amount is measured as the
higher of value in use and fair value less cost to sell
Impairment losses may be reversed
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Ltd.
40
41
Investments in Subsidiaries
A corporation (the parent) can acquire control
of another corporation (the subsidiary)
Control is generally acquired through
purchasing 50% or more voting shares
Control is defined as continuing power to
determine/direct the strategic operating,
financing, and investment policies/activities,
without the co-operation of others
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Ltd.
42
Investments in Subsidiaries
Under IFRS, investments for subsidiaries are accounted
for preparation of consolidated financial statements
43
Consolidated Financial
Statements
Parent Corporation
- Income Statement
- Balance Sheet
Subsidiary Corporation
- Income Statement
- Balance Sheet
Consolidated Entity
44
Presentation and
Disclosure
For investments without significant influence or
control, key presentation issue is classification of
investment as current vs. long-term
Key disclosures include following types of
information:
Carrying amount of investments
Income statement effects
Financial risk
45
Investments Recent
Changes
Due to the complexity of accounting for
investments, a number of proposals from
IASB and FASB relating to:
1. Simplification of existing accounting
standards
2. New model for impairments and use of
expected loss approach
46
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