Professional Documents
Culture Documents
CHAPTER
17
171
INVESTMENTS
U.S. GAAP
PERSPECTIVE
U.S. GAAP classifies
investments as trading,
available-for-sale (both debt
and equity investments), and
held-to-maturity (debt
investments only).
172
IFRS Supplement
For example, assume that Mitsubishi (JPN) purchases a bond investment that it
intends to hold to maturity. Its business model for this type of investment is to collect
interest and then principal at maturity. The payment dates for the interest rate and principal are stated on the bond. In this case, Mitsubishi accounts for the investment at
amortized cost. If, on the other hand, Mitsubishi purchased the bonds as part of a trading strategy to speculate on interest rate changes (a trading investment), then the debt
investment is reported at fair value. As a result, only debt investments such as receivables, loans, and bond investments that meet the two criteria above are recorded at
amortized cost. All other debt investments are recorded and reported at fair value.
Equity investments are generally recorded and reported at fair value. Equity investments do not have a fixed interest or principal payment schedule and therefore cannot
be accounted for at amortized cost. In summary, companies account for investments
based on the type of security, as indicated in Illustration 17-1.
ILLUSTRATION 17-1
Summary of Investment
Accounting Approaches
Type of Investment
Valuation Approach
Debt (Section 1)
Amortized cost
Fair value
Fair value*
Equity (Section 2)
*For some equity investments for which the investor exercises some control over the investee, use the equity method.
10
PV
PMT
4,000
FV
100,000
Answer
92,278
Classification as held-for-collection does not mean the security must be held to maturity.
For example, a company may sell an investment before maturity if (1) the security does not
meet the companys investment strategy (e.g., the company has a policy to invest in only
AAA-rated bonds but the bond investment has a decline in its credit rating), (2) a company
changes its strategy to invest only in securities within a certain maturity range, or (3) the
company needs to sell a security to fund certain capital expenditures. However, if a
company begins trading held-for-collection investments on a regular basis, it should assess
whether such trading is consistent with the held-for-collection classification. [5]
Chapter 17 Investments
173
92,278
92,278
Date
Cash
Received
Interest
Revenue
Bond
Discount
Amortization
Carrying
Amount
of Bonds
1/1/11
7/1/11
1/1/12
7/1/12
1/1/13
7/1/13
1/1/14
7/1/14
1/1/15
7/1/15
1/1/16
$ 4,000a
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
$ 4,614b
4,645
4,677
4,711
4,746
4,783
4,823
4,864
4,907
4,952
$ 614c
645
677
711
746
783
823
864
907
952
$ 92,278
92,892d
93,537
94,214
94,925
95,671
96,454
97,277
98,141
99,048
100,000
$40,000
$47,722
$7,722
Robinson records the receipt of the first semiannual interest payment on July 1,
2011 (using the data in Illustration 17-2), as follows.
July 1, 2011
Cash
Debt Investments
Interest Revenue
4,000
614
4,614
4,000
645
4,645
U.S. GAAP
PERSPECTIVE
Held-to-maturity investments
under U.S. GAAP are
recorded at amortized cost.
ILLUSTRATION 17-2
Schedule of Interest
Revenue and Bond
Discount Amortization
Effective-Interest Method
174
IFRS Supplement
Robinson reports its investment in Evermaster bonds in its December 31, 2011,
financial statements, as follows.3
ILLUSTRATION 17-3
Reporting of Bond
Investments at
Amortized Cost
$93,537
$ 4,000
Income Statement
Other income and expense
Interest revenue ($4,614 $4,645)
$ 9,259
Sometimes, a company sells a bond investment before its maturity. For example,
Robinson Company may sell securities as part of a change in its investment strategy
to move away from five-year debt investments, like the Evermaster bonds, to invest in
shorter-term bonds. Such a strategy would allow the bonds to reprice more frequently in
response to interest rate changes. Lets assume that Robinson Company sells its investment in Evermaster bonds on November 1, 2013, at 9934 plus accrued interest. The discount amortization from July 1, 2013, to November 1, 2013, is $522 ( 46 $783). Robinson
records this discount amortization as follows.
November 1, 2013
Debt Investments
Interest Revenue
522
522
Illustration 17-4 shows the computation of the realized gain on the sale.
ILLUSTRATION 17-4
Computation of Gain on
Sale of Bonds
$99,750
$95,671
522
96,193
$ 3,557
102,417
2,667
96,193
3,557
The credit to Interest Revenue represents accrued interest for four months, for which
the purchaser pays cash. The debit to Cash represents the selling price of the bonds
plus accrued interest ($99,750 $2,667). The credit to Debt Investments represents the
book value of the bonds on the date of sale. The credit to Gain on Sale of Debt Investment represents the excess of the selling price over the book value of the bonds.
3
Although the example here is based on a single investment, the IASB indicates that companies
evaluate the investment strategy (or business model for managing the investments) at a higher
level of aggregation than the individual security. As a result, a company may have more than
one investment strategy. That is, a company may hold a portfolio of investments that is managed
to collect contractual cash flows and another portfolio of investments that is managed to
realize gains and losses on fair value changes. [6]
Chapter 17 Investments
92,278
92,278
July 1, 2011
Cash
Debt Investments
Interest Revenue
4,000
614
4,614
4,000
645
4,645
Again, Illustration 17-2 shows the interest and amortization amounts. If the debt
investment is held-for-collection, no further entries are necessary. To apply the fair value
approach, Robinson determines that, due to a decrease in interest rates, the fair value
of the debt investment increased to $95,000 at December 31, 2011. Comparing the fair
value with the carrying amount of these bonds at December 31, 2011, Robinson has an
unrealized holding gain of $1,463, as shown in Illustration 17-5.
4
Companies may incur brokerage and transaction costs in purchasing securities. For
investments accounted for at fair value (both debt and equity), IFRS requires that these
costs be recorded in net income as other income and expense and not as an adjustment
to the carrying value of the investment. [7]
175
176
IFRS Supplement
ILLUSTRATION 17-5
Computation of Unrealized
Gain on Fair Value Debt
Investment (2011)
$95,000
93,537
$ 1,463
Robinson therefore makes the following entry to record the adjustment of the debt
investment to fair value at December 31, 2011.
Securities Fair Value Adjustment
Unrealized Holding Gain or LossIncome
1,463
1,463
ILLUSTRATION 17-6
Financial Statement
Presentation of Debt
Investments at Fair Value
$95,000
$ 4,000
Income Statement
Other income and expense
Interest revenue ($4,614 $4,645)
Unrealized holding gain or (loss)
$ 9,259
1,463
Continuing with our example, at December 31, 2012, assume that the fair value of
the Evermaster debt investment is $94,000. In this case, Robinson records an unrealized holding loss of $2,388, as shown in Illustration 17-7.
ILLUSTRATION 17-7
Computation of
Unrealized Gain on
Debt Investment (2012)
DEBT INVESTMENTS
DECEMBER 31, 2012
Investment
Evermaster Corporation 10% bonds
Less: Previous securities fair value
adjustment balance (Dr.)
Securities fair value adjustment (Cr.)
Amortized
Cost
Fair Value
$94,925
$94,000
$ (925)
1,463
$(2,388)
Chapter 17 Investments
177
As indicated in Illustration 17-7, the fair value of the debt investment is now less than the
amortized cost by $925. However, Robinson had rerecorded an unrealized gain in 2011.
Therefore, Robinson records a loss of $2,388 ($925 $1,463), which offsets the gain
recorded in 2011, resulting in a credit in the Securities Fair Value Adjustment
account of $925. Robinson makes the following journal entry.
Unrealized Holding Gain or LossIncome
Securities Fair Value Adjustment
2,388
2,388
A credit balance in the Securities Fair Value Adjustment account of $925 ($2,388
$1,463) reduces the amortized cost amount to fair value. Robinson reports its investment
in Evermaster bonds in its December 31, 2012, financial statements as shown in
Illustration 17-8.
ILLUSTRATION 17-8
Financial Statement
Presentation of Debt
Investments at Fair
Value (2012)
$94,000
$ 4,000
Income Statement
Other income and expense
Interest revenue ($4,677 $4,711)
Unrealized holding gain or (loss)
$ 9,388
$ (2,388)
Assume now that Robinson sells its investment in Evermaster bonds on November
1, 2013, at 99 34 plus accrued interest, similar to our earlier illustration. All the entries
and computations are the same as the amortized cost example. The only difference
occurs on December 31, 2013. In that case, since the bonds are no longer owned by
Robinson, the Securities Fair Value Adjustment account should now be reported at zero.
Robinson makes the following entry to record the elimination of the valuation account.
Securities Fair Value Adjustment
Unrealized Holding Gain or LossIncome
925
925
At December 31, 2013, the income related to the Evermaster bonds is as shown in
Illustration 17-9.
ILLUSTRATION 17-9
Income Effects on Debt
Investment (20112013)
Amortized Cost
Years
Interest
2011
2012
2013
$ 9,259
9,388
7,935
Total
$26,582
Fair Value
Unrealized
Gain (Loss)
Total
Interest
0
0
3,557
$0
0
0
$ 9,259
9,388
11,492
$ 9,259
9,388
7,935
$3,557
$0
$30,139
$26,582
Gain on Sale
Unrealized Gain
(Loss)
Total
$1,463
(2,388)
925
$10,722
7,000
12,417
$3,557
$30,139
Gain on Sale
0
0
3,557
As indicated, over the life of the bond investment, interest revenue and the gain on sale
are the same using either amortized cost or fair value measurement. However, under
the fair value approach, an unrealized gain or loss is recorded in each year as the fair
value of the investment changes; overall, the gains or losses net out to zero.
178
IFRS Supplement
The following chart illustrates the basic accounting for debt investments.
Debt Investments
Yes
Characteristics of the
financial asset test:
Contractual cash flows?
No
Yes
No
No
Amortized cost
Yes
1. Holdings of less than 20 percent (fair value method)investor has passive interest.
2. Holdings between 20 percent and 50 percent (equity method)investor has significant influence.
3. Holdings of more than 50 percent (consolidated statements)investor has controlling interest.
Illustration 17-11 lists these levels of interest or influence and the corresponding
valuation and reporting method that companies must apply to the investment.
ILLUSTRATION 17-11
Levels of Influence
Determine Accounting
Methods
Percentage
of Ownership
Level of
Influence
Valuation
Method
Significant
Control
Fair Value
Method
Equity
Method
Consolidation
Chapter 17 Investments
179
The accounting and reporting for equity investments therefore depend on the level
of influence and the type of security involved, as shown in Illustration 17-12.
Category
Valuation
Unrealized Holding
Gains or Losses
Holdings less
than 20%
1. Trading
2. NonTrading
Holdings between
20% and 50%
Holdings more
than 50%
Fair value
Recognized in net
income
Dividends declared;
gains and losses
from sale.
Fair value
Recognized in Other
comprehensive
income and as
separate component
of equity
Dividends declared;
gains and losses
from sale.
Equity
Not recognized
Proportionate share
of investees net
income.
Consolidation
Not recognized
Not applicable.
Companies should record equity investments acquired in exchange for non-cash consideration
(property or services) at the fair value of the consideration given, if the fair value can be
measured reliably. Otherwise, the value of the exchange can be determined with reference to the
fair value of the equity investment. Accounting for numerous purchases of securities requires
the preservation of information regarding the cost of individual purchases, as well as the dates
of purchases and sales. If specific identification is not possible, companies may use an average
cost for multiple purchases of the same class of security. The first-in, first-out method (FIFO) of
assigning costs to investments at the time of sale is also acceptable and normally employed.
ILLUSTRATION 17-12
Accounting and Reporting
for Equity Investments by
Category
U.S. GAAP
PERSPECTIVE
The accounting for trading
investments is the same
under U.S. GAAP and IFRS.
1710
IFRS Supplement
Cost
Burberry
Nestl
St. Regis Pulp Co.
259,700
317,500
141,350
718,550
Total cost
718,550
718,550
4,200
4,200
All three of the investee companies reported net income for the year, but only Nestl
declared and paid a dividend to Republic. But, recall that when an investor owns less
than 20 percent of the shares of another corporation, it is presumed that the investor
has relatively little influence on the investee. As a result, net income earned by the
investee is not a proper basis for recognizing income from the investment by the
investor. Why? Because the increased net assets resulting from profitable operations
may be permanently retained for use in the investees business. Therefore, the investor
earns net income only when the investee declares cash dividends.
At December 31, 2011, Republics equity investment portfolio has the carrying value
and fair value shown in Illustration 17-13.
ILLUSTRATION 17-13
Computation of Securities
Fair Value Adjustment
Equity Investment
Portfolio (2011)
Fair
Value
Unrealized
Gain (Loss)
Burberry
Nestl
St. Regis Pulp Co.
259,700
317,500
141,350
275,000
304,000
104,000
15,300
(13,500)
(37,350)
Total of portfolio
718,550
683,000
(35,550)
Investments
0
(35,550)
For Republics equity investment portfolio, the gross unrealized gains are 15,300, and
the gross unrealized losses are 50,850 (13,500 37,350), resulting in a net unrealized
loss of 35,550. The fair value of the equity investment portfolio is below cost by 35,550.
As with debt investments, Republic records the net unrealized gains and losses related to changes in the fair value of equity investments in an Unrealized Holding Gain
or LossIncome account. Republic reports this amount as other income and expense.
In this case, Republic prepares an adjusting entry debiting the Unrealized Holding Gain
or LossIncome account and crediting the Securities Fair Value Adjustment account
to record the decrease in fair value and to record the loss as follows.
December 31, 2011
Unrealized Holding Gain or LossIncome
Securities Fair Value Adjustment
35,550
35,550
Chapter 17 Investments
1711
On January 23, 2012, Republic sold all of its Burberry ordinary shares, receiving
287,220. Illustration 17-14 shows the computation of the realized gain on the sale.
287,220
259,700
27,520
ILLUSTRATION 17-14
Computation of Gain on
Sale of Burberry Shares
287,220
259,700
27,520
Fair
Value
Unrealized
Gain (Loss)
Continental Trucking
Nestl
St. Regis Pulp Co.
255,000a
317,500
141,350
278,350
362,550
139,050
23,350
45,050
(2,300)
Total of portfolio
713,850
779,950
66,100
Investments
ILLUSTRATION 17-15
Computation of Securities
Fair Value Adjustment
Equity Investment
Portfolio (2012)
(35,550)
101,650
At December 31, 2012, the fair value of Republics equity investment portfolio
exceeds carrying value by 66,100 (unrealized gain). The Securities Fair Value Adjustment account had a credit balance of 35,550 at December 31, 2012. To adjust its
December 31, 2012, equity investment portfolio to fair value, the company debits the
Securities Fair Value Adjustment account for 101,650 (35,550 66,100). Republic
records this adjustment as follows.
December 31, 2012
Securities Fair Value Adjustment
Unrealized Holding Gain or LossIncome
101,650
101,650
U.S. GAAP
PERSPECTIVE
Under U.S. GAAP, unrealized
gains and losses on
available-for-sale
investments are reported in
other comprehensive income.
1712
IFRS Supplement
To illustrate, assume that on December 10, 2011, Republic Corporation purchased
20,750 of 1,000 ordinary shares of Hawthorne Company for 20.75 per share (which
represents less than a 20 percent interest). Hawthorne is a distributor for Republic products in certain locales, the laws of which require a minimum level of share ownership
of a company in that region. The investment in Hawthorne meets this regulatory requirement. As a result, Republic accounts for this investment at fair value, with unrealized
gains and losses recorded in other comprehensive income (OCI).7 Republic records
this investment as follows.
December 10, 2011
Equity Investments
Cash
20,750
20,750
On December 27, 2011, Republic receives a cash dividend of 450 on its investment in the ordinary shares of Hawthorne Company. It records the cash dividend as
follows.
December 27, 2011
Cash
Dividend Revenue
450
450
Similar to the accounting for trading investments, when an investor owns less than
20 percent of the ordinary shares of another corporation, it is presumed that the investor
has relatively little influence on the investee. Therefore, the investor earns income when
the investee declares cash dividends.
At December 31, 2011, Republics investment in Hawthorne has the carrying value
and fair value shown in Illustration 17-16.
ILLUSTRATION 17-16
Computation of Securities
Fair Value Adjustment
Non-Trading Equity
Investment (2011)
Carrying Value
Fair Value
Hawthorne Company
Previous securities fair value adjustment balance
20,750
24,000
Unrealized
Gain (Loss)
3,250
0
3,250
For Republics non-trading investment, the unrealized gain is 3,250. That is, the
fair value of the Hawthorne investment exceeds cost by 3,250. Because Republic has
classified this investment as non-trading, Republic records the unrealized gains and
losses related to changes in the fair value of this non-trading equity investment in an
Unrealized Holding Gain or LossEquity account. Republic reports this amount as a
part of other comprehensive income and as a component of other accumulated comprehensive income (reported in equity) until realized. In this case, Republic prepares
an adjusting entry crediting the Unrealized Holding Gain or LossEquity account and
debiting the Securities Fair Value Adjustment account to record the decrease in fair
value and to record the loss as follows.
December 31, 2011
Securities Fair Value Adjustment
Unrealized Holding Gain or LossEquity
3,250
3,250
Chapter 17 Investments
1713
Republic reports its equity investments in its December 31, 2011, financial statements
as shown in Illustration 17-17.
24,000
Equity
Accumulated other comprehensive gain
3,250
3,250
ILLUSTRATION 17-17
Financial Statement
Presentation of Equity
Investments at Fair
Value (2011)
450
22,500
20,750
1,750
ILLUSTRATION 17-18
Computation of Gain on
Sale of Shares
22,500
20,750
1,750
Because Republic no longer holds any equity investments, it makes the following entry
to eliminate the Securities Fair Value Adjustment account.8
Unrealized Holding Gain or LossEquity
Securities Fair Value Adjustment
3,250
3,250
In summary, the accounting for non-trading equity investments deviates from the
general provisions for equity investments. The IASB noted that while fair value provides the most useful information about investments in equity investments, recording
unrealized gains or losses in other comprehensive income is more representative for
non-trading equity investments. [13]
Once non-trading equity investments are sold, companies may transfer the balance of
unrealized holding gains or losses in Accumuluted other comprehensive income to retained
earnings. Transferring the balance to retained earnings has merit, as these gains or losses
would have been recorded in net income in a prior period if these securities were accounted
for as trading securities. Some contend that these unrealized gains or losses should be
recycled; that is, these amounts should be recorded in net income when a non-trading
investment is sold. The IASB rejected this approach because it would increase the
complexity of the accounting for these investments. [12]
1714
IFRS Supplement
IMPAIRMENT OF VALUE
A company should evaluate every held-for-collection investment, at each reporting
date, to determine if it has suffered impairmenta loss in value such that the fair
value of the investment is below its carrying value.9 For example, if an investee
experiences a bankruptcy or a significant liquidity crisis, the investor may suffer a
permanent loss. If the company determines that an investment is impaired, it writes
down the amortized cost basis of the individual security to reflect this loss in value.
The company accounts for the write-down as a realized loss, and it includes the amount
in net income.
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. If an investment is impaired, the company should measure the
loss due to the impairment. 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 effective-interest rate. [14]
Contractual
Cash Flows
Expected
Cash Flows
Loss of
Cash Flows
2011
2012
2013
2014
$ 20,000
20,000
20,000
220,000
$ 16,000
16,000
16,000
216,000
$ 4,000
4,000
4,000
4,000
$280,000
$264,000
$16,000
Dec. 31
As indicated, the expected cash flows of $264,000 are less than the contractual cash
flows of $280,000. The amount of the impairment to be recorded equals the difference
between the recorded investment of $200,000 and the present value of the expected
cash flows, as shown in Illustration 17-20.
ILLUSTRATION 17-20
Computation of
Impairment Loss
Recorded investment
Less: Present value of $200,000 due in 4 years at 10%
(Table 6-2); FV(PVF4,10%); ($200,000 .68301)
Present value of $16,000 interest receivable annually
for 4 years at 10% (Table 6-4); R(PVF-OA4,10%);
($16,000 3.16986)
Loss on impairment
$200,000
$136,602
50,718
187,312
$ 12,688
Note that impairments tests are conducted only for debt investments that are held-forcollection (which are accounted for at amortized cost). Other debt and equity investments
are measured at fair value each period; thus, an impairment test is not needed.
Chapter 17 Investments
1715
The loss due to the impairment is $12,688.10 Why isnt it $16,000 ($280,000
$248,000)? A loss of $12,688 is recorded because Mayhew must measure the loss at a
present value amount, not at an undiscounted amount. Mayhew recognizes an impairment loss of $12,688 by debiting Loss on Impairment for the expected loss. At the same
time, it reduces the overall value of the investment. The journal entry to record the loss
is therefore as follows.
Loss on Impairment
Debt Investments
12,688
12,688
Debt investments
Securities fair value adjustment
Carrying value
1,200,000
125,000
1,325,000
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 managementto a held-for-collection strategy for these debt investments. British
10
Many question this present value calculation because it uses the investments historical
effective-interest ratenot the current market rate. As a result, the present value computation
does reflect the fair value of the debt investment, and many believe the impairment loss is
misstated.
11
The Board rejected retrospective application because recasting prior periods according to
the new investment model would not reflect how the investments were managed in the
prior periods. The IASB indicates that a change in a companys investment business model
is a significant and demonstrable event, and it is likely that this change will be disclosed
when the change occurs. [16]
U.S. GAAP
PERSPECTIVE
U.S. GAAP does not permit
the reversal of impairments
related to available-for-sale
debt and equity investments.
1716
IFRS Supplement
Sky makes the following entry to transfer these securities to the held-for-collection
classification.
January 1, 2011
Debt Investments
Securities Fair Value Adjustment
U.S. GAAP
PERSPECTIVE
Under U.S. GAAP, the fair
value option may be used for
holdings greater than 20
percent. IFRS does not permit
the use of the fair value
option for these investments.
125,000
125,000
Therefore, at January 1, 2011, the debt investments are stated at fair value. However,
in subsequent periods, British Sky will account for the investment at amortized cost.
The effective-interest rate used in the amortized cost model is the rate used to discount
the future cash flows to the fair value of British Skys debt investment of 125,000 on
January 1, 2011.
Classification
Debt Investment
1. Meets business model (heldfor-collection) and contractual
cash flow tests.
Income Effects
Equity Investment
1. Does not meet contractual cash
flow test; holdings less than
20 percent (trading).
ILLUSTRATION 17-21
Summary of Investment
Accounting Approaches
Embedded Derivatives
Rapid innovation in the development of complex financial instruments drove efforts
toward unifying and improving the accounting standards for derivatives. In recent
years, this innovation has led to the development of hybrid securities. These securities have characteristics of both debt and equity. They often combine traditional and
derivative financial instruments.
For example, a convertible bond (discussed in Chapter 16) is a hybrid instrument. It
consists of two parts: (1) a debt security, referred to as the host security, combined with
(2) an option to convert the bond to ordinary shares, the embedded derivative.
Chapter 17 Investments
1717
AUTHORITATIVE LITERATURE
Authoritative Literature References
[1] International Accounting Standard 32, Financial Instruments: Presentation (London, U.K.: International
Accounting Standards Committee Foundation, 2003), par. 11.
[2] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. 4.1.
[3] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), paras. BC1921.
[4] International Accounting Standard 32, Financial Instruments: Presentation (London, U.K.: International
Accounting Standards Committee Foundation, 2003), par. 11.
[5] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. B4.3.
[6] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. B4.2.
[7] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. 5.1.1.
[8] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. B5.1.1.
[9] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), paras. B5.1B5.6.
[10] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. 5.4.4.
[11] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. BC86(d).
[12] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), par. BC86(b).
[13] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), paras. BC83BC84.
[14] International Accounting Standard 39, Financial Instruments: Recognition and Measurement, International
Accounting Standards Committee Foundation, London (March 1999), paras. 58-65 and AG84AG93.
12
A company can also designate such a derivative as a hedging instrument. The company
would apply the hedge accounting provisions outlined earlier in the chapter.
13
As discussed in Chapter 16, the issuer of the convertible bonds would bifurcate the option
component of the convertible bonds payable.
1718
IFRS Supplement
[15] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), paras. BC6970.
[16] International Financial Reporting Standard 9, Financial Instruments (London, U.K.: International Accounting
Standards Committee Foundation, 2009), paras. BC7273.
QUESTIONS
1. Describe the two criteria for determining the valuation of
financial assets.
balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Companys trading bond investment has a fair value 60,000 below
carrying value. (b) Assume the same information as part
(a), except that Laura Company has a debit balance in its
Securities Fair Value Adjustment account of 10,000 at
the beginning of the year. Prepare the adjusting entry at
year-end.
10. What is the fair value option? Briefly describe its application to debt investments.
BRIEF EXERCISES
BE17-1 Garfield Company made an investment in 80,000 of the 9%, 5-year bonds of Chester Corporation for 74,086, which provides an 11% return. Garfield plans to hold these bonds to collect contractual
cash flows. Prepare Garfields journal entries for (a) the purchase of the investment, and (b) the receipt
of annual interest and discount amortization.
BE17-2 Use the information from BE17-1, but assume Garfield plans to actively trade the bonds to profit
from market interest rates changes. Prepare Garfields journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. The bonds have a year-end fair value of 75,500.
BE17-3 Carow Corporation purchased, as a held-for-collection investment, 60,000 of the 8%, 5-year
bonds of Harrison, Inc. for 65,118, which provides a 6% return. The bonds pay interest semiannually.
Prepare Carows journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual
interest and premium amortization.
Chapter 17 Investments
BE17-4 Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment
for 13,200. During the year, Sherman paid a cash dividend of 3.25 per share. At year-end, Sherman
shares were selling for 34.50 per share. Prepare Fairbankss journal entries to record (a) the purchase of
the investment, (b) the dividends received, and (c) the fair value adjustment.
BE17-5 Use the information from BE17-4 but assume the shares were purchased to meet a non-trading
regulatory requirement. Prepare Fairbankss journal entries to record (a) the purchase of the investment,
(b) the dividends received, and (c) the fair value adjustment.
BE17-6 Cameron Company has a portfolio of debt investments that it has managed as a trading investment. At December 31, 2010, Cameron had the following balances related to this portfolio: debt investments, 250,000; securities fair value adjustment, 10,325 (Dr). Cameron management decides to change
its business model for these investments to a held-for-collection strategy, beginning in January 2011. Prepare the journal entry to transfer these investments to the held-for-collection classification.
EXERCISES
E17-1
1.
2.
3.
4.
(Investment Classifications) For the following investments, identify whether they are:
Debt investments at amortized cost.
Debt investments at fair value.
Trading equity investments.
Non-trading equity investments.
E17-3 (Debt Investments) Assume the same information as in E17-2 except that Roosevelt has an active
trading strategy for these bonds. The fair value of the bonds at December 31 of each year-end is as follows.
2010
2011
2012
$534,200
$515,000
$513,000
2013
2014
$517,000
$500,000
Instructions
(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare the journal entries to record the interest received and recognition of fair value for 2010.
(c) Prepare the journal entry to record the recognition of fair value for 2011.
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IFRS Supplement
E17-4 (Equity Investments) On December 21, 2010, Zurich Company provided you with the following information regarding its trading investments.
December 31, 2010
Investments (Trading)
Cost
Fair Value
20,000
10,000
20,000
19,000
9,000
20,600
(1,000)
(1,000)
600
Total of portfolio
50,000
48,600
(1,400)
0
(1,400)
During 2011, Carolina Company shares were sold for 9,500. The fair value of the shares on December 31,
2011, was: Stargate Corp. shares19,300; Vectorman Co. shares20,500.
Instructions
(a) Prepare the adjusting journal entry needed on December 31, 2010.
(b) Prepare the journal entry to record the sale of the Carolina Company shares during 2011.
(c) Prepare the adjusting journal entry needed on December 31, 2011.
E17-5 (Equity Investment Entries and Reporting) Player Corporation makes an equity investment
costing $73,000 and classifies it as non-trading. At December 31, the fair value of the investment is $67,000.
Instructions
Prepare the adjusting entry to report the investments properly. Indicate the statement presentation of the
accounts in your entry.
E17-6 (Equity Method) On January 1, 2010, Meredith Corporation purchased 25% of the ordinary
shares of Pirates Company for 200,000. During the year, Pirates earned net income of 80,000 and paid
dividends of 20,000.
Instructions
Prepare the entries for Meredith to record the purchase and any additional entries related to this investment in Pirates Company in 2010.
E17-7 (Impairment) Komissarov Company has a debt investment in the bonds issued by Keune Inc.
The bonds were purchased at par for 400,000 and, at the end of 2010, have a remaining life of 3 years
with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as
held-for-collection. Keune is facing a tough economic environment and informs all of its investors that it
will be unable to make all payments according to the contractual terms. The controller of Komissarov has
prepared the following revised expected cash flow forecast for this bond investment.
Dec. 31
Expected
Cash Flows
2011
2012
2013
35,000
35,000
385,000
455,000
Instructions
(a) Determine the impairment loss for Komissarov at December 31, 2010.
(b) Prepare the entry to record the impairment loss for Komissarov at December 31, 2010.
(c) On January 15, 2011, Keune receives a major capital infusion from a private equity investor. It
informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly
describe how Komissarov would account for the bond investment in light of this new information.
Chapter 17 Investments
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Instructions
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Refer to M&Ss financial statements and the accompanying notes to answer the following questions.
(a) What investments does M&S report in 2008, and where are these investments reported in its financial statements?
(b) How are M&Ss investments valued? How does M&S determine fair value?
(c) How does M&S use derivative financial instruments?
Instructions
Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). When you have accessed
the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)
(a) Since the Teton shares do not trade on one of the large securities exchanges, Cascade argues that the
fair value of this investment is not readily available. According to the authoritative literature, when
is the fair value of a security readily determinable?
(b) How is an impairment of a debt investment accounted for?
(c) To avoid volatility in their financial statements due to fair value adjustments, Cascade debated
whether the bond investment could be classified as held-for-collection; Cascade is pretty sure it will
hold the bonds for 5 years. What criteria must be met for Cascade to classify it as held-for-collection?
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