SlideShare a Scribd company logo
17-1
4. Understand the accounting for equity
investments at fair value.
5. Explain the equity method of
accounting and compare it to the fair
value method for equity investments.
After studying this chapter, you should be able to:
Investments
04
LEARNING OBJECTIVES
1. Describe the accounting framework
for financial assets.
2. Understand the accounting for debt
investments at amortized cost.
3. Understand the accounting for debt
investments at fair value.
17-2
ACCOUNTING FOR FINANCIAL ASSETS
Financial Asset
 Cash.
 Equity investment of another company (e.g., ordinary or
preference shares).
 Contractual right to receive cash from another party
(e.g., loans, receivables, and bonds).
IASB requires that companies classify financial assets into two
measurement categories—amortized cost and fair value—
depending on the circumstances.
17-3
Measurement Basis—A Closer Look
IFRS requires that companies measure their financial
assets based on two criteria:
 Company’s business model for managing its financial
assets; and
 Contractual cash flow characteristics of the financial
asset.
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.
ACCOUNTING FOR FINANCIAL ASSETS
17-4
Measurement Basis—A Closer Look
Equity investments are generally recorded and reported at
fair value.
ACCOUNTING FOR FINANCIAL ASSETS
17-5
At December 31, 2015, Republic’s equity investment portfolio has
the carrying value and fair value shown.
Equity Investments—Trading (Income)
17-6
Equity Investments—Trading (Income)
Unrealized Holding Gain or Loss—Income 35,550
Fair Value Adjustment 35,550
17-7
On January 23, 2016, Republic sold all of its Burberry ordinary
shares, receiving €287,220.
Cash 287,220
Equity Investments 259,700
Gain on Sale of Equity Investment 27,520
Equity Investments—Trading (Income)
17-8
In addition, assume that on February 10, 2016, Republic purchased
€255,000 of Continental Trucking ordinary shares (20,000 shares
€12.75 per share), plus brokerage commissions of €1,850.
Republic’s equity investment portfolio as of December 31, 2016.
Equity Investments—Trading (Income)
17-9
Fair Value Adjustment 101,650
Unrealized Holding Gain or Loss—Income 101,650
Republic records this adjustment as follows.
17-10
The accounting entries to record non-trading equity
investments are the same as for trading equity investments,
except for recording the unrealized holding gain or loss.
Report the unrealized holding gain or loss as other
comprehensive income (OCI).
Equity Investments—Non-Trading (OCI)
17-11
Illustration: On December 10, 2015, Republic Corporation
purchased 1,000 ordinary shares of Hawthorne Company for
€20.75 per share (total cost €20,750). The investment 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.
Republic accounts for this investment at fair value.
Equity Investments 20,750
Cash 20,750
Equity Investments—Non-Trading (OCI)
17-12
On December 27, 2015, Republic receives a cash dividend of
€450 on its investment in the ordinary shares of Hawthorne
Company. It records the cash dividend as follows.
Cash 450
Dividend Revenue 450
Equity Investments—Non-Trading (OCI)
17-13
At December 31, 2015, Republic’s investment
in Hawthorne has the carrying value and fair
value shown.
Fair Value Adjustment 3,250
Unrealized Holding Gain or Loss—Equity 3,250
Equity Investments—Non-Trading (OCI)
Republic records this adjustment as follows.
17-14
Equity Investments—Non-Trading (OCI)
17-15
On December 20, 2016, Republic sold all of its Hawthorne
Company ordinary shares receiving net proceeds of €22,500.
Unrealized Holding Gain or Loss—Equity 1,500
Fair Value Adjustment 1,500
Equity Investments—Non-Trading (OCI)
Entry to adjust the carrying value of the non-trading investment.
17-16
On December 20, 2016, Republic sold all of its Hawthorne
Company ordinary shares receiving net proceeds of €22,500.
Cash 22,500
Equity Investments 20,750
Fair Value Adjustment 1,750
Equity Investments—Non-Trading (OCI)
Entry to record the sale of the investment.
17-17
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.
Holdings Between 20% and 50%
17-18
Equity Method
Record the investment at cost and subsequently adjust
the amount each period for
 the investor’s proportionate share of the earnings
(losses) and
 dividends received by the investor.
If investor’s share of investee’s losses exceeds the carrying amount
of the investment, the investor ordinarily should discontinue
applying the equity method.
Holdings Between 20% and 50%
17-19
17-20
Controlling Interest - When one corporation acquires a voting
interest of more than 50 percent in another corporation.
 Investor is referred to as the parent.
 Investee is referred to as the subsidiary.
 Investment in the subsidiary is reported on the parent’s
books as a long-term investment.
 Parent generally prepares consolidated financial
statements.
Holdings of More Than 50%
17-21
DEBT INVESTMENTS
Debt investments are characterized by contractual payments
on specified dates of
 principal and
 interest on the principal amount outstanding.
Companies measure debt investments at
 amortized cost or
 fair value.
17-22
Illustration: Robinson Company purchased €100,000 of 8%
bonds of Evermaster Corporation on January 1, 2015, at a
discount, paying €92,278. The bonds mature January 1, 2020
and yield 10%; interest is payable each July 1 and January 1.
Robinson records the investment as follows:
January 1, 2015
Debt Investments 92,278
Cash 92,278
Debt Investments—Amortized Cost
17-23
Debt Investments—Amortized Cost
17-24
Cash 4,000
Debt Investments 614
Interest Revenue 4,614
Debt Investments—Amortized Cost
Robinson Company records the receipt of the first semiannual
interest payment on July 1, 2015, as follows:
17-25
Interest Receivable 4,000
Debt Investments 645
Interest Revenue 4,645
Debt Investments—Amortized Cost
Because Robinson is on a calendar-year basis, it accrues
interest and amortizes the discount at December 31, 2015, as
follows:
17-26
Reporting of Bond Investment at Amortized Cost
Debt Investments—Amortized Cost
17-27
Assume that Robinson Company sells its investment on
November 1, 2017, at 99¾ plus accrued interest. Robinson
records this discount amortization as follows:
(€783 x 4/6 = €522)
Debt Investments 522
Interest Revenue 522
17-28
Computation Gain on Sale of Bonds
Cash 102,417
Interest Revenue (4/6 x €4,000) 2,667
Debt Investments 96,193
Gain on Sale of Debt Investments 3,557
Debt Investments—Amortized Cost
17-29
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
 Adjust the amortized cost to fair value.
 Any unrealized holding gain or loss reported as part of
net income (fair value method).
Debt Investments—Fair Value
17-30
Illustration: Robinson Company purchased €100,000 of 8
percent bonds of Evermaster Corporation on January 1, 2015,
at a discount, paying €92,278. The bonds mature January 1,
2020, and yield 10 percent; interest is payable each July 1 and
January 1.
The journal entries in 2015 are exactly the same as those for
amortized cost.
Debt Investments—Fair Value
17-31
Entries are the same as those for amortized cost.
Debt Investments—Fair Value
17-32
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, 2015.
Fair Value Adjustment 1,463
Unrealized Holding Gain or Loss—Income 1,463
Debt Investments—Fair Value
17-33
Debt Investments—Fair Value
17-34
At December 31, 2016, assume that the fair value
of the Evermaster debt investment is €94,000.
Unrealized Holding Gain or Loss—Income 2,388
Fair Value Adjustment 2,388
Debt Investments—Fair Value
17-35
Debt Investments—Fair Value
17-36
Assume now that Robinson sells its investment in Evermaster
bonds on November 1, 2017, at 99 ¾ plus accrued interest. The
only difference occurs on December 31, 2017. Since the bonds
are no longer owned by Robinson, the Fair Value Adjustment
account should now be reported at zero. Robinson makes the
following entry to record the elimination of the valuation account.
Fair Value Adjustment 925
Unrealized Holding Gain or Loss—Income 925
Debt Investments—Fair Value
17-37
Income
Effects on
Debt
Investment
(2015-2017)
Debt Investments—Fair Value
17-38
Illustration (Portfolio): Wang Corporation has two debt
investments accounted for at fair value. The following illustration
identifies the amortized cost, fair value, and the amount of the
unrealized gain or loss.
Debt Investments—Fair Value (portfolio)
17-39
Illustration (Portfolio): Wang makes an adjusting entry at
December 31, 2015 to record the decrease in value and to
record the loss as follows.
Unrealized Holding Gain or Loss—Income 9,537
Fair Value Adjustment 9,537
Debt Investments—Fair Value
17-40
Illustration (Sale of Debt Investments): Wang Corporation sold
the Watson bonds (from Illustration 17-10) on July 1, 2016, for
¥90,000, at which time it had an amortized cost of ¥94,214.
Cash 90,000
Loss on Sale of Debt Investments 4,214
Debt Investments 94,214
Debt Investments—Fair Value
17-41
Wang reports this realized loss in the “Other income and
expense” section of the income statement. Assuming no other
purchases and sales of bonds in 2016, Wang on December 31,
2016, prepares the information:
Debt Investments—Fair Value
17-42
Wang records the following at December 31, 2016.
Fair Value Adjustment 4,537
Unrealized Holding Gain or Loss—Income 4,537
Debt Investments—Fair Value
17-43
Financial Statement Presentation
Debt Investments—Fair Value
17-44
EQUITY INVESTMENTS
Equity investment represents ownership of ordinary,
preference, or other capital shares.
 Cost includes price of the security.
 Broker’s commissions and fees are recorded as
expense.
The degree to which one corporation (investor) acquires an
interest in the common stock of another corporation
(investee) generally determines the accounting treatment for
the investment subsequent to acquisition.
17-45
EQUITY INVESTMENTS
17-46
EQUITY INVESTMENTS
17-47
Under IFRS, the presumption is that equity investments are
held-for-trading.
General accounting and reporting rule:
 Investments valued at fair value.
 Record unrealized gains and losses in net income.
EQUITY INVESTMENTS
Holdings of Less Than 20%
17-48
EQUITY INVESTMENTS
Holdings of Less Than 20%
IFRS allows companies to classify some equity investments
as non-trading.
General accounting and reporting rule:
 Investments valued at fair value.
 Record unrealized gains and losses in other
comprehensive income.
17-49
Illustration: November 3, 2015, Republic Corporation
purchased ordinary shares of three companies, each
investment representing less than a 20 percent interest. These
shares are held-for-trading.
Republic records these investments as follows:
Equity Investments—Trading (Income)
17-50
Equity
Investments —
Trading
Republic records these investments as follows:
Equity Investments 718,550
Cash 718,550
On December 6, 2015, Republic receives a cash dividend of
€4,200 on its investment in the ordinary shares of Nestlé.
Cash 4,200
Dividend Revenue 4,200
17-51
Reporting Treatment of Investments

More Related Content

Similar to IFA 2 CH 5 Invetsments.pptx

Accounting Principles, 12th Edition Ch17
Accounting Principles, 12th Edition Ch17 Accounting Principles, 12th Edition Ch17
Accounting Principles, 12th Edition Ch17
AbdelmonsifFadl
 
Investment advince from wayne lippman : lippman & Associates CPA's
Investment advince from wayne lippman : lippman & Associates CPA'sInvestment advince from wayne lippman : lippman & Associates CPA's
Investment advince from wayne lippman : lippman & Associates CPA's
Wayne Lippman
 
Statement of cash flows
Statement of cash flowsStatement of cash flows
Statement of cash flows
Jashim Uddin
 
Chapter9 projectcashflows
Chapter9 projectcashflowsChapter9 projectcashflows
Chapter9 projectcashflows
AKSHAYA0000
 
Pengantar Akuntansi 2 - Ch12 Investment
Pengantar Akuntansi 2 - Ch12 InvestmentPengantar Akuntansi 2 - Ch12 Investment
Pengantar Akuntansi 2 - Ch12 Investment
yuliapratiwi2810
 
Barco NV Segmental Analysis
Barco NV Segmental AnalysisBarco NV Segmental Analysis
Barco NV Segmental Analysis
Guillaume Danis
 
ch16 Dilutive Securities (1).pptx
ch16 Dilutive Securities (1).pptxch16 Dilutive Securities (1).pptx
ch16 Dilutive Securities (1).pptx
IndahFitriani31
 
capital structue ppt for bba final year s
capital structue ppt for bba final year scapital structue ppt for bba final year s
capital structue ppt for bba final year s
TanishaSaraf1
 
Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)
Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)
Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)
FatenAlJoaid
 
Rate of Return ratios
Rate of Return ratiosRate of Return ratios
Rate of Return ratios
uma reur
 
Accounting
AccountingAccounting
Accounting
LordFratamort
 
Bic Group - Overview of the value creation and implied expectations
Bic Group - Overview of the value creation and implied expectationsBic Group - Overview of the value creation and implied expectations
Bic Group - Overview of the value creation and implied expectations
Guillaume Danis
 
Bba 2204 fin mgt week 11 capital budget cashflow & risk
Bba 2204 fin mgt week 11 capital budget cashflow & riskBba 2204 fin mgt week 11 capital budget cashflow & risk
Bba 2204 fin mgt week 11 capital budget cashflow & risk
Stephen Ong
 
Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]
Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]
Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]
Ted Cominos
 
Solutions Manual for Advanced Accounting 11th Edition by Beams
Solutions Manual for Advanced Accounting 11th Edition by BeamsSolutions Manual for Advanced Accounting 11th Edition by Beams
Solutions Manual for Advanced Accounting 11th Edition by Beams
ZiaPace
 
Bba 2204 fin mgt week 10 capital budgeting
Bba 2204 fin mgt week 10 capital budgetingBba 2204 fin mgt week 10 capital budgeting
Bba 2204 fin mgt week 10 capital budgeting
Stephen Ong
 
Effects of operating and financial Leverages
Effects of operating and financial Leverages  Effects of operating and financial Leverages
Effects of operating and financial Leverages
sangamdesai
 
chhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptx
chhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptxchhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptx
chhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptx
MarlboroRed2
 
Bba 4 fm u 5 capital structure,dividend policy
Bba 4 fm u 5 capital structure,dividend policyBba 4 fm u 5 capital structure,dividend policy
Bba 4 fm u 5 capital structure,dividend policyProf. Devrshi Upadhayay
 

Similar to IFA 2 CH 5 Invetsments.pptx (20)

Accounting Principles, 12th Edition Ch17
Accounting Principles, 12th Edition Ch17 Accounting Principles, 12th Edition Ch17
Accounting Principles, 12th Edition Ch17
 
Investment advince from wayne lippman : lippman & Associates CPA's
Investment advince from wayne lippman : lippman & Associates CPA'sInvestment advince from wayne lippman : lippman & Associates CPA's
Investment advince from wayne lippman : lippman & Associates CPA's
 
Statement of cash flows
Statement of cash flowsStatement of cash flows
Statement of cash flows
 
Ch 11
Ch 11Ch 11
Ch 11
 
Chapter9 projectcashflows
Chapter9 projectcashflowsChapter9 projectcashflows
Chapter9 projectcashflows
 
Pengantar Akuntansi 2 - Ch12 Investment
Pengantar Akuntansi 2 - Ch12 InvestmentPengantar Akuntansi 2 - Ch12 Investment
Pengantar Akuntansi 2 - Ch12 Investment
 
Barco NV Segmental Analysis
Barco NV Segmental AnalysisBarco NV Segmental Analysis
Barco NV Segmental Analysis
 
ch16 Dilutive Securities (1).pptx
ch16 Dilutive Securities (1).pptxch16 Dilutive Securities (1).pptx
ch16 Dilutive Securities (1).pptx
 
capital structue ppt for bba final year s
capital structue ppt for bba final year scapital structue ppt for bba final year s
capital structue ppt for bba final year s
 
Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)
Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)
Statement of cash flow / Faten Al Joaid - certified auditor (LACPA)
 
Rate of Return ratios
Rate of Return ratiosRate of Return ratios
Rate of Return ratios
 
Accounting
AccountingAccounting
Accounting
 
Bic Group - Overview of the value creation and implied expectations
Bic Group - Overview of the value creation and implied expectationsBic Group - Overview of the value creation and implied expectations
Bic Group - Overview of the value creation and implied expectations
 
Bba 2204 fin mgt week 11 capital budget cashflow & risk
Bba 2204 fin mgt week 11 capital budget cashflow & riskBba 2204 fin mgt week 11 capital budget cashflow & risk
Bba 2204 fin mgt week 11 capital budget cashflow & risk
 
Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]
Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]
Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]
 
Solutions Manual for Advanced Accounting 11th Edition by Beams
Solutions Manual for Advanced Accounting 11th Edition by BeamsSolutions Manual for Advanced Accounting 11th Edition by Beams
Solutions Manual for Advanced Accounting 11th Edition by Beams
 
Bba 2204 fin mgt week 10 capital budgeting
Bba 2204 fin mgt week 10 capital budgetingBba 2204 fin mgt week 10 capital budgeting
Bba 2204 fin mgt week 10 capital budgeting
 
Effects of operating and financial Leverages
Effects of operating and financial Leverages  Effects of operating and financial Leverages
Effects of operating and financial Leverages
 
chhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptx
chhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptxchhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptx
chhxhhdh&hdhd14dudhdbudhdhdjduduhdhdhdj.pptx
 
Bba 4 fm u 5 capital structure,dividend policy
Bba 4 fm u 5 capital structure,dividend policyBba 4 fm u 5 capital structure,dividend policy
Bba 4 fm u 5 capital structure,dividend policy
 

Recently uploaded

RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...
RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...
RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...
BBPMedia1
 
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-indiafalcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
Falcon Invoice Discounting
 
ikea_woodgreen_petscharity_cat-alogue_digital.pdf
ikea_woodgreen_petscharity_cat-alogue_digital.pdfikea_woodgreen_petscharity_cat-alogue_digital.pdf
ikea_woodgreen_petscharity_cat-alogue_digital.pdf
agatadrynko
 
Memorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.pptMemorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.ppt
seri bangash
 
LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024
Lital Barkan
 
ikea_woodgreen_petscharity_dog-alogue_digital.pdf
ikea_woodgreen_petscharity_dog-alogue_digital.pdfikea_woodgreen_petscharity_dog-alogue_digital.pdf
ikea_woodgreen_petscharity_dog-alogue_digital.pdf
agatadrynko
 
Enterprise Excellence is Inclusive Excellence.pdf
Enterprise Excellence is Inclusive Excellence.pdfEnterprise Excellence is Inclusive Excellence.pdf
Enterprise Excellence is Inclusive Excellence.pdf
KaiNexus
 
Meas_Dylan_DMBS_PB1_2024-05XX_Revised.pdf
Meas_Dylan_DMBS_PB1_2024-05XX_Revised.pdfMeas_Dylan_DMBS_PB1_2024-05XX_Revised.pdf
Meas_Dylan_DMBS_PB1_2024-05XX_Revised.pdf
dylandmeas
 
Buy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star ReviewsBuy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star Reviews
usawebmarket
 
Digital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and TemplatesDigital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and Templates
Aurelien Domont, MBA
 
What are the main advantages of using HR recruiter services.pdf
What are the main advantages of using HR recruiter services.pdfWhat are the main advantages of using HR recruiter services.pdf
What are the main advantages of using HR recruiter services.pdf
HumanResourceDimensi1
 
Business Valuation Principles for Entrepreneurs
Business Valuation Principles for EntrepreneursBusiness Valuation Principles for Entrepreneurs
Business Valuation Principles for Entrepreneurs
Ben Wann
 
Maksym Vyshnivetskyi: PMO Quality Management (UA)
Maksym Vyshnivetskyi: PMO Quality Management (UA)Maksym Vyshnivetskyi: PMO Quality Management (UA)
Maksym Vyshnivetskyi: PMO Quality Management (UA)
Lviv Startup Club
 
Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...
Lviv Startup Club
 
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdfModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
fisherameliaisabella
 
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s Dholera
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s DholeraTata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s Dholera
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s Dholera
Avirahi City Dholera
 
The Parable of the Pipeline a book every new businessman or business student ...
The Parable of the Pipeline a book every new businessman or business student ...The Parable of the Pipeline a book every new businessman or business student ...
The Parable of the Pipeline a book every new businessman or business student ...
awaisafdar
 
BeMetals Presentation_May_22_2024 .pdf
BeMetals Presentation_May_22_2024   .pdfBeMetals Presentation_May_22_2024   .pdf
BeMetals Presentation_May_22_2024 .pdf
DerekIwanaka1
 
3.0 Project 2_ Developing My Brand Identity Kit.pptx
3.0 Project 2_ Developing My Brand Identity Kit.pptx3.0 Project 2_ Developing My Brand Identity Kit.pptx
3.0 Project 2_ Developing My Brand Identity Kit.pptx
tanyjahb
 
The-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic managementThe-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic management
Bojamma2
 

Recently uploaded (20)

RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...
RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...
RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...
 
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-indiafalcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
 
ikea_woodgreen_petscharity_cat-alogue_digital.pdf
ikea_woodgreen_petscharity_cat-alogue_digital.pdfikea_woodgreen_petscharity_cat-alogue_digital.pdf
ikea_woodgreen_petscharity_cat-alogue_digital.pdf
 
Memorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.pptMemorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.ppt
 
LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024LA HUG - Video Testimonials with Chynna Morgan - June 2024
LA HUG - Video Testimonials with Chynna Morgan - June 2024
 
ikea_woodgreen_petscharity_dog-alogue_digital.pdf
ikea_woodgreen_petscharity_dog-alogue_digital.pdfikea_woodgreen_petscharity_dog-alogue_digital.pdf
ikea_woodgreen_petscharity_dog-alogue_digital.pdf
 
Enterprise Excellence is Inclusive Excellence.pdf
Enterprise Excellence is Inclusive Excellence.pdfEnterprise Excellence is Inclusive Excellence.pdf
Enterprise Excellence is Inclusive Excellence.pdf
 
Meas_Dylan_DMBS_PB1_2024-05XX_Revised.pdf
Meas_Dylan_DMBS_PB1_2024-05XX_Revised.pdfMeas_Dylan_DMBS_PB1_2024-05XX_Revised.pdf
Meas_Dylan_DMBS_PB1_2024-05XX_Revised.pdf
 
Buy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star ReviewsBuy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star Reviews
 
Digital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and TemplatesDigital Transformation and IT Strategy Toolkit and Templates
Digital Transformation and IT Strategy Toolkit and Templates
 
What are the main advantages of using HR recruiter services.pdf
What are the main advantages of using HR recruiter services.pdfWhat are the main advantages of using HR recruiter services.pdf
What are the main advantages of using HR recruiter services.pdf
 
Business Valuation Principles for Entrepreneurs
Business Valuation Principles for EntrepreneursBusiness Valuation Principles for Entrepreneurs
Business Valuation Principles for Entrepreneurs
 
Maksym Vyshnivetskyi: PMO Quality Management (UA)
Maksym Vyshnivetskyi: PMO Quality Management (UA)Maksym Vyshnivetskyi: PMO Quality Management (UA)
Maksym Vyshnivetskyi: PMO Quality Management (UA)
 
Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...
 
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdfModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
 
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s Dholera
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s DholeraTata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s Dholera
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s Dholera
 
The Parable of the Pipeline a book every new businessman or business student ...
The Parable of the Pipeline a book every new businessman or business student ...The Parable of the Pipeline a book every new businessman or business student ...
The Parable of the Pipeline a book every new businessman or business student ...
 
BeMetals Presentation_May_22_2024 .pdf
BeMetals Presentation_May_22_2024   .pdfBeMetals Presentation_May_22_2024   .pdf
BeMetals Presentation_May_22_2024 .pdf
 
3.0 Project 2_ Developing My Brand Identity Kit.pptx
3.0 Project 2_ Developing My Brand Identity Kit.pptx3.0 Project 2_ Developing My Brand Identity Kit.pptx
3.0 Project 2_ Developing My Brand Identity Kit.pptx
 
The-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic managementThe-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic management
 

IFA 2 CH 5 Invetsments.pptx

  • 1. 17-1 4. Understand the accounting for equity investments at fair value. 5. Explain the equity method of accounting and compare it to the fair value method for equity investments. After studying this chapter, you should be able to: Investments 04 LEARNING OBJECTIVES 1. Describe the accounting framework for financial assets. 2. Understand the accounting for debt investments at amortized cost. 3. Understand the accounting for debt investments at fair value.
  • 2. 17-2 ACCOUNTING FOR FINANCIAL ASSETS Financial Asset  Cash.  Equity investment of another company (e.g., ordinary or preference shares).  Contractual right to receive cash from another party (e.g., loans, receivables, and bonds). IASB requires that companies classify financial assets into two measurement categories—amortized cost and fair value— depending on the circumstances.
  • 3. 17-3 Measurement Basis—A Closer Look IFRS requires that companies measure their financial assets based on two criteria:  Company’s business model for managing its financial assets; and  Contractual cash flow characteristics of the financial asset. 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. ACCOUNTING FOR FINANCIAL ASSETS
  • 4. 17-4 Measurement Basis—A Closer Look Equity investments are generally recorded and reported at fair value. ACCOUNTING FOR FINANCIAL ASSETS
  • 5. 17-5 At December 31, 2015, Republic’s equity investment portfolio has the carrying value and fair value shown. Equity Investments—Trading (Income)
  • 6. 17-6 Equity Investments—Trading (Income) Unrealized Holding Gain or Loss—Income 35,550 Fair Value Adjustment 35,550
  • 7. 17-7 On January 23, 2016, Republic sold all of its Burberry ordinary shares, receiving €287,220. Cash 287,220 Equity Investments 259,700 Gain on Sale of Equity Investment 27,520 Equity Investments—Trading (Income)
  • 8. 17-8 In addition, assume that on February 10, 2016, Republic purchased €255,000 of Continental Trucking ordinary shares (20,000 shares €12.75 per share), plus brokerage commissions of €1,850. Republic’s equity investment portfolio as of December 31, 2016. Equity Investments—Trading (Income)
  • 9. 17-9 Fair Value Adjustment 101,650 Unrealized Holding Gain or Loss—Income 101,650 Republic records this adjustment as follows.
  • 10. 17-10 The accounting entries to record non-trading equity investments are the same as for trading equity investments, except for recording the unrealized holding gain or loss. Report the unrealized holding gain or loss as other comprehensive income (OCI). Equity Investments—Non-Trading (OCI)
  • 11. 17-11 Illustration: On December 10, 2015, Republic Corporation purchased 1,000 ordinary shares of Hawthorne Company for €20.75 per share (total cost €20,750). The investment 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. Republic accounts for this investment at fair value. Equity Investments 20,750 Cash 20,750 Equity Investments—Non-Trading (OCI)
  • 12. 17-12 On December 27, 2015, Republic receives a cash dividend of €450 on its investment in the ordinary shares of Hawthorne Company. It records the cash dividend as follows. Cash 450 Dividend Revenue 450 Equity Investments—Non-Trading (OCI)
  • 13. 17-13 At December 31, 2015, Republic’s investment in Hawthorne has the carrying value and fair value shown. Fair Value Adjustment 3,250 Unrealized Holding Gain or Loss—Equity 3,250 Equity Investments—Non-Trading (OCI) Republic records this adjustment as follows.
  • 15. 17-15 On December 20, 2016, Republic sold all of its Hawthorne Company ordinary shares receiving net proceeds of €22,500. Unrealized Holding Gain or Loss—Equity 1,500 Fair Value Adjustment 1,500 Equity Investments—Non-Trading (OCI) Entry to adjust the carrying value of the non-trading investment.
  • 16. 17-16 On December 20, 2016, Republic sold all of its Hawthorne Company ordinary shares receiving net proceeds of €22,500. Cash 22,500 Equity Investments 20,750 Fair Value Adjustment 1,750 Equity Investments—Non-Trading (OCI) Entry to record the sale of the investment.
  • 17. 17-17 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. Holdings Between 20% and 50%
  • 18. 17-18 Equity Method Record the investment at cost and subsequently adjust the amount each period for  the investor’s proportionate share of the earnings (losses) and  dividends received by the investor. If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method. Holdings Between 20% and 50%
  • 19. 17-19
  • 20. 17-20 Controlling Interest - When one corporation acquires a voting interest of more than 50 percent in another corporation.  Investor is referred to as the parent.  Investee is referred to as the subsidiary.  Investment in the subsidiary is reported on the parent’s books as a long-term investment.  Parent generally prepares consolidated financial statements. Holdings of More Than 50%
  • 21. 17-21 DEBT INVESTMENTS Debt investments are characterized by contractual payments on specified dates of  principal and  interest on the principal amount outstanding. Companies measure debt investments at  amortized cost or  fair value.
  • 22. 17-22 Illustration: Robinson Company purchased €100,000 of 8% bonds of Evermaster Corporation on January 1, 2015, at a discount, paying €92,278. The bonds mature January 1, 2020 and yield 10%; interest is payable each July 1 and January 1. Robinson records the investment as follows: January 1, 2015 Debt Investments 92,278 Cash 92,278 Debt Investments—Amortized Cost
  • 24. 17-24 Cash 4,000 Debt Investments 614 Interest Revenue 4,614 Debt Investments—Amortized Cost Robinson Company records the receipt of the first semiannual interest payment on July 1, 2015, as follows:
  • 25. 17-25 Interest Receivable 4,000 Debt Investments 645 Interest Revenue 4,645 Debt Investments—Amortized Cost Because Robinson is on a calendar-year basis, it accrues interest and amortizes the discount at December 31, 2015, as follows:
  • 26. 17-26 Reporting of Bond Investment at Amortized Cost Debt Investments—Amortized Cost
  • 27. 17-27 Assume that Robinson Company sells its investment on November 1, 2017, at 99¾ plus accrued interest. Robinson records this discount amortization as follows: (€783 x 4/6 = €522) Debt Investments 522 Interest Revenue 522
  • 28. 17-28 Computation Gain on Sale of Bonds Cash 102,417 Interest Revenue (4/6 x €4,000) 2,667 Debt Investments 96,193 Gain on Sale of Debt Investments 3,557 Debt Investments—Amortized Cost
  • 29. 17-29 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  Adjust the amortized cost to fair value.  Any unrealized holding gain or loss reported as part of net income (fair value method). Debt Investments—Fair Value
  • 30. 17-30 Illustration: Robinson Company purchased €100,000 of 8 percent bonds of Evermaster Corporation on January 1, 2015, at a discount, paying €92,278. The bonds mature January 1, 2020, and yield 10 percent; interest is payable each July 1 and January 1. The journal entries in 2015 are exactly the same as those for amortized cost. Debt Investments—Fair Value
  • 31. 17-31 Entries are the same as those for amortized cost. Debt Investments—Fair Value
  • 32. 17-32 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, 2015. Fair Value Adjustment 1,463 Unrealized Holding Gain or Loss—Income 1,463 Debt Investments—Fair Value
  • 34. 17-34 At December 31, 2016, assume that the fair value of the Evermaster debt investment is €94,000. Unrealized Holding Gain or Loss—Income 2,388 Fair Value Adjustment 2,388 Debt Investments—Fair Value
  • 36. 17-36 Assume now that Robinson sells its investment in Evermaster bonds on November 1, 2017, at 99 ¾ plus accrued interest. The only difference occurs on December 31, 2017. Since the bonds are no longer owned by Robinson, the Fair Value Adjustment account should now be reported at zero. Robinson makes the following entry to record the elimination of the valuation account. Fair Value Adjustment 925 Unrealized Holding Gain or Loss—Income 925 Debt Investments—Fair Value
  • 38. 17-38 Illustration (Portfolio): Wang Corporation has two debt investments accounted for at fair value. The following illustration identifies the amortized cost, fair value, and the amount of the unrealized gain or loss. Debt Investments—Fair Value (portfolio)
  • 39. 17-39 Illustration (Portfolio): Wang makes an adjusting entry at December 31, 2015 to record the decrease in value and to record the loss as follows. Unrealized Holding Gain or Loss—Income 9,537 Fair Value Adjustment 9,537 Debt Investments—Fair Value
  • 40. 17-40 Illustration (Sale of Debt Investments): Wang Corporation sold the Watson bonds (from Illustration 17-10) on July 1, 2016, for ¥90,000, at which time it had an amortized cost of ¥94,214. Cash 90,000 Loss on Sale of Debt Investments 4,214 Debt Investments 94,214 Debt Investments—Fair Value
  • 41. 17-41 Wang reports this realized loss in the “Other income and expense” section of the income statement. Assuming no other purchases and sales of bonds in 2016, Wang on December 31, 2016, prepares the information: Debt Investments—Fair Value
  • 42. 17-42 Wang records the following at December 31, 2016. Fair Value Adjustment 4,537 Unrealized Holding Gain or Loss—Income 4,537 Debt Investments—Fair Value
  • 44. 17-44 EQUITY INVESTMENTS Equity investment represents ownership of ordinary, preference, or other capital shares.  Cost includes price of the security.  Broker’s commissions and fees are recorded as expense. The degree to which one corporation (investor) acquires an interest in the common stock of another corporation (investee) generally determines the accounting treatment for the investment subsequent to acquisition.
  • 47. 17-47 Under IFRS, the presumption is that equity investments are held-for-trading. General accounting and reporting rule:  Investments valued at fair value.  Record unrealized gains and losses in net income. EQUITY INVESTMENTS Holdings of Less Than 20%
  • 48. 17-48 EQUITY INVESTMENTS Holdings of Less Than 20% IFRS allows companies to classify some equity investments as non-trading. General accounting and reporting rule:  Investments valued at fair value.  Record unrealized gains and losses in other comprehensive income.
  • 49. 17-49 Illustration: November 3, 2015, Republic Corporation purchased ordinary shares of three companies, each investment representing less than a 20 percent interest. These shares are held-for-trading. Republic records these investments as follows: Equity Investments—Trading (Income)
  • 50. 17-50 Equity Investments — Trading Republic records these investments as follows: Equity Investments 718,550 Cash 718,550 On December 6, 2015, Republic receives a cash dividend of €4,200 on its investment in the ordinary shares of Nestlé. Cash 4,200 Dividend Revenue 4,200