Kế toán, kiểm toán - Chapter 12: Reporting and analyzing investments

CHAPTER 12:REPORTING AND ANALYZING INVESTMENTSLO 1: Identify reasons to invest, and classify investments.LO 2: Account for non-strategic investments.LO 3: Account for strategic investments.LO 4: Explain how investments are reported in the financial statements.LO 5: Compare the accounting for a bond investment and a bond payable (Appendix 12A).LEARNING OBJECTIVESDebt investmentsGuaranteed investment certificates or term deposits, bonds, commercial paper and other debt securitiesEarn interest over timeBorrower is usually obligated to return the original investment (principal)Equity investmentsPreferred and common shares of other corporationsMay or may not earn any revenueNo obligation to return principalClassifying InvestmentsNon-strategic investmentsTo generate investment incomeStrategic investmentsTo influence or control the operations of another companyClassifying Investments (Cont’d)Non-Strategic InvestmentsReasons for purchasing non-strategic investments:Effective use of excess cashTo earn capital gains – held for trading investmentsFurther classified as short-term investments or long-term investmentsDepends on liquidity of investment and how long management wishes to hold the investmentOnly equity securities (normally common shares) can be considered a strategic investmentTo influence the relationship between companiesUsually classified as long-term investmentsStrategic InvestmentsRecorded at purchase cost at acquisitionAfter acquisition, four alternate valuation modelsFair value through profit or loss modelAdjust up or down to reflect fair value at end of periodCauses an unrealized gain or loss, recorded in the income statementFair value through other comprehensive income (OCI) modelAs above, except unrealized gain or loss is recorded in other comprehensive incomeAmortized cost model (applies only to debt investmentsNot adjusted to reflect fair value Any discount or premium on purchase is amortized over the remaining life of the investmentAccounting for Non-Strategic InvestmentsCost modelUsed for equity investments when fair value not availableNo adjustment to record at fair valueFair value model is used unless:Investment is held to earn cash flows with fixed payment dates (usually debt instruments)Use amortized cost methodInvestment is not held to earn cash flows and does not trade in an active marketFair value model cannot be usedAccounting for Non-Strategic Investments (continued)Valuation Models for Non-Strategic InvestmentsAny increase or decrease in market price changes the carrying amount on the statement of financial positionCorresponding unrealized gain or loss is recorded in:The income statement (through profit or loss model)Other comprehensive income (if this model, on an investment-by-investment basis)Usually done via an adjusting journal entry at year endAny realized gains or losses on disposition are also reported on the same statement No difference in reporting unrealized and realized gains and losses, except for fair value through OCI debt investmentsUsing the Fair Value Model What is the difference between unrealized gains and losses and realized gains and losses?Discussion QuestionAccounting for Strategic InvestmentsInvestor is considered to have significant influence over the investee (associate)Investment in common shares is initially recorded at cost“Investment in Associates” accountInvestment account adjusted annually to show how the investor’s equity in the investee has changedThe investor’s share of associate’s net income or loss (increases or decreases investment in associate’s account)Dividends earned (decreases investment in associate’s account)Equity Method(More than 20%)Investment is recorded and cost and is not adjusted until the investment is soldWhen investee declares a dividend, investor records dividend revenueUsed under certain circumstancesCost ModelReporting Investments:Income Statement / OCINon-strategic investmentsInvestment purchased to earn contractual cash flowsAmortized cost model; optional use of fair value through profit or lossPresentation: current or non-current presentation based on contractInvestment not purchased to earn contractual cash flows (example: trading investments)Fair value through profit or loss; some exceptions through OCIPresentation: Usually current assets (but not always)Strategic investmentsInvestor has controlConsolidationInvestor has significant influence, but no controlEquity method; non-currentReporting Investments: Statement ofFinancial Position Under IFRSNon-strategic investmentsEquity investments with quoted prices in active marketsFair value through profit or lossPresentation: current or non-current based on management intentionNo active market or not an equity investmentAmortized cost if debt or cost model if equityPresentation: current or non-current based on management intentionStrategic investmentsInvestor has controlConsolidation, orIf fair value known, equity method or fair value through profit or lossInvestor has significant influence, but no controlIf fair value known, equity method or fair value through profit or lossIf not known, equity method or cost modelReporting Investments: Statement ofFinancial Position Under ASPEThe recording of bonds as an investment is similar to recording a bond liabilityInvestor (purchaser of bonds)Investee (issuer of bonds)Short-term investments in bonds accounted for using fair valueLong-term investments use amortized cost modelAppendix 12A:Investment in BondsComparing IFRS and ASPECOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. 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