Kế toán, kiểm toán - Chapter 12: Investments

INVESTMENTSChapter 12© 2013 The McGraw-Hill Companies, Inc.Nature of InvestmentsBonds and notes(Debt securities)Common and preferred stock(Equity securities)Investments can be accounted for in a variety of ways, depending on the nature of the investment relationship.Reporting Categories for InvestmentsAs in the separate financial statementsHeld-to-Maturity SecuritiesOn January 1, 2012, Matrix Ltd purchased as an investment $1,000,000, of 10%, 10-year bonds, interest paid semi-annually. The market rate for similar bonds is 12%. Let’s look at calculation of the present value of the bond issue.     Present Amount PV Factor Value Interest $ 50,000 × 11.46992 =$573,496 Principal 1,000,000 × 0.31180 = 311,805 Present value of bonds  $885,301       PV of ordinary annuity of $1, n = 20, i = 6%PV of $1, n = 20, i = 6%Held-to-Maturity SecuritiesPeriodInterest PaymentInterest Revenue Discount Amortization Unamortized DiscountCarrying Value  114,699 885,301 1 50,000 53,118 (3,118) 111,581 888,419 2 50,000 53,305 (3,305) 108,276 891,724 3 50,000 53,503 (3,503) 104,773 895,227 4 50,000 53,714 (3,714) 101,059 898,941 Partial Bond Amortization TableHeld-to-Maturity Securities$114,699 - $3,118 = $111,581 unamortized discountHow would this investment appear on the statement of financial position after one period of discount amortization?Held-to-Maturity SecuritiesTainting of HTM: Barring a few exceptions, a sale of “more than an insignificant amount” of HTM securities would taint the HTM classificationIAS No. 39 lists the major unforeseen events (exceptions) that could justify the sale of a HTM investmentA sale based on other reasons could taint a company’s HTM classification, as the company’s intent and ability to hold the investment to maturity becomes questionableWhen tainted, an investor is barred from classifying new debt securities as HTM for the current and subsequent two financial years. Furthermore, all HTM investments are to be reclassified as AFS investmentsHeld-to-Maturity SecuritiesOn December 31, 2012 after interest is received by Matrix, all the bonds are sold for $900,000 cash.PeriodInterest PaymentInterest Revenue Discount Amortization Unamortized DiscountCarrying Value  114,699 885,301 1 50,000 53,118 (3,118) 111,581 888,419 2 50,000 53,305 (3,305) 108,276 891,724 3 50,000 53,503 (3,503) 104,773 895,227 4 50,000 53,714 (3,714) 101,059 898,941 Loans and ReceivablesLoans and Receivables Are..Unquoted financial assets that have fixed or determinable paymentsThey Are Carried At Amortized CostBut may be carried at fair value via the use of the fair value option or via reclassification as AFS instrumentsThe Accounting Treatment Mirrors That Of HTM SecuritiesThe only exception is that the tainting rules do not applyTrading SecuritiesAdjustments to fair value are recorded:in a valuation account called Fair Value Adjustment, or as a direct adjustment to the investment account.as a net unrealized gain/loss on the Income Statement.Unrealized Gain Unrealized Loss Income StatementTrading Securities Matrix Ltd purchased additional securities classified as Trading Securities (TS) at the end of 2012. The fair value amounts for these securities on December 31, 2012, are shown below. Prepare the journal entries for Matrix Ltd to adjust the securities to fair value at 12/31/12.Trading SecuritiesNet Unrealized Loss is reported on the Income Statement.Trading SecuritiesUnrealized gains and losses from trading securities are reported on the income statement.Trading SecuritiesOn January 3, 2013, Matrix Ltd sold all trading securities for $65,000 cash.Available-for-Sale Securities Adjustments to fair value are recorded:in a valuation account called Fair Value Adjustment, or as a direct adjustment to the investment account.as a net unrealized gain/loss in Other Comprehensive Income (OCI), which accumulates in separate OCI components in equity.Unrealized Gain Unrealized Loss Other Comprehensive IncomeOther Comprehensive Income (OCI)When we add other comprehensive income to net income we refer to the result as “comprehensive income.”Accumulating Other Comprehensive IncomeUnrealized gains and losses on available-for-sale securities are accumulated in separate OCI components of the shareholders’ equity section of the statement of comprehensive income.Shareholders’ EquityOrdinary sharesUnrealized gains on AFS instrumentsRetained earningsTotal Shareholders’ EquityCumulativenet unrealizedgains and losses Example of Available-for-sale securitiesNow assume the same facts for our Matrix Ltd. example, except that the investment is for available-for-sale securities rather than trading securities. Example of Available-for-sale securitiesThe net unrealized gain is reported inother comprehensive income.Reclassification Adjustment When AFS Investments are SoldEventEffect on Comprehensive IncomeEffect on Shareholders' Equity Period 1: hold AFS investment and experience net unrealized loss.òOCI for unrealized loss.ò Equity Period 2: sell AFS investment and  realize loss on saleñ OCI to back out previously recognized unrealizedñ Equity (so net effect on Equity over time is zero)loss (so effect on OCI over time is zero) ò Net income for realized lossò Retained earningsOn January 3, 2013, Matrix Ltd sold all available-for-sale securities for $65,000 cash.Available-for-Sale SecuritiesImpairment of InvestmentsThis loss in valueis called an. . .Occasionally, an investment’s value will decline in light of a loss eventImpairmentLossA loss event provides objective evidence that a financial asset is impairedExamples of loss events:Significant financial difficulty of the issuer, orDefault in interest or principal payments, orProbable bankruptcy and observable decrease in cash flowsImpairment of InvestmentsWrite down the assets to fair value, with losses realized in income. AFSImpairment loss = Carrying amount less current fair value less any impairment loss previously recognizedImpairment losses for AFS debt/ equity instrument is reversed through income/OCIHTMImpairment loss is worked out in the same way as for AFS.Reversal of impairment is brought to net income, to bring the balance to what it would have been had no impairment occurredFair Value OptionCompanies can only elect the fair value option in three specific circumstances only*To avoid an accounting mismatchFor a group of financial assets or liabilities that are managed on a fair value basisWhen a financial instrument includes an “embedded derivative” and the issuer or holder of the instrument chooses to account for the instrument as a single instrumentIAS No. 39 allows companies to irrevocably elect the fair value option for a non-trading financial asset at time of recognition, to measure the asset at FVTPL* U.S. GAAP allows for the unconditional use of the fair value optionTransfers Between Reporting CategoriesUnrealized gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred. Transfers are accounted for at fair value on the transfer date.Limited Circumstances!Transfers Between Reporting CategoriesTransfer from:To:Permitted/required classificationDerivative securities (FVTPL)OthersNot permittedDesignated as FVTPL(“Fair value option”)OthersNot permittedNonderivative TSAFSPermitted if change in intention to trade (rare)Nonderivative TSL&RPermitted if meets the definition of L&R*AFSL&RPermitted if meets the definition of L&R*HTMAFSRequired if intention or ability is taintedAFSHTMPermitted if no further breaches of tainting rules in current year and preceding two yearsDisclosures of financial instruments (FI)DisclosuresClasses of FI, their significance, and the nature & extent of risk arising from them.Net gains or losses arising from:FI measured at FVTPLShowing separately those FI designated under the FV option, and TSAFS assetsShowing separately amount of gains/losses recognized directly in OCI, and amount removed from OCI and recognized in P&LHTM and L&R investmentsEntity’s exposure to concentration of risksBases for determining fair valueOthersDisclosure notes should also be provided to help financial statement users assess the quality of fair value measurements/estimates and understand how they affect the financial statementsInvestor Has Significant Influence As in the separate financial statementsInvestor Has Significant InfluenceExtent of Investor InfluenceReporting MethodLack of significant influence(usually 50% equity ownership) ConsolidationWhat Is Significant Influence?If an investor owns 20% of the voting rights of an investee, it is presumed that the investor has significant influence over the financial and operating policies of the investee. The presumption can be overcome if, for example: the investee challenges the investor’s ability to exercise significant influence through litigation or  other methods. the investor surrenders significant shareholder rights  in a signed agreement. the investor is unable to acquire sufficient information  about the investee to apply the equity method. the investor tries and fails to obtain representation on  the board of directors of the investee.Equity Method and ConsolidationThe equity method is used when an investor can’t control, but can “significantly influence” the investee:Control has two key features in IAS No. 27The power to govern the operating and financial policies of the investees, andThe rights to the benefits from the investee’s activities Although the concept of control is qualitative in nature, an entity is “presumed” to have control if it owns more than 50% of an investee’s issued or partial ordinary shares. Departure from this qualitative threshold is allowed, but it must be disclosed and explainedEquity Method and ConsolidationA “parent” and “subsidiary” relationship exists when a investor controls an investee.The parent and subsidiary are considered a single reporting entity.  Consolidated financial statements combine the  separate financial statements of the parent and  subsidiary each period into a single aggregate set  of financial statements. The equity method is sometimes referred to as a  “one line consolidation,” because it shows the  investor’s income and investment as increasing by  their portion of the investee’s income.Equity MethodThe investment account is increased by:Original investment cost.Proportionate share of investee's earnings.The investment account is decreased by:Dividends received.Equity Method – Example 1 On January 1, 2012, Matrix Ltd acquired 45% of the equity securities of Apex Ltd. for $1,350,000. On the investment date, Apex’s net assets had a fair value of $3,000,000. During 2012, Apex paid cash dividends of $150,000 and reported net income of $1,750,000. What amount will Matrix Ltd. report on the statement of financial position as Investment in Apex Ltd? Ignore taxes.Equity MethodEquity MethodEquity MethodInvestment in Apex Ltd. Investment 1,350,000 67,500 45% Dividends45% Earnings 787,500Reported amount 2,070,000 If the investee had a loss, the investment account would have been reduced.Equity Method - Example 2On January 1, 2012, Matrix Ltd purchase 25% of the ordinary shares of Apex Ltd. for $180,000. At the date of investment, the book value of the net assets of Apex was $400,000, and the net fair value of these assets is $600,000. During 2012, Apex paid cash dividends of $40,000, and reported earnings of $100,000.Equity MethodAssume that of the $50,000 excess of the fair value of net assets acquired ($600,000 × 25% = $150,000) over the book value of those net assets on Apex’s statement of financial position ($400,000 × 25% = $100,000), 75% is attributable to depreciable assets with a remaining life of 20 years and the remainder is attributable to land. Matrix uses the straight-line method of depreciation on similar owned assets.Equity MethodGoodwill is “implicit” or embedded in the investment Changing From the Equity Method to Another MethodThe new method (for example, fair value) is applied to the investment from that point onwardsWhen the investor’s level of influence changes, it may be necessary to change from the equity method to another method in the consolidated financial statements. Changing From the Equity Method to Another MethodThe equity method is simply discontinued and the new method applied from then on.For example, if there is a loss of significant influence, the investment is accounted for as a financial instrument under IAS 39 henceforth)Changing From Another Method to the Equity MethodWhen the investor’s ownership level increases to the point where they can exert significant influence, the investor should change to the equity method.The investment account would not be retroactively adjusted to the balance that would have existed if the equity method had always been used. The equity method would be applied to the profits of the associate only from the date when the investor is able to exert significant influence over the investeeComparison of Cost, Fair Value, and Equity Method  Separate Financial StatementsSeparate Financial StatementsConsolidated Financial StatementsAccounting method applied to investment in associateCost methodFair value method for AFS securitiesEquity methodSales proceeds1,446,0001,446,0001,446,000Carrying amount1,500,0001,500,0001,545,000Loss on sale(54,000)(54,000)*(99,000)Income previously recognized75,00075,000120,000Total income21,00021,00021,000The difference in terms of income between the cost, fair value and equity methods lies in the timing at which gains or losses are recognized The higher income earned in an earlier period under the equity method is offset by a lower terminal profit (or higher terminal loss) at the date of saleProportional Consolidation Investors are allowed to account for a joint venture using either the equity method or proportional consolidation.In proportional consolidationThe investor combines its proportionate share of the investee’s accounts with its own account on an item-by-item basis in the consolidated financial statement.Financial Instruments & DerivativesFinancial Assets:CashEquity instrument in another entityA contractual right to receive cash or exchange financial instruments under potentially favorable conditions; orA contractual right to receive a variable number of the entity’s own equity instruments.Financial Instruments & DerivativesFinancial liabilities:A contractual obligation to pay cash or exchange financial instruments under potentially unfavorable conditions; orA contractual obligation to issue a variable quantity of the entity’s own equity instruments.Derivatives:Financial instruments that “derive” their valuesor contractually required cash flows from someother security or index.Appendix 12A – Other InvestmentsIt is a common practice for companies to purchase life insurance policies on key officers. The company pays the premium and is the beneficiary of the policy. If the officer dies, the company receives the proceeds from the policy. Some types of policies build a portion of each premium as cash surrender value. The cash surrender value of such a policy is classified as an investment on the statement of financial position of the company.Appendix 12B – Impairment of a ReceivableWhen the original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor, the new arrangement is referred to as debt modification.Sometimes a troubled debt is settled in full when the debtor transfers assets or equities to the creditor. The creditor usually recognizes a loss on the settlement. Such a settlement is not considered unusual or infrequent.Accounting for Financial InstrumentsCurrent FrameworkIAS No. 39 (Measurement and Recognition)IAS No. 32 and IFRS No. 7 (Disclosure and Presentation)Feedback from PractitionersThe standards are “highly complex and cumbersome”New FrameworkIFRS No. 9! It is expected to lead to a consistent framework for accounting for all financial instrumentsPhase 1 was launched in Nov’ 2009IFRS 9 – Equity InstrumentsIFRS 9. Debt Instruments (1) IFRS 9. Debt Instruments (2) IAS No. 39 versus IFRS No. 9 Debt InstrumentsIAS No. 39 versus IFRS No. 9 Equity InstrumentsEnd of Chapter 12© 2013 The McGraw-Hill Companies, Inc.