Kế toán, kiểm toán - Chapter 15: Investments and international operations
Purchased to yield dividends or increases in fair value.
Not actively managed like held-for-trading securities.
If the intent is to sell available-for-sale securities within the longer of one year or operating cycle, they are classified as short-term investments. Otherwise, they are classified as long-term.
Adjust the cost of available-for-sale securities to reflect changes in fair value. This is done with a fair value adjustment to its total portfolio cost.
Any unrealized gain or loss is not reported as part of profit or loss but as part of other comprehensive income.
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Chapter 15INVESTMENTS AND INTERNATIONAL OPERATIONSCopyright © 2015 by McGraw-Hill Education (Asia). All rights reserved.BASICS OF INVESTMENTSCompanies transfer excess cash into investments to produce higher income.Some companies are set up to produce income from investments.Companies make investments for strategic reasons.Motivation for InvestmentsC1SHORT-TERM INVESTMENTSC1Short-term investments are securities that:Management intends to convert to cash within one year or the operating cycle, whichever is longer.Are readily convertible to cash.Short-term investments do not include cash equivalents. Cash equivalents are investments that are both readily converted to known amounts of cash and mature within three months. LONG-TERM INVESTMENTSLong-term investments:are not readily convertible to cash. are not intended to be converted to cash in the short term.are reported in the noncurrent section of the balance sheet, often in its own category.C1DEBT SECURITIES VERSUS EQUITY SECURITIESDebt SecuritiesReflect a creditor relationship Examples: Investments in notes, bonds, and CDsMay be issued by governments, companies, or individualsC1Equity SecuritiesReflect an owner relationship Examples: Investments in ordinary shares Issued by other companiesCLASSIFICATION AND REPORTINGC1Accounting for Investments depends on some or all of the following factors:1. purpose, e.g. trading or long-term investment, the company’s intent to hold the security either short-term or long-term,2. its contractual characteristics, e.g. debt or equity, 3. whether it is listed on an exchange, 4. the industry in which the reporting entity operates, and 5. the accounting policy choice of the reporting entity.HELD-FOR-TRADING SECURITIESAcquired principally for the purpose of selling or repurchasing them in the near term, with a pattern of short-term profit-taking. Such investments are accounted for by the fair value approach, in contrast to the historical cost approach generally used for other assets like land, buildings, and equipment. Fair value is the amount for which an asset could be exchanged between knowledgeable and willing parties, in an arm’s length transaction.P1Assume that Nestlé buys X Corp’s shares on October 1, with the intention to sell within a few months. The journal entry at purchase is as follows.HELD-FOR-TRADING SECURITIESP1When Nestlé’s fiscal year ends on December 31, the share price of X Corp has risen in value and the total market value is CHF 55,000. The CHF 5,000 value on top of the original cost is an unrealized gain on the investment. The year-end journal entry to record this gain is as follows.HELD-FOR-TRADING SECURITIESP1When Nestlé sells X Corp’s shares, it records a realized gain or loss. If Nestlé sells at CHF 60,000, which is higher than the carrying amount of CHF 55,000, then the journal entry is as follows.HELD-FOR-TRADING SECURITIESP1AVAILABLE-FOR-SALE SECURITIESPurchased to yield dividends or increases in fair value.Not actively managed like held-for-trading securities.If the intent is to sell available-for-sale securities within the longer of one year or operating cycle, they are classified as short-term investments. Otherwise, they are classified as long-term. Adjust the cost of available-for-sale securities to reflect changes in fair value. This is done with a fair value adjustment to its total portfolio cost. Any unrealized gain or loss is not reported as part of profit or loss but as part of other comprehensive income.P2AVAILABLE-FOR-SALE SECURITIES Assume that Nestlé buys Y Corp’s shares at CHF 100,000. Nestlé intends to hold this investment for longer than a year and decided to treat it as an available-for-sale (AFS) investment.P2AVAILABLE-FOR-SALE SECURITIESP2Upon sale at CHF 10,000, the journal entry is:Assume that at year-end, the fair market value of Y Corp’s shares is CHF 120,000. The journal entry is as follows.HELD-TO-MATURITY DEBTDebt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is recorded when earned. On September 1, 2014, Music City paid $29,500 plus a $500 brokerage fee to buy Dell’s 7%, 2-year bonds payable with a $30,000 par value. The bonds pay interest semiannually on August 31st and February 28th. Music City plans to hold the bonds until they mature (HTM securities).P3HELD-TO-MATURITY DEBTInterest earned but not received must be accrued on December 31, 2014. $30,000 par value × 7% × 4/12 = $700 interest earned.P3Significant influence is generally assumed with 20% to 50% ownership.0%20%50%100%Cost or Fair Value MethodEquity MethodConsolidated Financial StatementsP4Investor Ownership of Investee Shares OutstandingINVESTMENTS IN EQUITY WITH SIGNIFICANT INFLUENCEOriginal investment is recorded at cost.The investment account is increased by a proportionate share of investee’s earnings.The investment account is decreased by dividends received.P4INVESTMENTS IN EQUITY WITH SIGNIFICANT INFLUENCE On January 1, 2014, Micron Co. records the purchase of 3,000 shares (30%) of Star Co. ordinary shares at a total cost of $70,650 cash. P4INVESTMENTS IN EQUITY WITH SIGNIFICANT INFLUENCE For 2014, Star reports net income of $20,000, and pays total cash dividends of $10,000 on January 9, 2015.P4$10,000 × 30% = $3,000$20,000 × 30% = $6,000INVESTMENTS IN EQUITY WITH SIGNIFICANT INFLUENCEP4INVESTMENTS IN EQUITY WITH SIGNIFICANT INFLUENCERequired when investor has control over the investee.Equity Method is used.Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parent’s control.C2INVESTMENTS IN EQUITY WITH CONTROLACCOUNTING SUMMARY FOR INVESTMENTS IN SECURITIESC1COMPREHENSIVE INCOMEC1Comprehensive Income: all changes in equity during a period except those from owners’ investments and dividends. Example: Fair value adjustments on available-for-sale investments are shown in the statement of comprehensive income.COMPONENTS OF RETURN ON TOTAL ASSETSReturn ontotal assets=Profitmargin×Total assetturnoverNet incomeAverage total assets=×Net incomeNet salesNet salesAverage total assetsA1RETURN ON TOTAL ASSETSHere are the returns on total assets and its components for Gap, Inc. for the years 2012 through 2008:All companies desire a high return on total assets. To improve the return, the company must meet any decline in profit margin or total asset turnover with an increase in the other. Companies consider these components in planning strategies.A1APPENDIX15A: INVESTMENTS IN INTERNATIONAL OPERATIONSTwo major accounting challenges arise when companies have international operations:C3Accounting for sales and purchases listed in a foreign currency.Preparing consolidated financial statements with international subsidiaries.Each country uses its own currency for internal economic transactions.To make transactions in another country, units of that country’s currency must be acquired.The cost of those currencies is called the exchange rate.EXCHANGE RATES BETWEEN CURRENCIESC3SALES IN A FOREIGN CURRENCYBoston Company, a U.S.-based manufacturer makes a credit sale to London Outfitters, a British retail company. On December 12, 2014, Boston sells £10,000 with payment due on February 10, 2015. Boston keeps its record in U.S. dollars. At the date of sale, the British pound is valued at $1.80.£10,000 × $1.80 = $18,000C3SALES IN A FOREIGN CURRENCYBoston Company is a December 31, year-end company. On December 31, 2014, the British pound has an exchange rate of $1.84. The dollar value of the account receivable from London is $18,400 on this date. The receivable is to valued on the balance sheet at it current dollar amount.Accounts Receivable – London OutfittersDateExplanationDebitCreditBalance12/12/14 Sale 18,000 18,000 12/31/14 Adjustment for foreign currency400 18,400 C3SALES IN A FOREIGN CURRENCYOn February 10, 2015, Boston receives London Outfitters’ payment of £10,000. Boston immediately exchanges the pounds for U.S. dollars. The exchange rate on this date is $1.78 per pound, so Boston receives $17,800 for the £10,000 received in settlement. Accounts Receivable – London OutfittersDateExplanationDebitCreditBalance12/12/10 Sale 18,000 18,000 12/31/10 Adjustment for foreign currency400 18,400 2/10/11 Payment received 18,400 -0-C3PURCHASES IN A FOREIGN CURRENCYNC Imports, a U.S. company, purchases products costing €20,000 from Hamburg Brewing on January 15, when the exchange rate is $1.20 per euro.€20,000 × $1.20 = $24,000C3PURCHASES IN A FOREIGN CURRENCYNC Imports makes payment in full on February 14 when the exchange rate is $1.25 per euro.€20,000 × $1.25 = $25,000C3CONSOLIDATED STATEMENTS WITH INTERNATIONAL SUBSIDIARIESConsider a U.S.-based company that owns a controlling interest in a French company. The reporting currency of the U.S. company is the dollar. The French company maintains its books in Euros. Before preparing consolidated statements, the U.S. company must translate the French company’s statements into dollars. The process requires the parent company to select appropriate foreign exchange rates and to apply those rates to the foreign subsidiary’s account balances.TranslateAccount BalancesC3APPENDIX15B: NEW REQUIREMENTS UNDER IFRS 9C4IFRS 9 classifies financial instruments into two categories:1. at amortied cost; or 2. at fair value. CLASSIFICATION AND REPORTINGP4IFRS 9 uses two criteria to determine how financial assets should be classified and measured:(a) the entity’s business model for managing the financial assets (the “business model approach”); and(b) the contractual cash flow characteristics of the financial assets.PROCESS FOR DETERMINING THE CLASSIFICATION AND MEASUREMENTC4FVTOCI SECURITIESFVTOCI is a new category under IFRS 9. Unlike AFS securities, IFRS 9 prohibits subsequent transfer (‘recycling’) of fair value changes to profit or loss on sale of the investments for FVTOCI. In other words, both realized and unrealized changes in carrying amount (gains or losses) “by pass” the P&L and are reported in the OCI.Only dividend income is recognized in profit or loss.P4END OF CHAPTER 15
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