Kế toán, kiểm toán - Chapter 9: Investments

CHAPTER 9:INVESTMENTS2Chapter 9: InvestmentsAfter studying this chapter you should be able to:Understand the nature of investments including which types of companies have significant investments.Explain and apply the cost/amortized cost model of accounting for investments.Explain and apply the fair value through net income model of accounting for investments.Explain and apply the fair value through other comprehensive income model of accounting for investments.Explain and apply the incurred loss, expected loss, and fair value loss impairment models.Explain the concept of significant influence and apply the equity method.Explain the concept of control and when consolidation is appropriate.Explain how investments are presented and disclosed in the financial statements noting how this facilitates analysis.Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.3Investments4Type of InvestmentsDebt investments include investments in government debt, corporate bonds, convertible debt, and commercial paperEquity instruments represent ownership interests in companies (e.g., common stock, preferred stock)Motivations for investments include: to obtain short-term returns or long-term returns on investments, and for corporate strategy5MeasurementMethod of accounting for a particular investment can depend on:Type of instrument (debt vs. equity)Management’s intentCompany strategyAbility to reliably measure instrument’s fair value6Accounting ModelsThere are three main models of accounting for investments: Cost/amortized cost modelFair value through net income model (FV-NI)Fair value through other comprehensive income model (FV-OCI)7Accounting Models: SummaryCost/Amortized Cost ModelFV-NIFV-OCIAt acquisition, measure at:Cost (fair value + transaction costs)Fair valueFair valueAt each reporting date, measure at:Cost or amortized costFair valueFair valueUnrealized holding gains/losses reported in:Not applicableNet incomeOCIRealized holding gains/losses reported in: Net incomeNet incomeTransfer total realized to net income (recycling), or to retained earnings8Cost/Amortized Cost Model: Investments in SharesCost model for investments in shares of another entity: Recognize cost of investment at fair value (plus direct transaction costs)Report at cost (unless impaired)Recognize dividend income when have claim to dividend When dispose of investment, derecognize and report a gain/loss on disposal in net income.9Cost/Amortized Cost Model: Investments in Debt SecuritiesAmortized cost model for investments in debt securities of another entity: Recognize cost of investment at fair value (plus direct transaction costs)Report at amortized cost as well as interest receivable (unless impaired)Recognize interest income as earned, and also amortize any discount/premium by adjusting carrying amount of investment When dispose of investment, first bring accrued interest and discount/premium amortization up to date. Derecognize investment and report a gain/loss on disposal in net income.10Amortized Cost Model: ExampleGiven:Face amount: $100,000Purchase date: January 1, 2017Maturity date: January 1, 2022Interest paid: July 1st and January 1stCoupon (stated) rate of interest: 8%Market (effective) rate of interest: 10%What is the approximate purchase price?PV of $100,000 (n=10, i=5%) + PVA of ($100,000 X 4%) where n=10, i = 5%PV is approximately equal to $92,27811Amortized Cost Model: Example12The entry to record this purchase is:Investment in Bonds 92,278 Cash 92,278Note the discount of $7,722 ($100,000 – 92,278) is not recorded separately; it is amortized over the life of the bondThe effective interest method is used to amortize the premium or discount (required under IFRS)ASPE also allows straight-line method of amortizing premium or discountBond Discount Amortization13Reporting under Amortized Cost Model14Balance SheetCurrent assetsInterest receivable (accrued interest from investment) $xx,xxxLong-term investmentsInvestment, at amortized cost $xx,xxxIncome StatementOther revenue and gainsInterest income $x,xxxSale of InvestmentsDiscount (or premium) is amortized from last date of amortization to the date of saleNew carrying amount calculated, which is the amortized cost balance plus the discount (or minus the premium) amortized from last date of amortizationGain (or loss) calculated as the difference between selling price and carrying amount Any accrued interest income is calculated (and received) over and above the selling price of the investment15Fair Value through Net Income (FV-NI) ModelFair value through net income (FV-NI) also referred to as fair value through profit or loss (FVTPL) in IFRSAt acquisition, investment recorded at fair valueTransactions costs are expensedAt each reporting date, FV-NI investments are adjusted to current fair value and any holding gain or loss is reported in net incomeAny earned interest/dividend income and any holding gain or loss on the investment may be reported together as “Investment Income”16FV-NI: An example17For non-interest bearing Treasury bill:Purchase date: March 15Maturity date: September 15Pay = $19,231 for $20,000 six-month T-bill (8% yield)Entry on March 15:Temporary Investment in T-Bill 19,231 Cash 19,231Entry on Sept 15:Cash 20,000 Temporary Investment in T-Bill 19,231 Investment Income/Loss 769FV-NI: An example18A company reported on December 31, 2018:Investments Carrying Amount Fair Value In various shares $192,990 $191,200Adjustment to fair value (192,990-191,200= $1,790)Entry to record adjustment at year end:Investment Income/Loss 1,790 FV-NI Investments 1,790 2018Current assets:FV-NI Investments $191,200Fair Value through Other Comprehensive Income (FV-OCI)At acquisition, investments are recorded at fair value Transaction costs tend to be added to investment’s carrying amountAt each reporting date, FV-OCI investments are adjusted to current fair value and any holding gain or loss is reported in other comprehensive income (OCI)Accumulated holding gains/losses are reported in AOCI, which is a separate item under Shareholders’ Equity19Fair Value through Other Comprehensive Income (FV-OCI)When investments are disposed, previously unrealized holding gains or losses need to be transferred out of OCI/AOCIUnder FV-OCI with recycling, unrealized holding gains or losses are transferred (i.e. “recycled”) into net income (and as part of net income, closed into retained earnings)Under FV-OCI without recycling, unrealized holding gains or losses are transferred directly into retained earnings (bypassing net income)20FV-OCI: An Example21Fair Value and Cost at Acquisition (Nov. 3, 2016)Nova Industries Ltd. $259,700Columbia Soup Corp. 317,500St. Boniface Pulp Ltd. 141,350Total Cost $718,550Entry to Record: FV-OCI Investments 718,550 Unrealized Gain or loss – OCI 718,550FV-OCI: An example22On December 31, 2016 we assess the change in value: Carrying Amount FV Holding GainNova Industries Ltd. $259,700 $275,000 $15,300Columbia Soup Corp. 317,500 304,000 (13,500)St. Boniface Pulp Ltd. 141,350 104,000 (37,350)Total Cost $718,550 $683,000 $(35,550) Unrealized Gain or loss – OCI 35,550 FV-OCI Investments 35,550On December 31, 2016 we record the change in value:23FV-OCI: An example(Debt Instruments)Classifications24ImpairmentInvestments must be reviewed for possible impairment to ensure that future benefit justifies the valuation on the balance sheetThere are three different impairment models: Incurred loss modelExpected loss modelFull fair value model25Credit Risk26Impairment: Incurred Loss ModelImpairment test carried out only if there is evidence of possible impairmentIndicators of possible impairment include: Significant financial difficultiesDefaulting on interest/principal paymentsMajor financial reorganization or bankruptcyImpairment loss is recognized in net income as difference between carrying amount and revised present value of expected cash flowsRevised present value is calculated using discounted cash flow (DCF) model (using either historic or current market rate as discount rate)27Impairment: Expected Loss ModelImpairment test carried out continuouslyImpairment loss is recognized in net income as difference between carrying amount and revised present value of expected cash flowsRevised present value is calculated using discounted cash flow (DCF) model (using effective interest rate from time of acquisition)28Impairment: Fair Value Loss ModelImpairment loss is recognized in net income as difference between carrying amount and fair value Where fair value is determined using the discounted cash flow (DCF) model, use the current interest rate at time of impairment test 29Impairment: Accounting StandardsIFRS currently uses the following models: For all financial asset investments accounted for at cost or amortized cost: expected loss model (with original discount rate)For FV-NI instruments and equity investments accounted for using FV-OCI: full fair value modelNo need to do a separate impairment test30Impairment: Accounting StandardsASPE has following requirement: For financial asset investments accounted for at cost or amortized cost: incurred loss model (using current market rate)For equity instruments (with market values) and derivative instruments, use fair value model31Strategic InvestmentsAs common shares carry voting rights, extent of influence becomes a factor in determining the appropriate accounting treatmentThere are three levels of influence, each with its own accounting treatment:Little or no influenceSignificant influenceControl32Equity Investments: Common Shares33Investment in Associates: Significant InfluenceApplies to equity investments of significant influence (not control)Significant influence deemed using the following criteria:Quantitative test: 20% to 50% ownershipQualitative test:Representation on Board of DirectorsParticipation in policy-makingMaterial intercompany transactionsExchange of management personnelProvision of technical information34Investment in AssociatesUnder IFRS, investments in associates (i.e. “significant influence”) are accounted for using the equity method of accountingASPE, investors can choose from following options for all “significant influence” investments: Equity method, or Cost method (unless associate shares are quoted in active market, in which case FV-NI model is used)35Equity MethodInvestment recorded at cost of acquisitionInvestor takes into income its respective share of the investee net income for the year by debiting the Investment account and crediting Investment IncomeAny dividends received are credited to the Investment accountThe accrual basis of accounting is appliedConsider the following example of Maxi Limited:36Equity Method: Example37Given:Maxi Corp. purchases 20% of Mini Corp., and exercises significant influenceJanuary 2, 2016 Maxi purchases 48,000 shares @ $10 per shareFor the year 2016 Mini Corp. reports a net income of $200,000; Maxi Corp.’s share is 20% or $40,000December 31, 2016 shares of Mini Corp. have a market price of $12 per shareJanuary 28, 2017 Mini Corp. declared and paid a total cash dividend of $100,000For the year 2017, Mini Corp. reports a net loss of $50,000Prepare all necessary journal entries, using the Equity MethodEquity Method: Example38January 2, 2016Investment in Mini Corp. 480,000 Cash 480,000(48,000 shares x $10)December 31, 2016Investment in Mini Corp. 40,000 Investment Income 40,000($200,000 net income x 20%)December 31, 2016No entry required to reflect market price (or fair value). Investment is not impaired.January 28, 2017Cash 20,000 Investment in Mini Corp. 20,000($100,000 Dividend x 20%)December 31, 2017Investment Loss 10,000 Investment in Mini Corp. 10,000($50,000 net loss x 20%)Equity MethodAmounts paid in excess of (or less than) investee’s book value becomes part of the cost of the investmentThese amounts must be accounted for appropriately after the acquisitionFor example, if the difference is due to long-lived assets with fair values greater than book value, the difference must be amortizedShare of discontinued operations and other comprehensive income of investee are reported in the same way by the investor (major classifications of income are retained)39Equity Method: ImpairmentInvestments with significant influence are assessed at the end of each reporting period to determine if there are indicators of impairmentIf there are indicators of impairment, the impairment test is carried outImpairment loss is recognized in income and is measured as carrying amount in excess of investment’s recoverable amount Investment’s recoverable amount is measured as the higher of value in use and fair value less cost to sellImpairment losses may be reversed40Equity Method: DisposalOn disposal of the investment, both investment account and investment income accounts are brought up to date (i.e. adjusted for investor’s share of associate’s income and changes in book value up to date of sale)Investment’s carrying value is removed and any gains/losses are recognized in net income41Investments in SubsidiariesA corporation (the parent) can acquire control of another corporation (the subsidiary)Control is generally acquired through purchasing 50% or more voting sharesControl is defined as continuing power to determine/direct the strategic operating, financing, and investment policies/activities, without the co-operation of others42Investments in SubsidiariesUnder IFRS, investments for subsidiaries are accounted for preparation of consolidated financial statementsThe two corporations are reported as a single business entityUnder ASPE, parent company has the following options when accounting for subsidiaries: Consolidate all subsidiariesAccount for all subsidiaries under either equity or cost method (cost method cannot be used if shares are traded in an active market, and FV-NI is used instead)43Consolidated Financial Statements44Parent CorporationIncome StatementBalance SheetSubsidiary CorporationIncome StatementBalance SheetConsolidated Entity (Reported by Parent Corporation)Combined Balance Sheet, line-by-line (100%)Combined Income Statement, line-by-line (100%)Eliminate any unrealized inter-company gains and lossesEliminate any inter-company balancesParent eliminates the investment in the subsidiary companyNon-controlling interest reported (the percent of the subsidiary not owned by the parent) on both balance sheet and income statementsPresentation and DisclosureFor investments without significant influence or control, key presentation issue is classification of investment as current vs. long-termKey disclosures include following types of information: Carrying amount of investmentsIncome statement effectsFinancial riskIFRS generally has more onerous disclosure requirements than ASPE45A Comparison of IFRS and ASPEAt the time of writing, the IASB has just issued a new standard, IFRS 9, which is effective in 2018. 46A Comparison of IFRS and ASPEAt the time of writing, the IASB has just issued a new standard, IFRS 9, which if effective in 2018. 47