8.1 & 8.2 Flashcards

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1
Q

Describe an investment in financial assets?

A

Where the investing firm has no control

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2
Q

Describe an investment in associates

A

Where the firm has significant influence, but not control

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3
Q

Describe a business combination

A

The investing firm has control over the operations of the investee firm

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4
Q

What is the ownership threshold for investments in associates?

A

Typically between 20% and 50% of the votes is considered a non-controlling interest

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5
Q

How is significant influence evidenced?

A

Seat on board
Involvement in policy making
Material intercompany transactions
Interchange of personnel
Dependence on technology

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6
Q
  1. Can you have significant ownership with <20% ownership? 2. Can you own between 20% and 50% and not have significant influence? How would you class these investments?
A
  1. Yes. An investment in associate
  2. Yes. An investment in financial assets
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7
Q

What is the threshold for business combinations?

A

Over 50%

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8
Q

What is a joint venture?

A

Control is shared by two or more investors

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9
Q

What accounting method is used for joint ventures?

A

Both IFRS and US GAAP require the equity method, although in rare cases both permit proportional consolidation

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10
Q

What is the accounting treatment for investments in financial assets?

A

Three options:
1. Amortised cost
2. Fair value through OCI
3. Fair value through P&L

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11
Q

What is the accounting treatment of investments in associates?

A

Equity method

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12
Q

.What is the accounting treatment for business combinations?

A

The acquisition method

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13
Q

What type of securities does amortised cost accounting apply to?

A

Only applies to debt securities where you must have the ability and intention to hold to maturity

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14
Q

What is the criteria test for amortised cost accounting?

A

Two criteria must be met:
1. Business model test: is the bond going to be held until maturity, firm will collect contractual cash flows?
2. Cash flow test: is it definitely debt e.g. the only payments should be coupon payments and principal repayment

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15
Q

What is amortised cost?

A

The original cost of the debt;
plus any discount OR;
minus any premium
….That has been amortised to date

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16
Q

What is the accounting treatment of amortised cost on the BS and IS

A
  1. Asset is carried on BS at amortised cost (original cost + discount - premium amortised to date)
  2. Interest income is recognised in the income statement, adjusted for any amortisation of premium/discount
  3. Subsequent changes in value are ignored because it will be held to maturity… UNLESS the asset is impaired
17
Q

How do premiums/discounts impact asset values?

A
  1. Discounts/Premiums are amortised over the life of the bond
  2. Premium bonds will reduce the value of the asset over time
  3. Discount bonds will increase the value of the asset over time
18
Q

What securities does FV through P&L apply to?

A
  1. Debt… if it is held for trading or amortised cost results in an accounting mismatch
  2. Equities held for trading, or designated as FVPL at purchase
  3. Derivatives not for hedging are always carried as FVPL
  4. If an asset has an embedded option, the whole asset is carried as FVPL
19
Q

How are FVPL securities held on the balance sheet?

A
  1. They are reported at fair value
  2. Changes in fair value, realised and unrealised, are recognised in the income statement, alongside any dividend or interest income
20
Q

How are FVOCI securities reported on the BS & IS?

A
  1. Carried at fair value on the balance sheet
  2. Unrealised gains and losses reported in OCI
  3. Dividend and interest income recorded in the income statement
  4. Realised gain/loss reported in income statement
21
Q

Summary IS & BS treatment of amortised cost

A

BS = amortised cost = purchase cost + discount - premium amortised to date
IS = interest income including amortisation of discount/premium. Realised gains from sale

22
Q

Summary IS and BS treatment of FVPL

A

BS = carried at FV
IS = realised & unrealised gains/losses, dividend and interest income

23
Q

summary treatment of FVOCI

A

BS = carried at FV. Unrealised gain/loss recognised in OCI
IS = interest and dividend income. Realised gain/losses

24
Q

How is interest income treated?

A

Always the same way whether it is amortised cost, FVPL or FVOCI…

Interest income + amortised discount - amortised cost

25
Q

When is reclassification allowed?

A
  1. For equity… it is never allowed
  2. For debt, you can only reclassify if the business model has changed
26
Q

What is the impact of loan impairment under IFRS 9?

A
  1. A new expected credit loss model has been introduced
  2. Need to look at historic loan performance but also use forward looking information
  3. It results in an earlier recognition of impairment; 12-month expected loss for performing loans and life-time expected loss for non-performing loans
27
Q

How do you calculate unrealised gains/losses?

A

Equity = FV - purchase price = cumulative gain/loss
Debt = FV - amortised cost = cumulative gain/loss

28
Q

How do you calculate the unrealised gain/loss for the period?

A

It is the change in the cumulative unrealised gain/loss

29
Q

How do you calculate the amortisation amount?

A

Purchase price X initial YTM = interest payment
Interest payment - coupon payment = amortisation amount