Chapter 4 - Equity Investments

Question 1

What is the price to book ratio

What is a good result

Answer 1

Market cap/ net assets

Result over 1 suggests confidence

Question 2

What is the equation for enterprise value

Answer 2

Value of equity = enterprise value - debt

Question 3

What are the different ways shares investments can be classified in the banks books and when do these occur

Answer 3

FVTPL- Shares held for trading or to benefit from changes in FV

FVTOCI - if shares not held for trading, irrevocable election can be made at initial recognition to classify as FVTOCI eg associate, JV, subsid, long term investment

Question 4

How do you record a share valued at FVTOCI on initial recognition

What about the subsequent measurement

What happens at disposal

Answer 4

Initially valued at fair value including transaction costs

Revalued at each reporting date - gains / losses recognized in FVTOCI reserve

Gains/ losses never reclassified to P/L but are transferred to retained earnings on disposal (DOES NOT HIT P/L)

Question 5

How do you record a share valued at FVTPL on initial recognition

What about the subsequent measurement

Answer 5

Initially recognized at fair value with transaction cost shown separately as P/L

Revalued at each reporting date and gains/losses recognized in profit or loss