Chapter 8 Investing in FVOCI & FVPL Flashcards
What are the methods to measure financial equity assets?
- Fair Value Profit or Loss (FVPL)
2. Fair Value Other Comprehensive Income (FVOCI)
Explain the concept of FVPL with regards to measurement, b/s date and disposal
On Measurement
Fair value of equity instrument will be recorded
Transaction costs to BE EXPENSED (Unlike FVOCI which capitalises the expense)
On Balance sheet Date,
Equity instruments will be marked to market
Unrealised holding gains or loss will be sent to P&L
On Disposal,
Realised gains and losses will be sent to P&L
- On 15 Dec 20x3, Vic Ltd purchases 10,000 shares in Beck Ltd for $30,000 (10,000 shares @$3/- each)
- Transaction costs are $1,000
- Vic Ltd choose the default option to recognise investment as FVPL
- On 31 Dec 20x3 the shares are trading at $35,000 (10,000 x $3.50 per share)
- On 15 Jan 20x4 the shares are sold for $38,000 (10,000 x $3.80 per share)
- Vic Ltd’s year end is 31 December
What are the journal entries?
15 Dec 20X3
DR Investment in FVPL 30K
DR Transaction Cost 1K
CR Cash / Payables 31K
31 Dec 20X3
DR Investment in FVPL 5K
CR Unrealised gain in FVPL 5K
15 Jan 20X4
DR Cash 38K
CR Investment in FVPL 35K
CR Realised Gain on sale of FVPL 3K
Is the choice to convert to FVOCI a reversible one?
No the choice to switch to FVOCI is an irrevocable one
What is FV reserve?
FV reserve is part of shareholder’s equity
Explain the concept of FVOCI and go into detail on recognition date, balance sheet date and disposal
ON recognition date
Need to recognise fair value + transaction costs (unlike FVPL, transaction costs for FVOCI will be capitalised)
On balance sheet date
mark to market value
unrealised holding gain/loss will be sent to fair value reserve under balance sheet equity & P&L OCI
On disposal
realised gains and losses are sent to fair value reserve and balance will be closed to retain earnings
- On 15 Dec 20x3, Kim Ltd purchases 10,000 in West Ltd for $30,000 (10,000 shares @$3/- each)
- Transaction costs are $1,000
- Kim Ltd makes an irrevocable choice at initial recognition to classify the investment as FVOCI
- On 31 Dec 20x3 the shares are trading at $35,000 (10,000 x $3.50 per share)
- On 30 June 20x4 the shares are sold for $38,000 (10,000 x $3.80 per share)
- Kim Ltd’s year end is 31 December
What are the journal entries?
15 Dec 20X3
DR Investment in FVOCI 31K (Need to capitalize transaction cost)
CR Cash / Payables 31K
31 Dec 20X3
DR Investment in FVOCI 4K
CR FV Reserve 4K (This amount will be sent to P&L under other comprehensive income as FV gain on investment in FVOCI AND sent to Balance Sheet under equity FV reserve)
30 June 20X4
DR Investment in FVOCI 3K [Mark to market]
CR FV reserve 3K [Mark to market]
DR Cash 38K [sale of shares]
CR Investment in FVOCI 38K [Sale of shares]
DR FV Reserve 7K [4K + 3K]
CR Retained Earnings 7K
What are associated companies?
An entity over which an investor has significant influence over operations
- Investor can significantly influence the entity’s operations if
- Representation on the board of directors
- Participation in policy decisions etc.
- Investor, typically, holds 20% to 50% of the voting shares, however, it is possible to have significant influence even if investor holds less than 20%
How do you account for associated companies?
Investor records its investments in the associated company as an asset in its balance sheet.
Normally accounted for using the Equity Method
What is the equity method?
Investment account is initially recorded at COST
Subsequently adjusted to record its proportionate share of increase or decrease in net assets of the associated company
What are subsidiary companies?
An entity whose Investor controls more than 50% of the voting shares
- Investor called the parent
- Investee called the subsidiary
- Parent controls the entity’s operations.
- Parent can elect majority of board members
What is investment property?
Property of land and/or building that is held by the owner to earn rental or capital appreciation
NOT FOR USE IN COMPANY’S MAIN BUSINESS
What are the two models for accounting for investment property?
1) Cost Model
2) Fair Value Model
On 31st Apr YXZ Ltd, purchased property for $10,000. The company intends to earn rental from the property. It chooses the FV model.
On reporting date 31 Dec the fair value of the investment property purchased by YXZ Ltd is $15,000
What are the journal entries
31st April
DR Investment Property 10K
CR Cash 10K
31 Dec
DR Investment property 5K
CR Unrealised Gain of Investment property 5K {RECORDED IN P&L}
