Chapter 9 - study guide Flashcards
3 methods for no significant influence in your investment:
- Cost/amortized cost
- FV-NI
- FV-OCI
each of these modeles have different rules for measurement at aquisition, treatment of unrealized gains/losses and treatment of realized gains/losses
cost model and amortized cost model apply to:
- cost model applies to investment in equity instruments (shares) (ASPE doesn’t use this method if the shares are quoted in an active market, it uses FV-NI for this case)
- amortized cost model applies to investments in debt instruments and long-term notes and loans receivables
Characteristics of cost/amortized cost model:
- inv recorded at aquisition cost (usually the FV at the aquisition + transaction costs)
- subsequent changes in FV are not recorded!
- unless impaired, the investment is reported at COST/AMORTIZED COST
- amortized model is used under IFRS for the investments held to maturity
- only realized gains and losses are recorded and thererore affect net income
- dividend + interest revenue affect net income
Amortized cost (for bonds)
- cash received = par (face) value x coupon/stated rate (the rate you actually get paid, which can be less or more than the market rate)
- interest income = carrying amount at the beginning of each interest period x yield (effective/ market) interest rate
- mentioning the FV value doesn’t make any difference for this method, is just a trick
FAIR VALUE of the investment only counts for FV-NI and FV-OCI
FV-NI => IFRS (bonds or shares) - trading purposes
FV-NI Investment account - to record the inv.
Use the INVESTMENT INCOME/LOSS account for:
- recording interest/dividend income
- Gain/Loss on a sale
- Accrued interest at the end of the period
- record the adjustment to FV (after the adjusment, the original cost is not relevant anymore)
- Transaction costs! (this way they are charged to NI)
- amortize the excess purchase price of an Investment in another company (when they say it’s becuase of the assets). Goodwill is for when you buy the whole company!
dr. Investment Income/Loss
cr. Investment in Associate
* this account is included in Net Income on the Income Statement*
Cash received from a bond
(and what rate you use for accrued interest)
= the face value of the bond x the promised rate (=coupon or stated rate for the bond)
Interest income from a bond
= carrying bond amount x market/yield rate (the one you were supposed to get)
The difference is the amortization. If interest income:
> cash received => the bond was at a discount
< cash received => the bond was at a premium
Interest receivable on a bond
(FV-NI - IFRS and ASPE)
- if there was an interest receivable on a bond when you bought it, then when you record the cash received:
dr. Cash 9,000
cr. Interest Receivable 1,500
(IFRS) cr. Investment Income/Loss 7,500
(ASPE) cr. Interest Income
cr/dr FV-NI Investments (Premium/Discount)
FV-NI - ASPE
(what is different than IFRS)
- separates Interest/Dividend Income from gains or losses
(more transparency, better for decision-making, better for tax purposes)
a) Dividend/Interest Revenue
b) Unrealized gain or losses - for adjusting to FV at each reporting date (as opposed to have a single acocunt for IFRS - Investment Income/Loss)
2. Any discount/premium is amortized BEFORE the change in FV is recognized. The carrying amount will be changed => the adjustment entry will be different than under IFRS where there is no entry for amortization
FV - OCI
(permitted only under IFRS)
- transaction costs tend to be added to the carrying amount - however at the first adjustment to FV (at the reporting date), transaction costs end up as part of the holding gain or loss recognized on OCI
- divident income reported separately from unrealized holding gains/losses because the first one goes in Net Income and the other goes in the OCI portion on the I/S which is net of tax!
(similar to FV-NI method under ASPE:
- account for Dividend Revenue
- Unrealized Gain or loss - for the FV adjustment)
FV - OCI characteristics
- long-term equity investments, relationship purposes
- aquisition = FV; valuation = FV
- unrealized gain/losses => recorded in OCI and closed in AOCI at the end of each period
Selling your FV-OCI investment
(3 entries)
- adjust the investment’s carrying amount to its fair value (which is the price you will be paid for it!) at the date of disposal
dr. FV-OCI Inv 840
cr. Unrealized gain/loss - OCI 840
300 * 2.8 => 10 (the price you will be paid) - 7.20 (the carrying amount at Dec 31)
- remove the investment’s carrying amount from the asset account (which now has the same value as how much you will be paid!) - or to make it simpler: the amount for net proceeds
- reclassification adjustment that transfers the holding gain that is now realized out of OCI into
(i) Net Income (FV-OCI with recycling)
dr. Unrealized Gain/Loss - OCI 300
cr. Gain on Sale of Invest 300
(proceeds - COST)
(ii) RE (FV-OCI without recycling) - IAS 9
dr. Unrealized Gain/Loss - OCI 300
cr. Retained Earnings 300
(proceeds - COST) - OR THE SUM OF THE PRIOR ENTRIES TO OCI FOR THAT (PART) OF THE INVESTMENT (840-540 = 300)
Calculate your gain/loss when you sell your FV-OCI Invest
(first entry) - another way to do it
- The price you will be paid - fees/commissions = net proceeds from sale
- Net proceeds - Carrying amount (adjusted to FV if that’s the case)
this is a lot simpler!
However you still have to have the other two entries!
2) dr. Cash (net proceeds)
cr. FV-OCI Investment
3) dr. Unrealized Gain/ Loss - OCI
cr. Gain on Sale (if it was a gain :) - the whole amount (PROCEEDS - (TRANSACTION FEES) - COST) = GAIN OR LOSS
Partial sale of the FV-OCI
(tricky, if not careful)
be careful to take into account all the changes - keep a T account
first and second entry will change the balance in that investment account!
FV-OCI
IFRS 9 vs IFRS 39
IFRS 9 will be implemented in 2015 = no recycling - the third transaction goes directly to Retained earnings instead of Gain/Loss on Sale
