FAR: IFRS—Investments in Equity and Debt Securities 3/29/2018

Question 1

Which, if either, of the following statements concerning the transfer of investments between categories under IFRS No. 9 is/are correct?

I. Only investments in debt securities may be transferred between categories.

II. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated.

1) I only.
2) II only.
3) Both I and II.
4) Neither I nor II.

Answer 1

1 Only

Statement I is correct, but Statement II is not correct. Only investments in debt securities may be transferred between categories; equity securities may not be transferred between categories (Statement I). When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must be restated (Statement II).

Question 2

Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31

Par value $100,000
Original cost 108,000
Current premium 3,500
Fair value 105,000

Inco’s business model is to regularly invest in debt to receive the cash flow provided by interest and the repayment of principal on maturity. The bonds are not associated with any other asset or liability.

Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31 IFRS-based Statement of Financial Position?

1) $100,000
2) $103,500
3) $105,000
4) $108,000

Answer 2

$103,500

This answer ($105,000) results from reporting the investment in bonds at fair value. Under IFRS No. 9, investments in debt securities made under an entity’s business model plan to make and hold such investments solely to receive cash flow from interest and principal repayment, and when there is no accounting mismatch, should be reported at amortized cost, not at fair value.

Question 3

Which, if any, of the following transfers between categories is possible under IFRS No. 9 for investments in debt securities?

A) Amortized cost to fair value: B) Fair value to amortized cost

1) Yes: Yes
2) Yes: No
3) No: Yes
4) No: No

Answer 3

Yes, Yes

Under IFRS No. 9, investments in debt securities may be transferred not only from amortized cost to fair value but also from fair value to amortized cost when an investment that originally fails to meet both the business model test and the cash flow characteristic test subsequently meets both tests.

Question 4

Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31

Par value $100,000
Original cost 108,000
Current premium 3,500
Fair value 105,000

Inco normally does not invest in debt but made this investment with the expectation that it could profit from short-term decreases in the market interest rate.

Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31 IFRS-based Statement of Financial Position?

1) $100,000
2) $103,500
3) $105,000
4) $108,000

Answer 4

$105,000

Under IFRS No. 9, investments in debt securities that are not made under an entity’s business model plan to make and hold such investments solely to receive cash flow from interest and principal repayment should be reported at fair value. Thus, this investment should be reported at the fair value, $105,000.

Question 5

Which, if any, of the following characteristics concerning the categories of investments under IFRS No. 9 is/are correct?

I. There is a single category for debt investments and a single category for equity investments.

II. The business model test used in evaluating debt instruments for classification purposes is concerned with the investor’s intent.

1) I only
2) II only
3) Both I and II
4) Neither I nor II

Answer 5

II Only

Statement I is not correct; Statement II is correct. While there is a single category for equity investments (at fair value), there are two categories for debt investments (at amortized cost and at fair value) (Statement I). The business model test used in evaluating debt instruments for classification purposes is concerned with the investor’s intent. Specifically, did the investor make the investment to collect cash flows from interest and return of principal, rather than to make a profit on sale of the investment (Statement II)?