Financial Instruments - Passive Investments

Question 1

What does FV through profit and loss mean?

Answer 1

At the end of each balance sheet date, the asset/liability is re-measured to fair value and any movement in the FV is taken directly through the income statement. (actively)

Question 2

What does FV through OCI mean?

Answer 2

Financial statements are classified and measured at FVOCI if they are held in a business model whose objective is achieved by collecting contractual cash flows and selling financial assets.

Question 3

What is included in FVTPL

Answer 3

1. Assets that are not qualified to be classified at amortized cost of FVTOCI.
2. Assets classified as held for trading
3. Assets that are designated FVTPL upon initial recognition

Question 4

How are Passive investments defined

Answer 4

Recognized when the entity becomes a party to the contractual provision of the instrument - gains control of the asset. Note: The user does not hold significant influence, joint control, or control over the investee.

Question 5

How are transaction costs recorded? (FVTPL)

Answer 5

Purchasing costs of the investment are expensed in net income when they are incurred

Question 6

How are subsequent measures of passive investments recorded? (FVTPL)

Answer 6

They are classified as FVTPL with all gains and losses recognized through unrealized gains/losses temporarily until the investment is sold

Question 7

Amortized costs

Answer 7

These are financial assets that are held in order to collect contractual cash flows – for the sole purpose of principal and interest. Aka. Bank deposits, AR balances, redeemable PS, bonds.

Question 8

How are transaction costs recorded (Amortized)

Answer 8

Transaction costs are added to the cost of investment on the balance sheet

Question 9

How are subsequent measures of passive investments recorded (Amortized)

Answer 9

Assets are measured at amortized cost using the effective interest method less impairment costs.

Question 10

FVOCI

Answer 10

Includes equity investments that are designated as FVOCI and debt instruments with cash flows that are solely payment of principal and interest.

Question 11

How are transaction costs recoded (FVOCI)

Answer 11

Paid upon purchase of the investment are capitalized as part of the cost of the investment

Question 12

How are subsequent measures of passive investments recorded (FVOCI)

Answer 12

Assets are measured at amortized cost using the effective interest method, less impairment costs. Assets are measured at fair value, with UNREALIZED gains or losses reported in OCI, net of tax. When a debt investment is classified as FVOCI is sold, the cumulative unrealized gain/loss is then transferred to net income (recycled from OCI)
Note: Deferred taxes

Question 13

Note: There are no significant differences between ASPE and IFRS in passive investments

Answer 13

Note: There are no significant differences between ASPE and IFRS in passive investments

Note: ASPE measures the following at FMV

• investments in equity instruments that are quoted in an active market
• certain derivatives

All others are recorded at amortized cost – which then allows the user to choose

Question 14

For amortized cost investments, what are the differences between ASPE and IFRS

Answer 14

IFRS requires the use of the effective interest method, and ASPE permits a choice between the straight-line and effective interest method

Question 15

How do you initially record a passive investment?

Answer 15

You find the fair market value at that date you obtain contractual provisions of the instrument

Question 16

How are transaction costs treated in FVTPL?

Answer 16

They’re expensed in net income as they incur

Question 17

How is impairment calculated for amortized investments?

Answer 17

when the PV of estimated future cash flows (discounted using original effective interest rate) is less than the assets carrying – impairment is recorded in profit or loss and can be reversed up to the amount that if no impairment has been recognized. Reversal is through profit and loss as well

Question 18

How are transaction costs treated in Amortized cost?

Answer 18

They’re added to the cost of the investment in the balance sheet