INVESTMENTS Flashcards
What causes transfers between classifications for investments which do not give the investor significant influence?
Changes in investor intent or Changes in investor ability to hold-to-maturity.
How do we account for the transfer of an investment from held-for-trading to held-to-maturity or available-for-sale?
- Credit Trading at recorded fair value; 2. Debit held-to-maturity or available-for-sale at current fair value; 3. Recognize unrealized holding gain/ loss in net income.
How do we account for the transfer of an investment from held-to-maturity to available-for-sale?
- Credit held-to-maturity at unamortized cost; 2. Debit available-for-sale at fair value; 3. Unrealized (holding) gain or loss to Other Comprehensive Income.
How do we account for the transfer of an investment from available-for-sale to held-to-maturity?
- Credit available-for-sale at recorded fair value; 2. Debit held-to-maturity at current fair value; 3. Unrealized holding gain/loss stays in Accumulate Other Comprehensive Income in Shareholders’ Equity; 4. Unrealized holding gain/loss at date of transfer amortized over remaining life of debt.
What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the cost method?
Under normal circumstances, the carrying amount of the investment does not change under the cost method.
What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?
The carrying amount of the investment would change when: 1. The subsidiary pays a liquidating dividend (i.e., dividend greater than earnings since the investment was made); 2. The investor buys additional shares of the subsidiary or sells some of the share it already owns.
How do we account for the transfer of an investment from held-to-maturity to held-for-trading?
- Credit held-to-maturity at unamortized cost; 2. Debit available-for-sale at fair value; 3. Unrealized (holding) gain or loss to Other Comprehensive Income. 3. Recognize unrealized holding gain/ loss in net income.
Identify the three major equity method items recognized each period by an investor.
- Recognize investor’s share of investee’s net income/loss; 2. Recognize investor’s share of investee’s dividends declared; 3. Recognize adjustment to share of investee’s net income/loss for “depreciation/amortization” of amount allocated to excess of fair value over book value.
Under what conditions will an investment give the investor significant influence, but not control, over the investee?
When an investor owns 20% to 50% of the voting equity securities of an investee and there are no impediments to the investor exercising its voting rights to influence the investee’s operating and financial policies. Investments in non-voting equity securities (e.g., preferred stock) or in debt securities does not convey influence.
What is the required accounting if a change in an investor’s level of ownership results in a loss of significant influence, but the entire investment is not disposed of?
The investor must cease using the equity method of accounting and begin accounting for the investment at fair value (either as available-for-sale or held-for-trading). The investment will be adjusted to fair value at the date significant influence is lost and any difference between fair value and the prior equity-based carrying amount will be recognized as a gain or loss in current income.
At the time an investment gives the investor significant influence, but not control, over an investee, how will any difference between the cost of the investment and the book value of the investee’s assets and liabilities be allocated?
To adjust an investee’s assets and liabilities to fair value, then 1. If cost of investment > fair value of investee’s net assets, to Goodwill; OR 2. If cost of investment
When an investor has significant influence over the operating and financial policies of an investee, what method must be used to account for the investment in the investee?
The investment must be carried on the investor’s books and reported in the investor’s financial statements using the full equity method of accounting.
At the time an investor makes an investment that gives it significant influence over an investee, what information must the investor determine in order to use the equity method of accounting?
At the time of investment, the investor must determine: 1. Book value of assets and liabilities of investee; 2. Fair value of assets and liabilities of investee; 3. Allocation of any difference between cost of investment and fair value of investee’s assets and liabilities.
What are the elements that enter into the determination of revenue recognized from an equity method investment?
Investor’s share of investee’s reported net income/loss - “depreciation/amortization” on excess of cost of investment over book value (OR + “depreciation/amortization” on excess of book value over cost of investment) = net revenue recognized for equity method investment. Dividends received do not enter into the determination of the investor’s revenue recognized; they reduce the investment account.
Under what conditions can property already held be transferred into or out of the investment property category?
Transfers of property into or out of the investment property category can be made only when it is clearly evident that there has been a change in the use of the property.
What are the acceptable methods (models) for measuring and reporting investment property?
The cost method (model) and the fair value method (model). An entity may use only one of these methods to measure and report all of its investment property.
If an owner uses part of property, under what conditions may the other part be accounted for as investment property?
If the part of the property used by the owner and the part not used by the owner can be sold or leased separately and if the part not used otherwise meets the definition of investment property, it can be treated as investment property.
What are the characteristics of investment property under International Financial Reporting Standards (IFRS)?
- Investment property consists of building and/or land; 2. Held by the owner or a lessee under a capital lease; 3. For the purpose of earning rental income, recognizing capital appreciation, or both.
Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to measure a debt investment at fair value that would otherwise be measured at amortized cost?
An investor can elect to measure a debt investment that would otherwise be measured at amortized cost at fair value when the use of fair value would eliminate or significantly reduce a measurement or recognition inconsistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases.
What conditions must be met under International Financial Reporting Standards (IFRS) No. 9 for an investment in debt to be classified as debt instruments measured at amortized cost?
Two conditions must be met: 1. Business model test - where the entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value; 2. Cash flow characteristic test - where the contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest.
What are the categories of investments under International Financial Reporting Standards (IFRS) No. 9?
Under IFRS No. 9 two categories of investments (and other financial assets) include: 1. Debt investments measured at amortized cost; 2. All other investments, including debt instruments not at amortized cost and all equity investments.
Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to report gains or losses from changes in fair value of equity investments in other comprehensive income, rather than through profit and loss (net income)?
If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income, rather than through profit and loss (net income). The election must be made when the investment is first recognized and subsequently cannot be changed.
When are losses on equity securities classified as available-for-sale reclassified to earnings?
When the equity security is sold or when the losses are other-than-temporary (the security is impaired).
When can the losses associated with the impairment of a debt security can be reversed.
Losses associated with the impairment of a debt or equity security cannot be reversed.
What are the main factors to consider when determining whether the decline in fair value is other-than-temporary?
- Whether the security will recover in value. Taking into consideration: a. Length of time and extent to which the fair value has been less than cost; b. The financial condition of the issuer and the near term prospects of recovery 2. Whether the investor has positive ability and intent to hold the security until recovery could occur.
