Passive Investments

Question 1

Passive investments

Answer 1

investments that are made for the purpose of earning a return on the investment until cash is needed at a future date

• Include short-term investments of idle cash and longer-term investments to fund future expansion or longer-term goals

Question 2

3 categories of financial assets

Answer 2

• FVTPL
• Amortized cost
• FVTOCI

Question 3

Initial recognition

Answer 3

All investments are recorded at fair value

Question 4

Examples of FVTPL

Answer 4

• publicly traded shares
• interest rate swaps

Question 5

FVTPL include assets that are…

Answer 5

• not classified as amortized cost, FVTOCI
• assets classified as held for sale. One that meets one of the following:
  
  • acquired/incurred principally for the purpose of selling or repurchasing it in the near term
  • upon initial recognition: part of a portfolio
  • a derivative
• assets that upon initial recognition, are designated as FVTPL

Question 6

FVTPL: Transaction costs….

Answer 6

are expensed in net income when they occur

DR Bank charges and fees
CR Cash

Question 7

FVTPL: subsequent measurement , g/l

Answer 7

measured at fair value at each reporting period, all g/l recognized in p/l

DR Investment in shares
CR Unrealized gain

Question 8

FVTPL : impairment

Answer 8

impairment losses and recoveries are not separated from the overall change in fair value during the reporting period

Question 9

Amortized cost includes financial assets that…

Answer 9

includes financial assets held in order to collect contractual cash flows, when the cash flows consist solely of principal and interest

Examples:

• bank deposits
• A/R balances
• redeemable preferred shares
• bonds that the company intends to hold until maturity

Question 10

Amortized cost: transaction costs…

Answer 10

added to the cost of the investment

Question 11

Amortized cost: subsequent measurement, impairment

Answer 11

assets are measured at amortized cost using the effective interest method, less impairment losses

Impairment

• impaired when PV of estimated future cash flows, is less than assets carrying value
  
  • PV calculated using asset’s original effective interest rate
  • loss recorded in p/l
  • CV of asset is reduced

Question 12

Amortized cost: Bond example. To record for interest payable at year end

Answer 12

DR Cash (face value of bond x coupon rate)

CR Interest revenue (PV of bond x effective interest rate)
CR Investment in bonds (difference)

Question 13

FVTOCI

Answer 13

• only under IFRS
• Includes:
  
  • equity instruments designated as FVTOCI
  • debt instruments with cash flows that are solely payments of principal and interest
    
    • asset held for the purpose of collecting cash flows and to sell the investment

Question 14

FVTOCI: transaction costs…

Answer 14

realized upon purchase of the investment and are capitalized as part of the cost of the investment

Question 15

FVTOCI subsequent measurement. debt vs equity

Answer 15

Debt

• measured at amortized cost using the effective interest method, less impairment costs
• each reporting period, asset is measured at fair value. g/l reported in OCI, net of tax

Equity

• measured at fair value with g/l reported in OCI, net of tax
• when sold, accumulated OCI transferred to retained earnings

Impairment losses reported in net income

Question 16

FVTOCI example… Purchased 1,000 @ $23/share, Dec 31 $25/share

Answer 16

DR Investment in shares (25000-23450)*
CR Unrealized gain - OCI (difference
CR Deferred taxes (* x tax rate)

Question 17

ASPE differences

Answer 17

• Only equity investments quoted in an active market and certain derivatives are measured at FMV.
• No OCI, all g/l -> Net income
• When amortized cost is used, choice use eff int method or straight line.
• choice to measure assets at FMV