Sec 3 - Cost & Equity Method

Question 1

What does significant influence under IFRS mean?

Answer 1

The investor has authority and power to participate in policy decisions.

(No control of the entity is necessary.)

Question 2

What are the three general approaches to accounting for investments in financial instruments under IFRS?

Answer 2

1. Amortized Cost
2. Fair Value Through Other Comprehensive Income (FVTOCI)
3. Fair Value Through Profit or Loss (FVTPL)

Question 3

How are joint ventures and joint operations accounted for under IFRS

Answer 3

Joint Venture - Equity Method (shared control AND shared rights to net assets)

Joint Operations - Proportionate Consolidation Approach (shared control but NO rights to net assets)

Question 4

EQUITY METHOD Journal Entries for:
Investment, Net Income, Dividends Received &
Depreciation/Amortization/Goodwill

Answer 4

Investment: Dr. Investment / Cr. Cash
Net Income: Dr. Investment / Cr. Equity in Invstmt
Dividends Rec’d: Dr. Cash / Cr. Investment
Depr/Amort/GW: Dr. Equity in Invstmnt / Cr. Investment

Question 5

COST METHOD Journal Entries for:
Investment, Net Income, Dividends Received &
Depreciation/Amortization/Goodwill

Answer 5

Investment: Dr. Investment / Cr. Cash
Net Income: no entry
Dividends Rec’d: Dr. Cash / Cr. Dividend Income
Depr/Amort/GW: no entry (investment recorded at cost)

Question 6

Under IFRS under what circumstances are financial assets measured at amortized cost?

Answer 6

When:

1. Business model is HTM to collect scheduled cash flows
2. Cash flows are exclusively principal and interest pymts

Question 7

Under IFRS under what circumstances are financial assets measured at fair value through other comprehensive income (FVTOCI)?

Where are unrealized gains/losses recognized?

Answer 7

When:
1. Business model is to HTM or sell to collect cash flows

In OCI (other comprehensive income)

Question 8

How are impairment losses recognized?

Answer 8

Impairment losses are recognized in P&L

If the fair value increases, any prior impairment is reversed with any with excess being reported in OCI

Question 9

Investments Held For Trading (HFT)

Describe impact on B/S, I/S, C/F

Answer 9

B/S - Current investments only, can be debt or equity, recorded at FMV

I/S - Unrealized G/L reported (along with realized G/L and interest/dividends which is consistent with AFS & HTM)

C/F - Operating activity

Question 10

Investments Available For Sale (AFS)

Describe impact on B/S, I/S, C/F

Answer 10

B/S - Current & Non current investments, can be debt or equity, recorded at FMV, Unrealized G/L on B/S as part of OCI

I/S - realized G/L and interest/dividends

C/F - Investing activity

Question 11

Investments Held To Maturity (HTM)

Describe impact on B/S, I/S, C/F

Answer 11

B/S -Non current only, Debt only, recorded at amortized cost

I/S - realized G/L and interest/dividends

C/F - Investing activity

Question 12

When reporting changes in market values in OCI over years, is the amount cumulative or for the current year only?

Answer 12

OCI is reported as part of Stockholder’s Equity which is on the

Balance Sheet. The B/S reports current year amounts only (not cummulative)

Question 13

What are the characteristics of a derivative?

Answer 13

N - No initial net investment
U - Underlying amount (price)
N - Notional amount (# of units)
S - net Settlement amount (exchange)