Set 2 - FR Chapter 4 Financial Instruments - Passive Investments

Question 1

Define passive investments

Answer 1

Investments made for the purpose of earning a return on the investment until cash is needed at a future date.

Question 2

Under IFRS what are the three types of passive investments classifications?

Answer 2

FVTPL
Amortized Cost
FVOCI

Question 3

When are these measured? How are they initially measured under all 3 approaches?

Answer 3

When the asset is controlled by the entity. All 3 are at FV intially.

Question 4

FVTPL - what type of assets are measured here? What are some examples?

Answer 4

Anything that doesn’t meet amortized cost criteria, or assets designated as FVTPL - can only do this if it significantly reduces measurement or recognition inconsistency. Cannot be revoked. Examples include public shares or derivatives. Assets are held-for-trading.

Question 5

FVTPL - Subsequent measurement?

Answer 5

Subseq measure - FV.

Question 6

FVTPL - how are transaction costs handled?

Answer 6

Expense transactions costs immediately.

Question 7

FVTPL - Impairment?

Answer 7

Impairment - not separate from overall change in FV

Question 8

FVTPL - Classification of unrealized gains and losses?

Answer 8

Unrealized g/l - P/L.

Question 9

FVTPL - Derecognition?

Answer 9

Derecognition - Gain/Loss in P/L.

Question 10

Amortized cost - what type of assets are measured here? What are some examples?

Answer 10

Financial assets held as part of business model to collect contractual cash flows, when they consist solely of principal and interest. This includes A/R, bank deposits and bonds held until maturity.

Question 11

Amortized cost - how are transaction costs handled?

Answer 11

Transaction costs added to CV.

Question 12

Amortized cost - Subsequent measurement?

Answer 12

Sub Meas - amortized cost using effective interest rate method.

Question 13

Amortized cost - Classification of unrealized gains and losses?

Answer 13

No classification of gains and losses.

Question 14

Amortized cost - Impairment? Can these be reversed?

Answer 14

Impairment - if discounted cash flows using original effective interest rate are less than CV then impaired. Less impairment losses - record loss in P/L. Impairment losses can be reversed up to the amount of amortized cost that would have been if no impairment had been recognized.

Question 15

Bonds - face value vs coupon rate

Answer 15

Face value is the amount the bond actually sells for. Coupon rate is the amount of interest actually paid.

Question 16

Bonds example journal entries for amortized cost. Face value = $2,000,000. Coupon rate = 4.5%. Amount paid = $2,044,518. Effective Interest Rate = 4%

Answer 16

DR investment $2,044,518 CR Cash (at purchase)

DR Cash received $90,000 ($2,000,000 x 4.5%)
CR Int Revenue $81,781 ($2,044,518 x 4%)
CR Investment $8,219

Eventually the bond will be drawn down to $2,000,000 which is the Face Value.

Question 17

Amortized cost - Derecognition?

Answer 17

Derecognition - G/L in P/L.

Question 18

FVOCI - what type of assets are measured here? What are some examples?

Answer 18

Only for assets which do not qualify as held for trading. It is irrevocable and made at time of purchase.
Debt instruments with cash flows that are solely payments of principal and interest - such as investment in another company that is NOT regularly traded, but where there is NOT significant influence.

Question 19

FVOCI - how are transaction costs handled?

Answer 19

Transaction costs added to CV.

Question 20

FVOCI - Subsequent measurement?

Answer 20

Sub Measure - Debt: amortized cost using effective interest rate method, less impairment losses, net of tax. Via OCI. Equity: FV, net of tax via OCI. REMEMBER THE GAIN IN INVESTMENT IS SUBJECT TO 50% CAPITAL GAINS.

Question 21

FVOCI - Sub measurement JE examples

Answer 21

DR Investment CR Unrealized Gain - OCI CR deferred income tax liability (gain x tax rate x 1/2)

Question 22

FVOCI - Classification of unrealized gains and losses?

Answer 22

Unrealized G/L - OCI, net of tax.

Question 23

FVOCI - Impairment?

Answer 23

Impairment - Debt: cumulative loss transferred to P/L.

Equity - impairment loss not separate from other FV changes.

Question 24

FVOCI - Derecognition?

Answer 24

Derecognition - Debt: Current G/L recognized plus cumulative G/L xfer from OCI to net income.
Equity- OCI not recycled to net income - xfer to another account such as retained earnings.

Question 25

FVOCI Journal examples upon derecognition - debt instruments ONLY

Answer 25

DR Cash CR Investment in shares CR Gain on sale (to recognize sale)

DR Investment CR Unrealied Gain - OCI CR Deferred Tax (Gain x tax rate x 1/2) (to recognize final AOCI posting)

DR Cash CR Invesment (to remove investment)

DR AOCI CR Retained Earnings (remove everything from OCI)

Question 26

ASPE differences -transaction costs

Answer 26

For transaction costs, add to CV if carried at cost. Expense if carried at FV.

Question 27

ASPE differences - sub measurement

Answer 27

Sub meas - For equity - FV if quoted in active market. Use amortized cost - can use either effective interest or straight line method. OR can opt to choose FV for any instrument upon initial recognition.

Question 28

ASPE differences - impairment

Answer 28

Impairment - highest of - PV of expected cash flow if asset is held.

• selling price
• amount realizable from collateral net of costs.

Question 29

ASPE differences - unrealized Gain/Loss

Answer 29

Unrealized G/L go via P/L (no OCI in ASPE). Also actual G/L via P/L.