Set 2 - FR Chapter 4 Financial Instruments - Passive Investments Flashcards
Define passive investments
Investments made for the purpose of earning a return on the investment until cash is needed at a future date.
Under IFRS what are the three types of passive investments classifications?
FVTPL
Amortized Cost
FVOCI
When are these measured? How are they initially measured under all 3 approaches?
When the asset is controlled by the entity. All 3 are at FV intially.
FVTPL - what type of assets are measured here? What are some examples?
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.
FVTPL - Subsequent measurement?
Subseq measure - FV.
FVTPL - how are transaction costs handled?
Expense transactions costs immediately.
FVTPL - Impairment?
Impairment - not separate from overall change in FV
FVTPL - Classification of unrealized gains and losses?
Unrealized g/l - P/L.
FVTPL - Derecognition?
Derecognition - Gain/Loss in P/L.
Amortized cost - what type of assets are measured here? What are some examples?
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.
Amortized cost - how are transaction costs handled?
Transaction costs added to CV.
Amortized cost - Subsequent measurement?
Sub Meas - amortized cost using effective interest rate method.
Amortized cost - Classification of unrealized gains and losses?
No classification of gains and losses.
Amortized cost - Impairment? Can these be reversed?
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.
Bonds - face value vs coupon rate
Face value is the amount the bond actually sells for. Coupon rate is the amount of interest actually paid.
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%
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.
Amortized cost - Derecognition?
Derecognition - G/L in P/L.
FVOCI - what type of assets are measured here? What are some examples?
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.
FVOCI - how are transaction costs handled?
Transaction costs added to CV.
FVOCI - Subsequent measurement?
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.
FVOCI - Sub measurement JE examples
DR Investment CR Unrealized Gain - OCI CR deferred income tax liability (gain x tax rate x 1/2)
FVOCI - Classification of unrealized gains and losses?
Unrealized G/L - OCI, net of tax.
FVOCI - Impairment?
Impairment - Debt: cumulative loss transferred to P/L.
Equity - impairment loss not separate from other FV changes.
FVOCI - Derecognition?
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.
FVOCI Journal examples upon derecognition - debt instruments ONLY
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)
ASPE differences -transaction costs
For transaction costs, add to CV if carried at cost. Expense if carried at FV.
ASPE differences - sub measurement
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.
ASPE differences - impairment
Impairment - highest of - PV of expected cash flow if asset is held.
- selling price
- amount realizable from collateral net of costs.
ASPE differences - unrealized Gain/Loss
Unrealized G/L go via P/L (no OCI in ASPE). Also actual G/L via P/L.
