Chapter 9 Flashcards
(13 cards)
Cost Model for Investments
*also called fair value through (to?) profit and loss
[ASPE]
used for all equity except equity instruments quoted in an active market, or where the company elects to use FV-NI
[IFRS]
used for equity in limited situations where fair value is not estimable
[COST MODEL FOR EQUITY]
(1) recognize at FV of shares plus transaction costs
(2) unless impaired, report at cost at each SFP date
(3) recognize dividends when right to receive is established
(4) when disposed of, derecognize, and report a gain or loss
FV-NI Model for Investments
[ASPE]
used for equity instruments quoted in an active market, or where elective choice is made for investments
[IFRS]
used for equity instruments not accounted for with FV-OCI and debt instruments that do not meet criteria for amortized cost or FV-OCI models (generally where held for trading purposes)
[FV-NI MODEL]
* transaction costs are expensed
* carrying amount of FV is adjusted each reporting date, and gains and losses are reported in net income with dividends and interest
* changes in value are recognized in their own account, Unrealized Gains or Losses for equity, or Investment Income or Loss for debt instruments
* under effective interest, discounts or premiums must be amortized before the change in fair value
* bond investments can be kept at amortized cost and report interest separately, or they can be kept at FV with ALL interest and gains/losses are booked through Investment Income or Loss account
Amortized Cost Model for Investments
[ASPE]
used for all debt instruments, straight-line allowed for interest
[IFRS]
used for debt instruments that are held until maturity (and collect principal and interest), use effective interest method
[AMORTIZED COST MODEL FOR DEBT]
(1) recognize the debt instrument at FV plus transaction costs
(2) unless impaired, report at amortized cost as well as outstanding interest receivable at SFP date
(3) recognize interest as earned, amortizing any discount or premium at the same time
(4) on disposition, recognize interest and necessary amortization, derecognie reporting any gain or loss to net income
FV-OCI Model for Investments
[ASPE]
N/A
[IFRS]
used for equity instruments that are not influence, control, or trading investments (no recycling, dividends booked to income); and for debt instruments where business model is to hold on a contractual yield bases or sell the securities (with recycling)
[FV-OCI METHOD]
* transaction costs tend to be added to the carrying value
* changes in FV are recognized in Unrealized Gain or Loss - OCI account net of income tax
* for debt instruments, interest, impairment, and amortization are recognized in net income
* with recycling (for debt instruments) means that unrealized gains or losses are recycled into net income, without recycling (for equity) means they are transferred directly to retained earnings
* upon a sale, three entries are made
(1) carrying amount is adjusted to FV at disposal, and gain or loss is captured in OCI
(2) carrying amount is removed from asset account and POD are recorded (cash)
(3) the holding gain or loss is transferred out of OCI and into retained earnings (equity, no recycling) or booked to income (debt instrument, recycling)
Incurred Loss Model
[ASPE]
use this model except for FV-NI investments
[IFRS]
N/A
[INCURRED LOSS MODEL]
* investments are recognized as impaired when there is no longer reasonable assurance that the future cash flows will be collected in whole or when due (triggering event)
* realizable amount is measured as the highest of three
(1) PV of the discounted (market rate) future cash flows
(2) amount realized if the asset were sold
(3) amount realized if the entity called the asset and took collateral it had rights to
* the difference between this amount and the carrying amount is recognized as a loss
* after impairment interest income is recognized based on the revised cash flow estimate and the discount rate used to determine those flows
* further changes in NRV are recognized as an adjustment to the impairment loss
Expected Loss Model
[ASPE]
N/A
[IFRS]
use this model for cost/amortized cost and debt securities accounted for at FV-OCI
[EXPECTED LOSS MODEL]
* estimates of cash flows are made to determine PV on a continuous basis, discounted at the same effective interest rate as when the asset was acquired
* estimates are based on reasonably available information
* probability-weighted expected losses due to default in the next 12 months, and, if credit risk has increased, probability-weighted lifetime expected losses are considered
* impairment amount is the difference between the asset’s gross carrying amount and PV of discounted CF, booked to Loss on Impairment account
Fair Value Loss Model
[ASPE]
FV-NI investments
[IFRS]
FV-NI investments and FV-OCI equity investments
[FAIR VALUE LOSS MODEL]
under this model, the impairment loss is the difference between the asset’s fair value and its current carrying amount; there is no need to do a separate impairment test
Significant Influence
when a company takes a 20-50% stake in another company, it is considered to have “significant influence” and the company in which the investment was made is referred to as an associate;
for such investments, IFRS requires the equity method of accounting, and ASPE allows the investor to choose between the equity method and the cost method;
however, if the associate’s shares are quoted in an active market, under ASPE cost may not be used, but FV-NI method becomes an option
Equity Method
- the asset is initally recorded at the cost of the acquired shares, after which its carrying amount is adjusted each period for the investor’s proportionate share of the changes in the investee’s net assets;
- as the investee earns income, the investor recognizes its share of that income by debiting the investment account and crediting investment income
- if amounts were paid for shares in excess of book value, the difference must be amortized over the useful life of the acquired assets, credited to Investment Income or Loss account and offset by debit to Investment in Associate account
- when cash is received from the investment, this converts the investment account to cash; therefore cash is debited and the investment account is credited
- under IFRS and ASPE a significant influence investment is assessed for signs of impairment at each SFP date
- where possible impairment is observed, if carrying amount is higher than recoverable amount (value in use and FV less selling costs), the difference is booked to net income and the investment is written down
- upon sale, Investment in Associate and Investment Income accounts are brought up to date; carrying value is removed from the books; the difference between carrying amount and POD is recognized in income as gain or loss
Control
[ASPE]
defined as the continuing power to determine the strategic operating, financing, and investing policies of another entity without the cooperation of others (basically over 50% voting interest); equity or cost method is used but parent may elect to use consolidation
[IFRS]
the power to direct the activities of the other entity to generate returns, positive or negative, for the investor; subsidiaries consolidated financial statements must be included with the parent
Consolidation
in place of the investment in subsidiary account, the parent reports 100% of each of the assets and liabilities over which it has control; a noncontrolling interest account represents the portion f the net assets not owned and the portion of the entity’s consolidated net income that does not accrue to the parent company’s shareholders
Reclassifications of Investments
[ASPE]
FV option is irrevocable, otherwise not addressed
[IFRS]
no reclassification is permitted between measurement models unless there is a rare occurence of a change in the entity’s business model
Investment Measurement Models Permitted
[ASPE]
1. FV-NI for equity investments traded in an active market or those for which elective choice is made
2. cost/amortized cost for everything else
[IFRS]
1. amortized cost for debt instruments held to maturity
2. FV-OCI with no recycling for certain equity instruments and FV-OCI with recycling for debt securities under business model where they are held to maturity or for sale
3. FV-NI for everything else
