PREVIEW OF CHAPTER 17

Financial Accounting
Lecture 13 : Investment

HANU – FMT – Dinh Le Mai

Intermediate Accounting IFRS 2/e
Chapter 17
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
17-1 17-2

ACCOUNTING FOR FINANCIAL ASSETS

17 Investments
Financial Asset
Cash.
LEARNING OBJECTIVES
Equity investment of another company (e.g., ordinary or
After studying this chapter, you should be able to:
preference shares).
1. Describe the accounting framework 5. Understand the accounting for equity
for financial assets. investments at fair value. Contractual right to receive cash from another party
2. Understand the accounting for debt 6. Explain the equity method of (e.g., loans, receivables, and bonds).
investments at amortized cost. accounting and compare it to the fair
value method for equity investments.
3. Understand the accounting for debt IASB requires that companies classify financial assets into two
investments at fair value. 7. Discuss the accounting for impairments
of debt investments. measurement categories—amortized cost and fair value—
4. Describe the accounting for the fair
value option. 8. Describe the accounting for transfer of depending on the circumstances.
investments between categories.

17-3 17-4 LO 1

ACCOUNTING FOR FINANCIAL ASSETS ACCOUNTING FOR FINANCIAL ASSETS

Measurement Basis—A Closer Look Measurement Basis—A Closer Look

IFRS requires that companies measure their financial Equity investments are generally recorded and reported at
assets based on two criteria: fair value.

Company’s business model for managing its financial

assets; and

Contractual cash flow characteristics of the financial

asset.

Only debt investments such as receivables, loans, and bond

ILLUSTRATION 17-1
investments that meet the two criteria above are recorded at amortized Summary of Investment Accounting Approaches

cost. All other debt investments are recorded and reported at fair value.

17-5 LO 1 17-6 LO 1
 DEBT INVESTMENTS Debt Investments—Amortized Cost

Debt investments are characterized by contractual Illustration: Robinson Company purchased €100,000 of 8%
payments on specified dates of bonds of Evermaster Corporation on January 1, 2015, at a
principal and discount, paying €92,278. The bonds mature January 1, 2020
and yield 10%; interest is payable each July 1 and January 1.
interest on the principal amount outstanding.
Robinson records the investment as follows:
Companies measure debt investments at
January 1, 2015
amortized cost or
Debt Investments 92,278
fair value.
Cash 92,278

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Debt Investments—Amortized Cost Debt Investments—Amortized Cost

ILLUSTRATION 17-2 ILLUSTRATION 17-2

Robinson Company records the receipt of the first semiannual

interest payment on July 1, 2015, as follows:

Cash 4,000
Debt Investments 614
Interest Revenue 4,614

17-9 LO 2 17-10 LO 2

Debt Investments—Amortized Cost Debt Investments—Amortized Cost

ILLUSTRATION 17-2
Reporting of Bond Investment at Amortized Cost

Because Robinson is on a calendar-year basis, it accrues

interest and amortizes the discount at December 31, 2015, as
follows:
Interest Receivable 4,000
ILLUSTRATION 17-3
Debt Investments 645
Interest Revenue 4,645
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 ILLUSTRATION 17-2
Debt Investments—Amortized Cost

Computation Gain on Sale of Bonds

ILLUSTRATION 17-4

Assume that Robinson Company sells its investment on

November 1, 2017, at 99¾ plus accrued interest. Robinson
records this discount amortization as follows: Cash 102,417
Interest Revenue (4/6 x €4,000) 2,667
Debt Investments 522
Debt Investments 96,193
Interest Revenue 522
Gain on Sale of Debt Investments 3,557
(€783 x 4/6 = €522)
17-13 LO 2 17-14 LO 2

Debt Investments—Fair Value Debt Investments—Fair Value

Debt investments at fair value follow the same Illustration: Robinson Company purchased €100,000 of 8
accounting entries as debt investments held-for-collection percent bonds of Evermaster Corporation on January 1, 2015,
during the reporting period. That is, they are recorded at at a discount, paying €92,278. The bonds mature January 1,
amortized cost. 2020, and yield 10 percent; interest is payable each July 1 and
January 1.
However, at each reporting date, companies
The journal entries in 2015 are exactly the same as those for
Adjust the amortized cost to fair value.
amortized cost.
Any unrealized holding gain or loss reported as part of
net income (fair value method).

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Debt Investments—Fair Value Debt Investments—Fair Value

Entries are the same as those for amortized cost. To apply the fair value approach, Robinson determines that,
due to a decrease in interest rates, the fair value of the debt
investment increased to €95,000 at December 31, 2015.
ILLUSTRATION 17-5
Computation of Unrealized Gain on Fair
Value Debt Investment (2015)

Fair Value Adjustment 1,463

Unrealized Holding Gain or Loss—Income 1,463

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 Debt Investments—Fair Value Debt Investments—Fair Value

At December 31, 2016, assume that the fair value

ILLUSTRATION 17-7
Computation of
of the Evermaster debt investment is €94,000. Unrealized Gain on
Debt Investment (2016)

ILLUSTRATION 17-6
Financial Statement Presentation
of Debt Investments at Fair Value Unrealized Holding Gain or Loss—Income 2,388
Fair Value Adjustment 2,388

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Debt Investments—Fair Value Debt Investments—Fair Value

Assume now that Robinson sells its investment in Evermaster

bonds on November 1, 2017, at 99 ¾ plus accrued interest. The
only difference occurs on December 31, 2017. Since the bonds
are no longer owned by Robinson, the Fair Value Adjustment
account should now be reported at zero. Robinson makes the
following entry to record the elimination of the valuation account.

Fair Value Adjustment 925

Unrealized Holding Gain or Loss—Income 925
ILLUSTRATION 17-8
Financial Statement Presentation
of Debt Investments at Fair Value (2016)

17-21 LO 3 17-22 LO 3

Debt Investments—Fair Value Debt Investments—Fair Value

Income
Illustration (Portfolio): Wang Corporation has two debt
Effects on investments accounted for at fair value. The following illustration
Debt identifies the amortized cost, fair value, and the amount of the
Investment unrealized gain or loss. ILLUSTRATION 17-10
Computation of Fair Value Adjustment (2015)
(2015-2017)
Illustration 17-9

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 Debt Investments—Fair Value Debt Investments—Fair Value

Illustration (Portfolio): Wang makes an adjusting entry at Illustration (Sale of Debt Investments): Wang Corporation
December 31, 2015 to record the decrease in value and to sold the Watson bonds (from Illustration 17-10) on July 1, 2016,
record the loss as follows. for ¥90,000, at which time it had an amortized cost of ¥94,214.

Unrealized Holding Gain or Loss—Income 9,537 ILLUSTRATION 17-11

Computation of Loss on
Sale of Bonds
Fair Value Adjustment 9,537

Cash 90,000
Loss on Sale of Debt Investments 4,214
Debt Investments 94,214

17-25 LO 3 17-26 LO 3

Debt Investments—Fair Value Debt Investments—Fair Value

Wang reports this realized loss in the “Other income and Wang records the following at December 31, 2016.
expense” section of the income statement. Assuming no other ILLUSTRATION 17-12

purchases and sales of bonds in 2016, Wang on December 31,

2016, prepares the information:

Fair Value Adjustment 4,537

Unrealized Holding Gain or Loss—Income 4,537
ILLUSTRATION 17-12
Computation of Fair
17-27 Value Adjustment (2016) LO 3 17-28 LO 3

Debt Investments—Fair Value Fair Value Option

Financial Statement Presentation Companies have the option to report most financial assets at
fair value. This option
is applied on an instrument-by-instrument basis and

is generally available only at the time a company first

purchases the financial asset or incurs a financial liability.

If a company chooses to use the fair value option, it

measures this instrument at fair value until the company no
longer has ownership.

ILLUSTRATION 17-13
Reporting of Debt
Investments at Fair Value
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 Fair Value Option Summary of Debt Investment Accounting

Illustration: Hardy Company purchases bonds issued by the

German Central Bank. Hardy plans to hold the debt investment
until it matures in five years. At December 31, 2015, the
amortized cost of this investment is €100,000; its fair value at
December 31, 2015, is €113,000. If Hardy chooses the fair
value option to account for this investment, it makes the
following entry at December 31, 2015.

Debt Investment (German bonds) 4,537

ILLUSTRATION 17-14
Unrealized Holding Gain or Loss—Income 4,537 Summary of Debt
Investment Accounting

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EQUITY INVESTMENTS EQUITY INVESTMENTS

Equity investment represents ownership of ordinary,

preference, or other capital shares.

Cost includes price of the security.

Broker’s commissions and fees are recorded as

ILLUSTRATION 17-15
expense. Levels of Influence
Determine Accounting Methods

The degree to which one corporation (investor) acquires an

interest in the common stock of another corporation
(investee) generally determines the accounting treatment for
the investment subsequent to acquisition.

17-33 LO 5 17-34 LO 5

EQUITY INVESTMENTS EQUITY INVESTMENTS

Holdings of Less Than 20%

Under IFRS, the presumption is that equity investments are
held-for-trading.

General accounting and reporting rule:

Investments valued at fair value.

Record unrealized gains and losses in net income.

Illustration 17-16
Accounting and Reporting for Equity
Investments by Category

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 EQUITY INVESTMENTS Equity Investments—Trading (Income)

Holdings of Less Than 20% Illustration: November 3, 2015, Republic Corporation

purchased ordinary shares of three companies, each
IFRS allows companies to classify some equity investments
investment representing less than a 20 percent interest. These
as non-trading.
shares are held-for-trading.
General accounting and reporting rule:
Investments valued at fair value.

Record unrealized gains and losses in other

comprehensive income.

Republic records these investments as follows:

17-37 LO 5 17-38 LO 5

Equity Equity Investments—Trading (Income)

Investments
—Trading At December 31, 2015, Republic’s equity investment portfolio has
the carrying value and fair value shown.

Republic records these investments as follows:

Equity Investments 718,550
Cash 718,550

On December 6, 2015, Republic receives a cash dividend of

€4,200 on its investment in the ordinary shares of Nestlé.
ILLUSTRATION 17-17
Cash 4,200 Computation of Fair Value Adjustment—
Equity Investment Portfolio (2015)

Dividend Revenue 4,200

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Equity Investments—Trading (Income) Equity Investments—Trading (Income)

On January 23, 2016, Republic sold all of its Burberry ordinary

shares, receiving €287,220. ILLUSTRATION 17-18
Computation of Gain on Sale of Burberry Shares

Cash 287,220
Equity Investments 259,700
ILLUSTRATION 17-17
Gain on Sale of Equity Investment 27,520
Unrealized Holding Gain or Loss—Income 35,550
Fair Value Adjustment 35,550
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 Equity Investments—Trading (Income)

In addition, assume that on February 10, 2016, Republic purchased

€255,000 of Continental Trucking ordinary shares (20,000 shares
€12.75 per share), plus brokerage commissions of €1,850.
Republic’s equity investment portfolio as of December 31, 2016.

ILLUSTRATION 17-19
Computation of Fair
Value Adjustment—
Equity Investment
Portfolio (2016) ILLUSTRATION 17-19

Republic records this adjustment as follows.

Fair Value Adjustment 101,650

Unrealized Holding Gain or Loss—Income 101,650

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Equity Investments—Non-Trading (OCI) Equity Investments—Non-Trading (OCI)

The accounting entries to record non-trading equity Illustration: On December 10, 2015, Republic Corporation
investments are the same as for trading equity investments, purchased 1,000 ordinary shares of Hawthorne Company for
except for recording the unrealized holding gain or loss. €20.75 per share (total cost €20,750). The investment represents
less than a 20 percent interest. Hawthorne is a distributor for
Report the unrealized holding gain or loss as other
Republic products in certain locales, the laws of which require a
comprehensive income.
minimum level of share ownership of a company in that region.
The investment in Hawthorne meets this regulatory requirement.
Republic accounts for this investment at fair value.

Equity Investments 20,750

Cash 20,750

17-45 LO 5 17-46 LO 5

Equity Investments—Non-Trading (OCI) Equity Investments—Non-Trading (OCI)

On December 27, 2015, Republic receives a cash dividend of At December 31, 2015, Republic’s investment
€450 on its investment in the ordinary shares of Hawthorne in Hawthorne has the carrying value and fair ILLUSTRATION 17-20
Computation of Fair Value
Company. It records the cash dividend as follows. value shown. Adjustment—Non-Trading Equity
Investment (2015)

Cash 450
Dividend Revenue 450

Republic records this adjustment as follows.

Fair Value Adjustment 3,250

Unrealized Holding Gain or Loss—Equity 3,250
17-47 LO 5 17-48 LO 5
 Equity Investments—Non-Trading (OCI) Equity Investments—Non-Trading (OCI)

On December 20, 2016, Republic sold all of its Hawthorne

Company ordinary shares receiving net proceeds of €22,500.

ILLUSTRATION 17-22
Adjustment to Carrying Value of Investment

Entry to adjust the carrying value of the non-trading investment.

Unrealized Holding Gain or Loss—Equity 1,500

ILLUSTRATION 17-21
Financial Statement Presentation Fair Value Adjustment 1,500

17-49 LO 5 17-50 LO 5

Equity Investments—Non-Trading (OCI)

On December 20, 2016, Republic sold all of its Hawthorne

Company ordinary shares receiving net proceeds of €22,500.
17 Investments

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting framework for 5. Understand the accounting for equity
financial assets. investments at fair value.
ILLUSTRATION 17-22
Adjustment to Carrying Value of Investment
2. Understand the accounting for debt 6. Explain the equity method of
investments at amortized cost. accounting and compare it to the
Entry to record the sale of the investment. fair value method for equity
3. Understand the accounting for debt
investments at fair value. investments.
Cash 22,500
4. Describe the accounting for the fair 7. Discuss the accounting for impairments
Equity Investments 20,750 of debt investments.
value option.
Fair Value Adjustment 1,750 8. Describe the accounting for transfer of
17-51 LO 5 17-52 investments between categories.

Holdings Between 20% and 50% Holdings Between 20% and 50%

An investment (direct or indirect) of 20 percent or more of the Equity Method

voting shares of an investee should lead to a presumption that
Record the investment at cost and subsequently adjust
in the absence of evidence to the contrary, an investor has the
the amount each period for
ability to exercise significant influence over an investee.
the investor’s proportionate share of the earnings
In instances of “significant influence,” the investor must
(losses) and
account for the investment using the equity method.
dividends received by the investor.

If investor’s share of investee’s losses exceeds the carrying amount

of the investment, the investor ordinarily should discontinue
applying the equity method.

17-53 LO 6 17-54 LO 6
 Holdings of More Than 50%

Controlling Interest - When one corporation acquires a

voting interest of more than 50 percent in another
corporation.
Investor is referred to as the parent.

Investee is referred to as the subsidiary.

Investment in the subsidiary is reported on the parent’s

books as a long-term investment.

Parent generally prepares consolidated financial

statements.

ILLUSTRATION 17-23
Comparison of Fair Value Method and Equity Method LO 6
17-55 LO 6 17-56

OTHER REPORTING ISSUES Impairment of Value

Impairment of Value Illustration: At December 31, 2014, Mayhew Company has a

debt investment in Bao Group, purchased at par for ¥200,000
For debt investments, a company uses the impairment test to
(amounts in thousands). The investment has a term of four years,
determine whether “it is probable that the investor will be unable
with annual interest payments at 10 percent, paid at the end of
to collect all amounts due according to the contractual terms.”
each year (the historical effective-interest rate is 10 percent). This
This impairment loss is calculated as the difference between the debt investment is classified as held-for-collection.
carrying amount plus accrued interest and the expected future
Using the following information record the loss on impairment.
cash flows discounted at the investment’s historical effective-
interest rate.

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Impairment of Value Recovery of Impairment Loss

ILLUSTRATION 17-24
Investment Cash Flows

If subsequently the impairment loss decreases, some or all of

the previously recognized impairment loss shall be reversed
with a
ILLUSTRATION 17-25
Computation of debit to the Debt Investments account and
Impairment Loss

crediting Recovery of Impairment Loss.

Reversal of impairment losses shall not result in a carrying

amount of the investment that exceeds the amortized cost that
would have been reported had the impairment not been
recognized.
Loss on Impairment 12,680
Debt Investments 12,680
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 Transfers Between Categories Transfers Between Categories

Transferring an investment from one classification to another Illustration: British Sky Broadcasting Group plc (GBR) has a
portfolio of debt investments that are classified as trading; that is,
Should occur only when the business model for managing
the debt investments are not held-for-collection but managed to
the investment changes.
profit from interest rate changes. As a result, it accounts for these
IASB expects such changes to be rare. investments at fair value. At December 31, 2014, British Sky has
Companies account for transfers between classifications the following balances related to these securities.
prospectively, at the beginning of the accounting period
after the change in the business model.

17-61 LO 8 17-62 LO 8

Transfers Between Categories Reporting Treatment of Investments

Illustration: As part of its strategic planning process, completed

in the fourth quarter of 2014, British Sky management decides to
move from its prior strategy—which requires active
management—to a held-for-collection strategy for these debt
investments. British Sky makes the following entry to transfer
these securities to the held-for-collection classification.

Debt Investments 125,000

Fair Value Adjustment 125,000

ILLUSTRATION 17-26
Summary of Investment Accounting Approaches
17-63 LO 8 17-64 LO 8