Lecture Intermediate accounting (IFRS/e) - Chapter 12: Investments
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Chapter 12
INVESTMENTS
© 2013 The McGraw-Hill Companies, Inc.
Slide 2
Nature of Investments
Bonds
Bonds and
and
notes
notes
(Debt
(Debt
securities)
securities)
Common
Common and
and
preferred
preferred stock
stock
(Equity
(Equity
securities)
securities)
Investments can be accounted for in a
variety of ways, depending on the nature
of the investment relationship.
Slide 3
Reporting Categories for Investments
Reporting Categories for Investments
Control Characteristics of the Investment
Reporting Method Used by the Investor in
the Separate Financial Statements
Reporting Method Used by the
Investor in the Consolidated
Financial Statements
The investor lacks significant influence over the operating and financial policies of the investee:
Investments in typically quoted or publicly traded
debt securities for which the investor has the
“positive intent and ability” to hold to maturity
Investments in unquoted debt securities
Investments held in an active trading account
Other
Heldtomaturity (“HTM”) — investment
*
reported at amortized cost
Loans and receivables (“L&R”) —
investments reported at amortized cost
Trading securities (“TS”) — investment
reported at fair value (with unrealized gains and
losses included in net income)
As in the separate
financial statements
Availableforsale securities (“AFS”) —
investment reported at fair value (with unrealized
gains and losses excluded from net income and
*
reported directly in shareholders’ equity)
The investor has significant influence over the operating and financial policies of the investee:
Equity method—investment cost
Typically the investor owns between 20% and
Investment reported at cost or as a financial
adjusted for subsequent earnings and
50% of the ordinary shares of the investee
asset
dividends of the investee
The investor controls the investee:
Consolidation — the financial
Typically the investor owns more than 50% of the Investment reported at cost or as a financial
statements of the investor and investee
investee
asset
are combined as if they are a single
company.
* If the investor elects the fair value option, this type of investment also can be accounted for using the same approach that’s used for
trading securities, with the investment reported at fair value through profit or loss (FVTPL) and unrealized holding gains and losses
included in net income.
Slide 4
Held-to-Maturity Securities
On January 1, 2012, Matrix Ltd purchased as an
investment $1,000,000, of 10%, 10-year bonds, interest
paid semi-annually. The market rate for similar bonds is
12%. Let’s look at calculation of the present value of the
bond issue.
Present
Value
Amount
PV Factor
$
Interest 50,000
× 11.46992 = $573,496
Principal 1,000,000 × 0.31180
Present value of
bonds
= 311,805
$885,301
PV of ordinary annuity of $1, n = 20, i = 6%
PV of $1, n = 20, i = 6%
Slide 5
Held-to-Maturity Securities
Partial Bond Amortization Table
Period
1
2
3
4
Interest
Payment
50,000
50,000
50,000
50,000
Date
1-1-12
6-30-12
Interest
Revenue
53,118
53,305
53,503
53,714
Discount
Amortization
(3,118)
(3,305)
(3,503)
(3,714)
Description
Investment in bonds
Discount on bond investment
Cash
Cash
Discount on bond investment
Investment revenue
Unamortized
Discount
114,699
111,581
108,276
104,773
101,059
Debit
1,000,000
Carrying
Value
885,301
888,419
891,724
895,227
898,941
Credit
114,699
885,301
50,000
3,118
53,118
Slide 6
Held-to-Maturity Securities
How would this investment appear on
the statement of financial position after
one period of discount amortization?
Investment in bonds
Less: Discount on bond investment
Book value (amortized cost)
$ 1,000,000
111,581
$ 888,419
$114,699 - $3,118 = $111,581 unamortized discount
Slide 7
Held-to-Maturity Securities
Slide 8
Held-to-Maturity Securities
On December 31, 2012 after interest is received by
Matrix, all the bonds are sold for $900,000 cash.
Period
1
2
3
4
Interest
Payment
50,000
50,000
50,000
50,000
Interest
Revenue
53,118
53,305
53,503
53,714
Discount
Amortization
(3,118)
(3,305)
(3,503)
(3,714)
Date
Description
12/31/12 Cash
Discount on bond invetment
Investment revenue
12/31/12 Cash
Discount on bonds investment
Investment in bonds
Gain on sale of investment
Unamortized
Discount
114,699
111,581
108,276
104,773
101,059
Debit
50,000
3,305
Carrying
Value
885,301
888,419
891,724
895,227
898,941
Credit
53,305
900,000
108,276
1,000,000
8,276
Slide 9
Loans and Receivables
Slide 10
Trading Securities
1.
2.
Adjustments to fair value are recorded:
in a valuation account called Fair Value
Adjustment, or as a direct adjustment to the
investment account.
as a net unrealized gain/loss on the Income
Statement.
Unrealized Gain
Unrealized Loss
Income
Income
Statement
Statement
Slide 11
Trading Securities
Matrix Ltd purchased additional securities classified as
Trading Securities (TS) at the end of 2012. The fair value
amounts for these securities on December 31, 2012, are
shown below. Prepare the journal entries for Matrix Ltd to
adjust the securities to fair value at 12/31/12.
Type
TS
TS
Name
Mining, Inc
Ford Motor
No. of
Unit
Total
Fair
Gain or
Shares
Cost
Cost
Value
(Loss)
1,000 $ 42.00 $ 42,000 $ 41,000 $ (1,000)
1,500
15.00
22,500
20,000
(2,500)
Net Unrealized Holding Loss for TS
$ (3,500)
Slide 12
Trading Securities
Date
12/31
Description
Net unrealized holding gains and losses-IS
Fair value adjustment
Debit
3,500
Credit
Net
Net Unrealized
Unrealized Loss
Loss is
is reported
reported on
on
the
the Income
Income Statement.
Statement.
3,500
Slide 13
Trading Securities
Unrealized
gains and
losses from
trading
securities
are reported
on the
income
statement.
Slide 14
Trading Securities
On January 3, 2013, Matrix Ltd sold all trading
securities for $65,000 cash.
Date
03/01/13
12/31/13
Description
Cash
Investment in Ford Motor – TS
Investment in Mining, Inc. – TS
Gain on sale of investment
Fair value adjustment
Net unrealized gain or loss – I/S
Debit
65,000
Credit
22,500
42,000
500
3,500
3,500
Slide 15
Available-for-Sale Securities
Adjustments to fair value are recorded:
1. in a valuation account called Fair Value Adjustment,
or as a direct adjustment to the investment account.
2. as a net unrealized gain/loss in Other
Comprehensive Income (OCI), which accumulates in
separate OCI components in equity.
Unrealized Gain
Unrealized Loss
Other
Other
Comprehensive
Comprehensive
Income
Income
Slide 16
Other Comprehensive Income (OCI)
Other comprehensive income:
Foreign currency translation gains (losses)
Net unrealized gains (losses) on AFS investments
Minimum pension liability adjustment
Deferred gains (losses) from derivatives
Less: aggregate income tax expense (benefit)
Other comprehensive income
$ XX,XXX
-3,500
XXX
XXX
$ XX,XXX
X,XXX
$XX,XXX
When we add other comprehensive income to net income
we refer to the result as “comprehensive income.”
Slide 17
Accumulating Other Comprehensive Income
Unrealized
Unrealized gains
gains and
and losses
losses on
on available-foravailable-forsale
sale securities
securities are
are accumulated
accumulated in
in separate
separate
OCI
OCI components
components of
of the
the shareholders’
shareholders’ equity
equity
section
section of
of the
the statement
statement of
of comprehensive
comprehensive
income
income..
Cumulative
net unrealized
gains
and losses
Shareholders’ Equity
Ordinary shares
Unrealized gains on AFS instruments
Retained earnings
Total Shareholders’ Equity
Slide 18
Example of Available-for-sale securities
Now
Now assume
assume the
the same
same facts
facts for
for our
our Matrix
Matrix Ltd.
Ltd.
example,
example, except
except that
that the
the investment
investment is
is for
for
available-for-sale
available-for-sale securities
securities rather
rather than
than trading
trading
securities.
securities.
Type
Name
AFS Mining, Inc
AFS Ford Motor
No. of
Unit
Total
Fair
Gain or
Shares
Cost
Cost
Value
(Loss)
1,000 $ 42.00 $ 42,000 $ 41,000 $
(1,000)
1,500
15.00
22,500
20,000
(2,500)
Net Unrealized Holding Loss for AFS
$
(3,500)
Slide 19
Example of Available-for-sale securities
Date
12/31
Description
Net unrealized holding gains and losses-OCI
Fair value adjustment
Debit
3,500
The
The net
net unrealized
unrealized
gain
gain is
is reported
reported in
in
other
other comprehensive
comprehensive income.
income.
Credit
3,500
Slide 20
Reclassification Adjustment When AFS
Investments are Sold
Event
Period 1: hold AFS investment
and
experience net unrealized loss.
Effect on Comprehensive Effect on Shareholders'
Income
Equity
Equity
OCI for unrealized loss.
OCI to back out
Equity (so net effect on
previously recognized
Equity over time is zero)
unrealized
Period 2: sell AFS investment and
loss (so effect on
realize loss on sale
OCI over time is zero)
Net income for realized
loss
Retained earnings
Slide 21
Available-for-Sale Securities
On January 3, 2013, Matrix Ltd sold all availablefor-sale securities for $65,000 cash.
Date
03/01/13
12/31/13
Description
Cash
Investment in Ford Motor – TS
Investment in Mining, Inc. TS
Gain on sale of investment
Fair value adjustment
Net unrealized gain or loss – OCI
Debit
65,000
Credit
22,500
42,000
500
3,500
3,500
Slide 22
Impairment of Investments
Occasionally, an
investment’s value will
decline in light of a
loss event
This loss in value
is called an. . .
Impairment
Loss
Slide 23
Impairment of Investments
Slide 24
Fair Value Option
* U.S. GAAP allows for the unconditional use of the fair value option
Slide 25
Transfers Between Reporting Categories
Transfers are
accounted for
at fair value
on the
transfer date.
Limited
Circumstances!
Unrealized
Unrealized gains
gains or
or
losses
losses at
at
reclassification
reclassification
should
should be
be accounted
accounted
for
for in
in aa manner
manner
consistent
consistent with
with the
the
classification
classification into
into
which
which the
the security
security is
is
being
being transferred.
transferred.
