intermediate accounting chapter 17

8/10/2019 intermediate accounting chapter 17

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C H A P T E RC H A P T E R 1717

INVESTMENTSINVESTMENTS

Indah Kusumawardhani

Cut Nanda

Novi Purnama Sari


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1. Describe the accounting framework for financial assets.

2. Understand the accounting for debt investments at amortized cost.

3. Understand the accounting for debt investments at fair value.

4. Describe the accounting for the fair value option.5. Understand the accounting for euit! investments at fair value.

". #$plain the euit! method of accounting and compare it to the fair

value method for euit! investments.

%. Discuss the accounting for impairments of debt investments.

&. Describe the accounting for transfer of investments between

categories.

Learning ObjectivesLearning Objectives

Learning ObjectivesLearning Objectives


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Ot!er Re"#rtingOt!er Re"#rtingIss$esIss$es

%ebt Invest&ents%ebt Invest&entsInvest&ents inInvest&ents in

E'$it( Sec$ritiesE'$it( Sec$rities

'mortized cost'mortized cost

(air value(air value

(air value option(air value option

)ummar! of debt)ummar! of debt

investment accountinginvestment accounting

(air value(air value

#uit! method#uit! method

*onsolidation*onsolidation

+mpairment of value+mpairment of value

,ransfers between,ransfers betweencategoriescategories

(air value controvers!(air value controvers!

)ummar!)ummar!

Invest&entsInvest&ents



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Acc#$nting *#r +inancia, AssetsAcc#$nting *#r +inancia, Assets


.

+inancia, Asset

*ash.

#uit! investment of another compan! -e.g. ordinar! or

preference shares/.

*ontractual right to receive cash from another part!

-e.g. loans receivables and bonds/.

IASreuires that companies classif! financial assets into two

measurement categories0arti.e/c#stan/*air va,$e0

depending on the circumstances.


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Meas$re&ent asisA C,#ser L##



I+RSreuires that companies measure their financial assets

based on t3# criteria

*ompan!s business model for managing its financialassets and

*ontractual cash flow characteristics of the financial

asset.

On,( /ebt invest&entssuch as receivables loans and bond investments

that meet the two criteria above are recorded at arti.e/ c#st. 'll other

debt investments are recorded and reported at *air va,$e.


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Meas$re&ent asisA C,#ser L##



E'$it( invest&entsare generall! recorded and reported at

*air va,$e.

S$&&ar( #* Invest&ent Acc#$nting A""r#ac!esI,,$strati#n 17-1


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%ebt Invest&ents%ebt Invest&ents%ebt Invest&ents%ebt Invest&ents

%ebt invest&entsare characterized b! contractualpa!ments on specified dates of

principal and

interest on the principal amount outstanding.*ompanies &eas$redebt investments at

amortized cost or

fair value.


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I,,$strati#n6 obinson *ompan! purchased 166666 of &7bonds of #vermaster *orporation on 8anuar! 1 2611 at a

discount pa!ing 922%&. ,he bonds mature 8anuar! 1 261"

and !ield 167 interest is pa!able each 8ul! 1 and 8anuar! 1.

obinson records the investment as follows

an$ar( 18 2911

Debt +nvestments 922%&

*ash 922%&

%ebt Invest&entsArti.e/ C#st%ebt Invest&entsArti.e/ C#st%ebt Invest&entsArti.e/ C#st%ebt Invest&entsArti.e/ C#st


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I,,$strati#n 17-

)chedule of+nterestevenue and :ondDiscount'mortization0#ffective;+nterest


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I,,$strati#n6 obinson *ompan! records the receipt of thefirst semiannual interest pa!ment on 8ul! 1 2611 as follows

$,( 18 2911

*ash 4666

Debt +nvestments "14

+nterest evenue 4"14



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I,,$strati#n6 obinson is on a calendar;!ear basis it accruesinterest and amortizes the discount at December 31 2611 as

follows

%ece&ber 18 2911

+nterest eceivable 4666

Debt +nvestments "45

+nterest evenue 4"45



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eporting :ond +nvestment at 'mortized *ostI,,$strati#n 17-



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I,,$strati#n6 'ssume that obinson *ompan! sells itsinvestment in #vermaster bonds on =ovember 1 2613 at

99.%5 plus accrued interest. obinson records this discount

amortization as follows

N#ve&ber 18 291

Debt +nvestments 522

+nterest evenue 522

;022 < )=4 >;022 < )=4 > ;75;75



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*omputation of the realized gain on sale.

*ash 16241%

+nterest evenue -4>" $ 4666/ 2""%

Debt +nvestments 9"193

?ain on )ale of Debt +nvestments 355%

I,,$strati#n 17-)



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%ebt invest&ents at *air va,$efollow the same accountingentries as debt investments held;for;collection during the

reporting period. ,hat is the! are recorded at amortized

cost.

H#3ever8 at eac! re"#rting /ate companies

'd@ust the arti.e/ c#stto fair value.

'n! unrealized holding gain or loss reported as part ofnet inc#&e-fair value method/.

%ebt Invest&ents+air Va,$e%ebt Invest&ents+air Va,$e%ebt Invest&ents+air Va,$e%ebt Invest&ents+air Va,$e


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%ebt invest&ents at *air va,$efollow the same accountingentries as debt investments held;for;collection during the

reporting period. ,hat is the! are recorded at amortized

cost.

H#3ever8 at eac! re"#rting /ate companies

'd@ust the arti.e/ c#stto fair value.

'n! unrealized holding gain or loss reported as part ofnet inc#&e-fair value method/.



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I,,$strati#n6 obinson *ompan! purchased 166666 of &7bonds of #vermaster *orporation on 8anuar! 1 2611 at a

discount pa!ing 922%&. ,he bonds mature 8anuar! 1 261"

and !ield 167 interest is pa!able each 8ul! 1 and 8anuar! 1.

,he @ournal entries in 2611 are e$actl! the same as those for

amortized cost.



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I,,$strati#n6 #ntries are the same as those for amortized cost.



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I,,$strati#n6 ,o appl! the fair value approach obinsondetermines that due to a decrease in interest rates the fair

value of the debt investment increased to 95666 at

December 31 2611.


I,,$strati#n 17-0

)ecurities (air Aalue 'd@ustment 14"3

Unrealized Bolding ?ain or Coss0+ncome 14"3


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(inancial )tatement resentation


I,,$strati#n 17-4


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I,,$strati#n6 't December 31 2612 assume that the fairvalue of the #vermaster debt investment is 94666.


Unrealized Bolding ?ain or Coss0+ncome 23&&

)ecurities (air Aalue 'd@ustment 23&&

I,,$strati#n 17-7


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(inancial )tatement resentation


I,,$strati#n 17-5


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I,,$strati#n6 'ssume now that obinson sells its investment in#vermaster bonds on =ovember 1 2613 at 99 E plus accrued

interest. ,he onl! difference occurs on December 31 2613. )ince

the bonds are no longer owned b! obinson the )ecurities (air

Aalue 'd@ustment account should now be reported at zero.

obinson makes the following entr! to record the elimination of

the valuation account.


I,,$strati#n 17-7

)ecurities (air Aalue 'd@ustment 925

Unrealized Bolding ?ain or Coss0+ncome 925


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+ncome #ffects onDebt +nvestment

-2611;2613/


I,,$strati#n 17-:


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I,,$strati#n?P#rt*#,i# #* Sec$rities@6Febb *orporation hastwo debt investments accounted for at fair value. ,he following

illustration identifies the amortized cost fair value and the

amount of the unrealized gain or loss.

I,,$strati#n 17-19



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I,,$strati#n?P#rt*#,i# #* Sec$rities@6Febb makes anad@usting entr! at December 31 2611 to record the decrease in

value and to record the loss as follows.

Unrealized Bolding ?ain or Coss0+ncome 953%)ecurities (air Aalue 'd@ustment 953%



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I,,$strati#n?Sa,e #* %ebt Invest&ents@6 Febb *orporationsold the Fatson bonds -from +llustration 1%;16/ on 8ul! 1 2612

for 96666 at which time it had an amortized cost of 94214.

*ash 96666

Coss on )ale of Debt +nvestments 4214


I,,$strati#n 17-11



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I,,$strati#n ?Sa,e #* %ebt Invest&ents@6 Febb reports thisrealized loss in the GHther income and e$penseI section of the

income statement. 'ssuming no other purchases and sales of

bonds in 2612 Febb on December 31 2612 prepares the

informationI,,$strati#n 17-12



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I,,$strati#n ?Sa,e #* %ebt Invest&ents@6 Febb records thefollowing at December 31 2612.

)ecurities (air Aalue 'd@ustment 453%

Unrealized Bolding ?ain or Coss0+ncome 453%


I,,$strati#n 17-12


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*ompanies have the option to report most financial assets atfair value. ,his option

is applied on an instrument;b!;instrument basis and

is generall! available onl! at the time a compan! firstpurchases the financial asset or incurs a financial liabilit!.

+air Va,$e O"ti#n+air Va,$e O"ti#n+air Va,$e O"ti#n+air Va,$e O"ti#n

+f a compan! chooses to use the fair value option it

measures this instrument at fair value until the compan! nolonger has ownership.


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I,,$strati#n6 Bard! *ompan! purchases bonds issued b! the?erman *entral :ank. Bard! plans to hold the debt investment

until it matures in five !ears. 't December 31 2611 the

amortized cost of this investment is J166666 its fair value at

December 31 2611 is J113666. +f Bard! chooses the fair value

option to account for this investment it makes the following

entr! at December 31 2611.

Debt +nvestment?erman :onds 453%

Unrealized Bolding ?ain or Coss0+ncome 453%

+air Va,$e O"ti#n+air Va,$e O"ti#n+air Va,$e O"ti#n+air Va,$e O"ti#n


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S$&&ar( #* %ebt Invest&ent Acc#$ntingS$&&ar( #* %ebt Invest&ent Acc#$ntingS$&&ar( #* %ebt Invest&ent Acc#$ntingS$&&ar( #* %ebt Invest&ent Acc#$nting

I,,$strati#n 17-1)


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E'$it( Invest&entsE'$it( Invest&entsE'$it( Invest&entsE'$it( Invest&ents

E'$it( invest&entrepresents ownership of ordinar!preference or other capital shares.

*ost includes price of the securit!.

:rokers commissions and fees are recorded ase$pense.

,he degree to which one corporation ?invest#r@acuires an

interest in the common stock of another corporation

?investee@generall! determines the accounting treatment for

the investment s$bse'$ent t# ac'$isiti#n.


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E'$it( Invest&entsE'$it( Invest&entsE'$it( Invest&entsE'$it( Invest&ents

I,,$strati#n 17-10

Cevels of +nfluenceDetermine 'ccounting


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E'$it( Invest&ents at +air Va,$eE'$it( Invest&ents at +air Va,$eE'$it( Invest&ents at +air Va,$eE'$it( Invest&ents at +air Va,$e

Under I+RS the presumption is that euit! investmentsare !e,/-*#r-tra/ing.

?eneral accounting and reporting rule

+nvestments valued at fair value.

ecord unrealized gains and losses in net inc#&e.


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I+RSallows companies to classif! some euit!investments as n#n-tra/ing.

?eneral accounting and reporting rule

+nvestments valued at fair value.

ecord unrealized gains and losses in #t!er

c#&"re!ensive inc#&e.


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I,,$strati#n6 =ovember 3 2611 epublic *orporationpurchased ordinar! shares of three companies each

investment representing less than a 26 percent interest.

epublic records these investments as follows


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E'$it(E'$it(


at +air Va,$eat +air Va,$e

E'$it(E'$it(


at +air Va,$eat +air Va,$e

epublic records these investments as follows

#uit! +nvestments %1&556*ash %1&556

Hn December " 2611 epublic receives a cash dividend of

J4266 on its investment in the ordinar! shares of =estlK.*ash 4266

Dividend evenue 4266


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't December 31 2611 epublics euit! investment portfolio hasthe carr!ing value and fair value shown.

I,,$strati#n 17-17


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I,,$strati#n 17-17

Unrealized Bolding ?ain or Coss0+ncome 35556



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Hn 8anuar! 23 2612 epublic sold all of its :urberr! ordinar!shares receiving J2&%226.

*ash 2&%226

#uit! +nvestments 259%66?ain on )ale of #uit! +nvestment 2%526


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+n addition assume that on (ebruar! 16 2612 epublic purchasedJ255666 of *ontinental ,rucking ordinar! shares -26666 shares

J12.%5 per share/ plus brokerage commissions of J1&56.

epublics euit! investment portfolio as of December 31 2612.


I,,$strati#n 17-1:


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I,,$strati#n 17-1:

)ecurities (air Aalue 'd@ustment 161"56

Unrealized Bolding ?ain or Coss0+ncome 161"56


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E


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I,,$strati#n6 Hn December 16 2611 epublic *orporationpurchased 1666 ordinar! shares of Bawthorne *ompan! for

J26.%5 per share -total cost J26%56/. ,he investment represents

less than a 26 percent interest. Bawthorne is a distributor for

epublic products in certain locales the laws of which reuire a

minimum level of share ownership of a compan! in that region.

,he investment in Bawthorne meets this regulator! reuirement.

epublic accounts for this investment at fair value.

#uit! +nvestments 26%56

*ash 26%56


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I,,$strati#n6 Hn December 2% 2611 epublic receives a cashdividend of J456 on its investment in the ordinar! shares of

Bawthorne *ompan!. +t records the cash dividend as follows.

*ash 456

Dividend evenue 456


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I,,$strati#n6 't December 31 2611 epublics investment inBawthorne has the carr!ing value and fair value shown


Unrealized Bolding ?ain or Coss0#uit! 3256

I,,$strati#n 17-21


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I,,$strati#n 17-21(inancial )tatement resentation


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I,,$strati#n6 Hn December 26 2612 epublic sold all of its

Bawthorne *ompan! ordinar! shares receiving net proceeds of

J22566.

*ash 22566

#uit! +nvestments 26%56?ain on )ale of #uit! +nvestment 1%56



I,,$strati#n 17-22


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'n investment -direct or indirect/ of 26 percent or more of thevoting shares of an investee should lead to a presumption that

in the absence of evidence to the contrar! an investor has the

abilit! to e$ercise signi*icant in*,$enceover an investee.

+n instances of Gsignificant influenceI the investor must

account for the investment using the e'$it( &et!#/.

E'$it( Met!#/E'$it( Met!#/E'$it( Met!#/E'$it( Met!#/


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E'$it( Met!#/ecord the investment at cost and subseuentl! ad@ust

the amount each period for

the investors proportionate share of the earnings-losses/ and

dividends received b! the investor.

+f investors share of investees losses e$ceeds the carr!ing amount ofthe investment the investor ordinaril! should discontinue appl!ing theeuit! method.



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I,,$strati#n 17-2


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C#ns#,i/ati#nC#ns#,i/ati#nC#ns#,i/ati#nC#ns#,i/ati#n

C#ntr#,,ing Interest; Fhen one corporation acuires a votinginterest of more than 56 percent in another corporation

+nvestor is referred to as the "arent

+nvestee is referred to as the s$bsi/iar(.

+nvestment in the subsidiar! is reported on the parents

books as a long;term investment.

arent generall! prepares c#ns#,i/ate/ *inancia,

state&ents.


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(or /ebt invest&ents a compan! uses the impairment test to

determine whether Git is probable that the investor will be unable

to collect all amounts due according to the contractual terms.I

,his i&"air&ent ,#ssis calculated as the difference between the

carr!ing amount plus accrued interest and the e$pected future

cash flows discounted at the investments historical effective;

interest rate.

I&"air&ent #* Va,$e

I&"air&ent #* Va,$eI&"air&ent #* Va,$eI&"air&ent #* Va,$eI&"air&ent #* Va,$e


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I,,$strati#n6 't December 31 2616


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I&"air&ent #* Va,$eI&"air&ent #* Va,$eI&"air&ent #* Va,$eI&"air&ent #* Va,$e

I,,$strati#n 17-2) B 20

Coss on +mpairment 12"&&

Debt +nvestments 12"&&


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Trans*ers et3een Categ#riesTrans*ers et3een Categ#riesTrans*ers et3een Categ#riesTrans*ers et3een Categ#ries

Trans*erringan investment from one classification to another

)hould occur onl! when the b$siness /e,for managing

the investment c!anges.

+'): e$pects such changes to be rare.

*ompanies account for transfers between classifications

"r#s"ective,( at the beginning of the accounting period

after the change in the business model.


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I,,$strati#n6 :ritish )k! :roadcasting ?roup plc -?:/ has aportfolio of debt investments that are classified as trading that is

the debt investments are not held;for;collection but managed to

profit from interest rate changes. 's a result it accounts for these

investments at fair value. 't December 31 2616 :ritish )k! hasthe following balances related to these securities.


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I,,$strati#n6 's part of its strategic planning process completedin the fourth uarter of 2616 :ritish )k! management decides to

move from its prior strateg!0which reuires active management

0to a held;for;collection strateg! for these debt investments.

:ritish )k! makes the following entr! to transfer these securitiesto the held;for;collection classification.




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U.). ?'' classifies investments as trading available for;sale -both

debt and euit! investments/ and held to;maturit! -onl! for debtinvestments/. +() uses held;for;collection -debt investments/ trading

-both debt and euit! investments/ and non;trading euit! investment

classifications.

,he accounting for trading investments is the same between U.).

?'' and +(). Beld;to;maturit! -U.). ?''/ and held;for;collection

investments are accounted for at amortized cost. ?ains and losses

related to available;for;sale securities -U.). ?''/ and non;trading

euit! investments -+()/ are reported in other comprehensive income.


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:oth U.). ?'' and +() use the same test to determine whether the

euit! method of accounting should be used0that is significantinfluence with a general guide of over 26 percent ownership.

,he basis for consolidation under +() is control. Under U.). ?'' a

bipolar approach is used which is a risk;and;reward model -often

referred to as a variable;entit! approach/ and a voting;interest

approach. Bowever under both s!stems for consolidation to occur the

investor compan! must generall! own 56 percent of another compan!.


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U.). ?'' and +() are similar in the accounting for the fair value

option. ,hat is the option to use the fair value method must be made atinitial recognition the selection is irrevocable and gains and losses are

reported as part of income. Hne difference is that U.). ?'' permits

the fair value option for euit! method investments.

Fhile measurement of impairments is similar U.). ?'' does not

permit the reversal of an impairment charge related to available;for;sale

debt and euit! investments. +() allows reversals of impairments of

held;for;collection investments.

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intermediate accounting chapter 17