INTERMEDIATE

ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy

CHAPTER 9
Investments

Prepared by:

Dragan Stojanovic, CA
Rotman School of Management,
University of Toronto

CHAPTE
9:
R
INVESTMENTS
After studying this chapter you should be able to:
Understand the nature of investments including which types of companies have significant
investments.
Explain and apply the cost/amortized cost model of accounting for investments.
Explain and apply the fair value through net income model of accounting for investments.
Explain and apply the fair value through other comprehensive income model of accounting for
investments.
Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Explain the concept of significant influence and apply the equity method.
Explain the concept of control and when consolidation is appropriate.
Explain how investments are presented and disclosed in the financial statements noting how
this facilitates analysis.
Identify differences in accounting between IFRS and ASPE, and what changes are expected in
the near future.
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Investments
Understanding
Investments

Measurement

Cost / amortized
cost model
Types of
investments
Fair value through
net income model
Types of companies
that have
Fair value through
investments
OCI model
Information for
Impairment models
decision-making

Presentatio
Strategic
Investments n,
Investments Disclosure,
in associates and
Investments Analysis
in
subsidiaries

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Presentation
and
disclosure
Analysis

IFRS / ASPE
Comparison
Comparison
Looking
ahead

Type of Investments
Debt investments include investments in
government debt, corporate bonds,
convertible debt, and commercial paper
Equity instruments represent ownership
interests in companies (e.g., common stock,
preferred stock)
Motivations for investments include: to obtain
short-term returns or long-term returns on
investments, and for corporate strategy
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Measurement
Method of accounting for a particular
investment can depend on:
Type of instrument (debt vs. equity)
Managements intent
Company strategy
Ability to reliably measure instruments fair
value, or

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Accounting Models
There are three main models of
accounting for investments:
Cost/amortized cost model
Fair value through net income model (FV-NI)
Fair value through other comprehensive
income model (FV-OCI)

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Accounting Models:
Summary
Cost/Amortized
Cost Model
At acquisition,
measure at:

FV-NI

FV-OCI

Cost (fair value +

transaction costs)

Fair value

Fair value

At each reporting Cost or amortized

date, measure at: cost

Fair value

Fair value

Unrealized
holding
gains/losses
reported in:

Net income

OCI

Realized holding
gains/losses
reported in:

Not applicable

Net income
income
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& Sons
Canada,
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Transfer total
realized to net
income (recycling),
or to retained
earnings
7

Cost/Amortized Cost Model:

Investments in Shares

Cost model for investments in shares of

another entity:
1. Recognize cost of investment at fair value
(plus direct transaction costs)
2. Report at cost (unless impaired)
3. Recognize dividend income when have claim
to dividend
4. When dispose of investment, derecognize and
report a gain/loss on disposal in net income.
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Cost/Amortized Cost Model:

Investments in Debt Securities
Amortized cost model for investments in debt
securities of another entity:
1. Recognize cost of investment at fair value (plus direct
transaction costs)
2. Report at amortized cost as well as interest receivable
(unless impaired)
3. Recognize interest income as earned, and also
amortize any discount/premium by adjusting carrying
amount of investment
4. When dispose of investment, first bring accrued
interest and discount/premium amortization up to date.
Derecognize investment and report a gain/loss on
disposal in net income.
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Amortized Cost Model:

Example
Given:
Face amount: $100,000
Purchase date: January 1, 2014
Maturity date: January 1, 2019
Interest paid: July 1st and January 1st
Coupon (stated) rate of interest: 8%
Market (effective) rate of interest: 10%
What is the approximate purchase price?
PV of $100,000 (n=10, i=5%) + PVA of ($100,000 X 4%)
where n=10, i = 5%
PV is approximately equal to $92,278
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10

Amortized Cost Model:

Example
The entry to record this purchase is:
Investment in Bonds
Cash

92,278
92,278

Note the discount of $7,722 ($100,000 92,278) is

not recorded separately; it is amortized over the life
of the bond
The effective interest method is used to amortize the
premium or discount (required under IFRS)
ASPE also allows straight-line method of amortizing
premium or discount
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11

Bond Discount
Amortization

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Reporting under Amortized Cost

Model
Balance Sheet
Current assets
Interest receivable (accrued interest
from investment)
$xx,xxx
Long-term investments
Investment, at amortized cost

$xx,xxx

Income Statement
Other revenue and gains
Interest income

$x,xxx

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13

Sale of Investments
Discount (or premium) is amortized from last date of
amortization to the date of sale
New carrying amount calculated, which is the
amortized cost balance plus the discount (or minus
the premium) amortized from last date of amortization
Gain (or loss) calculated as the difference between
selling price and carrying amount
Any accrued interest income is calculated (and
received) over and above the selling price of the
investment
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14

Fair Value through Net Income (FV-NI)

Model
Fair value through net income (FV-NI) also referred to
as fair value through profit or loss (FVTPL) in IFRS
At acquisition, investment recorded at fair value
Transactions costs are expensed
At each reporting date, FV-NI investments are
adjusted to current fair value and any holding gain or
loss is reported in net income
Any earned interest/dividend income and any holding
gain or loss on the investment may be reported
together as Investment Income
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FV-NI: An example

For non-interest bearing Treasury bill:

Purchase date: March 15
Maturity date: September 15
Pay = $19,231 for $20,000 six-month T-bill (8% yield)

Entry on March 15:

Temporary Investment in T-Bill 19,231
Cash
19,231

Entry on Sept 15:

Cash
20,000
Temporary Investment in T-Bill
Investment Income/Loss

19,231
769

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16

FV-NI: An example
A company reported on December 31, 2015:
Investments
Carrying Amount
In various shares

$192,990

Fair Value

$191,200

Adjustment to fair value (192,990-191,200= $1,790)

Entry to record adjustment at year end:

Investment Income/Loss
FV-NI Investments

1,790
1,790
2015

Current assets:
FV-NI Investments

$191,200
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17

Fair Value through Other

Comprehensive Income (FV-OCI)
At acquisition, investments are recorded at fair
value
Transaction costs tend to be added to
investments carrying amount
At each reporting date, FV-OCI investments are
adjusted to current fair value and any holding
gain or loss is reported in other comprehensive
income (OCI)
Accumulated holding gains/losses are reported in
AOCI, which is a separate item under
Shareholders Equity
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Fair Value through Other

Comprehensive Income (FV-OCI)
When investments are disposed, previously
unrealized holding gains or losses need to be
transferred out of OCI/AOCI
Under FV-OCI with recycling, unrealized holding
gains or losses are transferred (i.e. recycled)
into net income (and as part of net income,
closed into retained earnings)
Under FV-OCI without recycling, unrealized
holding gains or losses are transferred directly
into retained earnings (bypassing net income)
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FV-OCI: An Example
Given share investment accounted for at FV-OCI:
Fair value at Dec. 31, 2013 $275,000
Carrying amt. at Dec. 31, 2013
259,700
Unrealized Holding Gain $ 15,300

Entry to Record:
FV-OCI Investments
15,300
Unrealized Gain or loss OCI

15,300

Long-term investments (assumed)

FV-OCI Investments
$ 275,000
Shareholders Equity
Accumulated other comprehensive income (loss)
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20

$ 15,300

FV-OCI: An example
On January 23, 2014 sell investment for $287,220
Entry to record adjustment to fair value:
FV-OCI Investments ($287,220 - 275,000)
12,220
Unrealized Gain or loss OCI
12,220
Entry to record sale and proceeds:
Cash
287,220
FV-OCI Investments

287,220

Entry to transfer holding gains:

Unrealized Gain or loss OCI (15,300+12,220)
Gain on Sale of Investment

27,520
27,520

OR (if FV-OCI without recycling)

Retained Earnings

27,520

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ASPE Classifications
ASPE generally relies on cost-based
model for equity investments, unless
active market prices are available
FV-NI model is allowed as an option for
any financial instrument
Under all models, interest earned and
dividends received are recognized in net
income
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22

IFRS Classifications
Amortized cost used only if both of following
conditions are satisfied:
Business model: investment managed on
contractual yield basis (and cash flows best
assessed relative to contractual cash flows
specified by instrument)
Contractual cash flow characteristics: cash flows
represent only payments of principal and interest on
principal outstanding, and occur at specified dates

If criteria for amortized cost do not apply, then

FV-NI is used.
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IFRS Classifications
IFRS standard effective 2015 (with early
adoption possible) includes two additional
options:
Investments held for longer term strategic
reasons (without control or significant influence)
may be accounted for under FV-OCI without
recycling if such choice is made on acquisition
Fair value option provides an opportunity to use
FV-NI accounting from acquisition if it corrects
an accounting mismatch
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IFRS Classifications
Reclassification from one category to
another is not allowed, except under very
limited situations

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Impairment
Investments must be reviewed for possible
impairment to ensure that future benefit
justifies the valuation on the balance sheet
There are three different impairment
models:
1. Incurred loss model
2. Expected loss model
3. Full fair value model
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Impairment: Incurred Loss

Model
Impairment test carried out only if there is evidence of possible
impairment
Indicators of possible impairment include:
Significant financial difficulties
Defaulting on interest/principal payments
Major financial reorganization or bankruptcy
Impairment loss is recognized in net income as difference
between carrying amount and revised present value of expected
cash flows
Revised present value is calculated using discounted cash flow
(DCF) model (using either historic or current market rate as
discount rate)
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Impairment: Expected Loss

Model
Impairment test carried out continuously
Impairment loss is recognized in net
income as difference between carrying
amount and revised present value of
expected cash flows
Revised present value is calculated using
discounted cash flow (DCF) model (using
effective interest rate from time of
acquisition)
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Impairment: Fair Value

Loss Model
Impairment loss is recognized in net
income as difference between carrying
amount and fair value
Where fair value is determined using the
discounted cash flow (DCF) model, using
the current interest rate at time of
impairment test

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29

Impairment: Accounting
Standards
IFRS currently uses the following models:
For all financial asset investments accounted for at
cost or amortized cost: incurred loss model (with
original discount rate)
For FV-NI instruments: full fair value model

IFRS proposals include:

For instruments at amortized cost: expected loss
model
For instruments at fair value: always adjust to FV

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Impairment: Accounting
Standards
ASPE has following requirement:
For financial asset investments accounted for
at cost or amortized cost: incurred loss model
(using current market rate)
For equity instruments (with market values)
and derivative instruments, use fair value
model

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31

Strategic Investments
As common shares carry voting rights,
extent of influence becomes a factor in
determining the appropriate accounting
treatment
There are three levels of influence, each
with its own accounting treatment:
1. Little or no influence
2. Significant influence
3. Control
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Equity Investments:
Common Shares

%
Ownership

0%

Level of Little or
Influence none

20%

Significant

50%

Control

Type of
Less than
Associate, or
Investment
significant
significant
influence
influence
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Subsidiary

33

100%

Investment in Associates: Significant

Influence

Applies to equity investments of significant influence

(not control)
Significant influence deemed using the following
criteria:

1. Quantitative test: 20% to 50% ownership

2. Qualitative test:

Representation on Board of Directors

Participation in policy-making
Material intercompany transactions
Exchange of management personnel
Provision of technical information
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Investment in Associates

Under IFRS, investments in associates (i.e.

significant influence) are accounted for using the
equity method of accounting
ASPE, investors can choose from following options
for all significant influence investments:

Equity method, or
Cost method (unless associate shares are quoted in
active market, in which case FV-NI model is used)

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Equity Method
Investment recorded at cost of acquisition
Investor takes into income its respective share
of the investee net income for the year by
debiting the Investment account and crediting
Investment Income
Any dividends received are credited to the
Investment account
The accrual basis of accounting is applied
Consider the following example of Maxi Limited:
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Equity Method: Example

Given:
Maxi Corp. purchases 20% of Mini Corp., and exercises
significant influence
January 2, 2013 Maxi purchases 48,000 shares @ $10 per
share
For the year 2013 Mini Corp. reports a net income of $200,000
December 31, 2013 shares of Mini Corp. have a market price of
$12 per share
January 28, 2014 Mini Corp. declared and paid a total cash
dividend of $100,000
For the year 2014, Mini Corp. reports a net loss of $50,000
Prepare all necessary journal entries, using the Equity Method
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Equity Method: Example

January 2, 2013
Investment in Mini Corp.
480,000
Cash
480,000
(48,000 shares x $10)
December 31, 2013
Investment in Mini Corp.
40,000
Investment Income 40,000
($200,000 net income x 20%)
December 31, 2013
No entry required to reflect market
price (or fair value). Investment is
not impaired.

January 28, 2014

Cash
20,000
Investment in Mini Corp. 20,000
($100,000 Dividend x 20%)
December 31, 2014
Investment Loss
10,000
Investment in Mini Corp. 10,000
($50,000 net loss x 20%)

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Equity Method
Amounts paid in excess of (or less than) investees
book value becomes part of the cost of the
investment
These amounts must be accounted for appropriately
after the acquisition
For example, if the difference is due to long-lived
assets with fair values greater than book value, the
difference must be amortized

Share of discontinued operations and other

comprehensive income of investee are reported in
the same way by the investor (major classifications
of income are retained)
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39

Equity Method:
Impairment
Investments with significant influence are assessed at
the end of each reporting period to determine if there
are indicators of impairment
If there are indicators of impairment, the impairment
test is carried out
Impairment loss is recognized in income and is
measured as carrying amount in excess of
investments recoverable amount
Investments recoverable amount is measured as the
higher of value in use and fair value less cost to sell
Impairment losses may be reversed
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Equity Method: Disposal

On disposal of the investment, both
investment account and investment income
accounts are brought up to date (i.e.
adjusted for investors share of associates
income and changes in book value up to
date of sale)
Investments carrying value is removed and
any gains/losses are recognized in net
income
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41

Investments in Subsidiaries
A corporation (the parent) can acquire control
of another corporation (the subsidiary)
Control is generally acquired through
purchasing 50% or more voting shares
Control is defined as continuing power to
determine/direct the strategic operating,
financing, and investment policies/activities,
without the co-operation of others
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Investments in Subsidiaries
Under IFRS, investments for subsidiaries are accounted
for preparation of consolidated financial statements

The two corporations are reported as a single

business entity

Under ASPE, parent company has the

following options when accounting for
subsidiaries:
Consolidate all subsidiaries
Account for all subsidiaries under either equity or cost
method (cost method cannot be used if shares are traded
in an active market, and FV-NI is used instead)
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Consolidated Financial
Statements
Parent Corporation
- Income Statement
- Balance Sheet

Subsidiary Corporation
- Income Statement
- Balance Sheet

Consolidated Entity

(Reported by Parent Corporation)

Combined Balance Sheet, line-by-line (100%)
Combined Income Statement, line-by-line (100%)
Eliminate any unrealized inter-company gains and losses
Eliminate any inter-company balances
Parent eliminates the investment in the subsidiary company
Non-controlling interest reported (the percent of the subsidiary not
owned by the parent) on both balance sheet and income statements
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Presentation and
Disclosure
For investments without significant influence or
control, key presentation issue is classification of
investment as current vs. long-term
Key disclosures include following types of
information:
Carrying amount of investments
Income statement effects
Financial risk

IFRS generally has more onerous disclosure

requirements than ASPE
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45

Investments Recent
Changes
Due to the complexity of accounting for
investments, a number of proposals from
IASB and FASB relating to:
1. Simplification of existing accounting
standards
2. New model for impairments and use of
expected loss approach

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46

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