Chapter 1 Accounting for Investments

Slides:



Advertisements
Similar presentations
Advanced Accounting, Fourth Edition
Advertisements

Advanced Accounting, Fourth Edition
Advanced Accounting, Third Edition
© 2009 Clarence Byrd Inc. 1 Chapter 2 Investments In Equity Securities.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Thilanka Warnakulasooriya B.Com Special (Col),
Chapter 11 Business Combinations. Financial Information Analysis2 Copyright 2006 John Wiley & Sons Ltd Business Combinations (Groups) Most large UK plc’s.
Business Combinations Business combination is defined as: ‘A transaction or other event in which an acquirer obtains control of one or more businesses’.
Revise lecture 31.
Chapter 8 Interests In Joint Ventures © 2009 Clarence Byrd Inc. 2 Joint Venture Defined  Paragraph (c) A joint venture is an economic activity.
Mergers, Acquisitions, and Other Inter- corporate Investments.
Slide 9-1. Slide 9-2 Intercompany Bond Holdings and Miscellaneous Topics— Consolidated Financial Statements Advanced Accounting, Fourth Edition 99.
© 2008 Clarence Byrd Inc. 1 Chapter 2 Investments In Equity Securities.
The Cash Flow Statement
Advanced Accounting, Fourth Edition
Investments in Associates: IAS 28
Chapter 2 Business Combinations
Completion of the Accounting Cycle
Tools for Business Decision-Making Fourth Canadian Edition Financial Accounting: Prepared by: Peggy Coady Memorial University of Newfoundland & Catherine.
ACCOUNTING PRINCIPLES SIXTH CANADIAN EDITION Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 16 Investments.
HKAS 28 Investments in Associates
Connolly – International Financial Accounting and Reporting – 4 th Edition CHAPTER 32 DISPOSAL OF SUBSIDIARIES.
Chapter 17: Investments Intermediate Accounting, 11th ed.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Edited by: Carolyn Doering, HHSS Weygandt · Kieso · Kimmel ·
Accounting for Group Structures 1. What are consolidated Financial statements? Consolidated Financial Statements are the financial Statement of a group.
ACCOUNTING PRINCIPLES SIXTH CANADIAN EDITION Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 13 Introduction to Corporations.
John Wiley & Sons, Inc. © 2005 Chapter 17 Investments Prepared by Naomi Karolinski Monroe Community College and and Marianne Bradford Bryant College Accounting.
Interests in Joint Ventures: IAS 31
Accounting for Associates and
FINANCIAL ACCOUNTING Tools for Business Decision-Making KIMMEL  WEYGANDT  KIESO  TRENHOLM  IRVINE CHAPTER 14: Performance Measurement.
Chapter One The Equity Method of Accounting for Investments McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
FINANCIAL ACCOUNTING Prepared by L. de Grace C.A. a user perspective Sixth Canadian Edition John Wiley & Sons Canada, Ltd. ©2011 CHAPTER 2 ANALYZING TRANSACTIONS.
Investments in Associates: IAS 28
Advanced Accounting, Third Edition
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil.
International Financial Reporting Standards IFRS 3- Business Combination.
Related Party Disclosures: IAS 24 Wiecek and Young IFRS Primer Chapter 26.
Chapter One The Equity Method of Accounting for Investments Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution.
Connolly – International Financial Accounting and Reporting – 4 th Edition CHAPTER 29 ASSOCIATES.
CHAPTER 4: ACCRUAL ACCOUNTING CONCEPTS
FINANCIAL ACCOUNTING Tools for Business Decision-Making KIMMEL  WEYGANDT  KIESO  TRENHOLM  IRVINE CHAPTER 12: REPORTING AND ANALYZING INVESTMENTS.
Advanced Accounting, Fifth Edition
Accounting for Groups at the Date of Acquisition
1 Financial Accounting: Tools for Business Decision Making Kimmel, Weygandt, Kieso, Trenholm KIMMEL.
WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 4 Completion of the Accounting Cycle.
Investments in Associates: IAS 28
Advanced Accounting, Third Edition
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
Investments Chapter 17 Accounting Principles, 7th Edition
Chapter 8 Accounting for Foreign Investments © 2013 Advanced Accounting, Canadian Edition by G. Fayerman.
WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 14 Corporations: Additional Topics.
WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 13 Introductions to Corporations.
11 revision of basic groups. CopyRight 2013 By 周冬华 博士 CPA Some definitions  Subsidiary - an entity which is controlled by another entity (the parent)
CHAPTER 2: Investments In Equity Securities.
FINANCIAL REPORTING FOR GROUP ENTITIES UNDER IFRS -IFRS 10 Consolidated Financial Statements Conf.univ.dr. Victor-Octavian Müller
Chapter 13: Investments Fundamentals of Intermediate Accounting
FINANCIAL REPORTING FOR GROUP ENTITIES UNDER IFRS IAS 28 Investments in Associates and Joint Ventures Conf.univ.dr. Victor-Octavian Müller
Prepared by: Keri Norrie, Camosun College
Chapter 31 Further consolidation issues IV: Accounting for changes in the degree of ownership of a subsidiary.
Prepared by: Debbie Musil Kwantlen University College
Chapter 8: Investments in Equity Securities
Corporations: Additional Topics and IFRS
Chapter 17: Investments Intermediate Accounting, 11th ed.
Prepared by: Carole Bowman, Sheridan College
Chapter 13 Cash Flow Statement. Chapter 13 Cash Flow Statement.
Chapter 18: Investments Intermediate Accounting, 10th Edition
Chapter 17: Investments Intermediate Accounting, 11th ed.
Investments In Equity Securities
Consolidated financial statements
Accounting for Associates and
Presentation transcript:

Chapter 1 Accounting for Investments © 2013 Advanced Accounting, Canadian Edition by G. Fayerman

Identifying Non-strategic Investments in Equity: Criteria If a company makes a non-strategic investment, it is considered a financial asset. (IFRS specifically exempts strategic investments from the definition of financial assets.) A financial asset is defined as any of the following: 1. Cash 2. An equity instrument of another company 3. A contractual right to receive cash or another financial asset from another company 4. A contractual right to exchange financial instruments under conditions that are potentially favourable. LO 1 2

Identifying Non-strategic Investments in Equity: Criteria Investments in the equity of other companies that are non-strategic meet the second criteria of the definition of a financial asset. There is a presumption that a company that owns less than 20% of the voting shares of another company does not have control, joint control, or significant influence. It can therefore be inferred that the company must have a non-strategic investment unless other factors prove otherwise (IAS 28). LO 1 3

Identifying Non-strategic Investments in Equity: Initial Recognition Until 2015, companies will be required to classify shares in equity instruments as either “fair value through profit or loss” or “available for sale” (IAS 39). For year ends beginning January 1, 2015, IFRS 9 Financial Instruments replaces IAS 39. (This textbook assumes early adoption of IFRS 9.) When adopting IFRS 9, companies must classify their investments in equity instruments at fair value through profit and loss (FVTPL). All equity instruments are recorded at fair value even if a market does not exist. LO 1 4

Identifying Non-strategic Investments in Equity: Initial Recognition Possible exceptions to FVTPL: (1) In limited circumstances, cost may be an appropriate estimate of fair value (e.g., if insufficient, more recent information is not available to determine fair value, or if there is a wide range of possible fair value measurements and if cost represents the best estimate of fair value within that range). (2) At the day of acquisition when the investment in shares is originally recorded, the company has the option of making an “irrevocable election” where it decides that subsequent changes to fair value will be put in other comprehensive income rather than through profit and loss. This election cannot be made for investments that are held for trading. In addition, this amount cannot be “recycled” through profit and loss. LO 1 5

Recording Non-strategic Equity Investments Transaction costs for investments that are FVTPL are expensed immediately. There is no requirement that dividend income be disclosed separately on the statement of comprehensive income. If a non-strategic investment is reported at FVTPL, there is no requirement to test for impairment. This is logical since the investment already reflects the fair value and any adjustment, whether an increase in value or an impairment, has been reflected in net income. LO 1 6

Strategic Investments: Parent-Subsidiary Relationships A subsidiary is defined as an entity that is controlled by another company, the parent. The criterion for identifying a parent–subsidiary relationship is control. IFRS 10 also requires that consolidated financial statements be prepared when there is a parent–subsidiary relationship. Determining whether one company controls another is then crucial to determining which entities should prepare consolidated financial statements. LO 2 7

Strategic Investments: Parent-Subsidiary Relationships Note that three criteria must be present in order for there to be control. The parent must have: 1. the ability to direct the financial and operating policies of another company (the power criterion), 2. the ability to obtain returns from the other company (the returns criterion), and 3. the ability to use its power to affect those returns (the link criterion). Only one company can control another company; control cannot be shared. A reporting company must assess control continuously. A company’s ability to control another company may change as facts and circumstances change. LO 2 8

Strategic Investments: Control - The Power Criterion The ability to direct financial and operating policies refers to a company’s capacity to control. One key aspect of control is the distinction between the capacity to control and that of actual control. Capacity to control does not require the holder to actually exercise control. Power arises from rights. Some examples of rights that provide power to the investor: voting rights (or potential voting rights) of an investee; rights to appoint, reassign, or remove members of an investee’s key management personnel (or another entity) who have the ability to direct the relevant activities; and rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor. LO 2 9

Strategic Investments: Control - The Returns Criterion Variable returns are defined as “returns that are not fixed and have the potential to vary as a result of the performance of the investee” (IFRS 10.B56). Returns could be both positive and negative. If a company owns common shares of another company it can expect variable returns since the dividend (positive) and changes in value of the shares are variable (positive and negative). Some examples of returns: dividends, other distributions of economic benefits from an investee, and changes in the value of the investor’s investment in that investee; remuneration for servicing an investee’s assets or liabilities, fees and exposure to loss from providing credit or liquidity support; and returns that are not available to other interest holders. LO 2 10

Strategic Investments: Control - The Link Criterion Link criterion: the ability to use power over the investee to affect the amount of the investor’s returns, which links the first two criteria (the power criterion and the returns criterion). For example, when a company has more than 50% of the voting shares, and it is the votes that determine a company’s power, it is obvious that this same company will have the ability to affect the returns since it is through their votes that relevant decisions are made. LO 2 11

Presentation of Consolidated Financial Statements for Controlled Entities “An entity that is a parent shall present consolidated financial statements.” (IFRS 10 , para. 4). The process of consolidation requires the parent company to combine its financial statements with the financial statements of its subsidiary. By consolidating the two statements, the economic entity is presented as one single company. Consolidated financial statements recognize that the separate legal entities are components of one economic unit and are distinguishable from the separate parent and subsidiary company statements. LO 2 12

Presentation of Consolidated Financial Statements Example 1.6 Assume that ABC Co. acquires its 100%-owned investment in XYZ Co. on December 31, 2013. A simplifying assumption here is that the amount paid for the investment is equal to the book value of XYZ at that date. LO 2 13

Strategic Investments: Associates IAS 28, para. 2, defines an associate as: “an entity…over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.” Significant influence is defined as: “the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.” Note: There is no requirement for the investor to hold any shares, or have a beneficial interest, in the associate. LO 3 14

Strategic Investments: Associates For significant influence: There is no requirement for the investor to hold any shares, or have a beneficial interest, in the associate. Key is participation as opposed to domination (control). It is the capacity to participate that is required, not actual participation. The holding of 20% or more of the voting power leads to the presumption of significant influence. LO 3 15

Strategic Investments: Associates Indicators of significant influence include: Board representation Participation in decisions about dividends/profit retentions Material transactions between the investor and investee Exchange of managerial staff Provision of/dependence on technical information LO 3 16

The Equity Method Associates are accounted for using the “equity” method Commonly referred to as the “single-line” method or “one-line consolidation” method All entries are recorded against the single line investment account Involves revaluing the investment and crediting the P&L with the investor’s share of post acquisition profits (after certain adjustments) “Investment in Associate” “Share of profit/(loss) of Associate” LO 3 17

Applying the Equity Method Initial investment in the associate (cost) +/- share of post-acquisition retained earnings* +/- share of current year profits/(losses)* – share of post acquisition dividends +/- share of increases/(decreases) in post-acquisition OCI = Equity carrying amount * Subject to some adjustments LO 3 18

Strategic Investments: Identifying Joint Arrangements A company may engage in arrangements that provide for joint control. The definition of control is the same as that used for the assessment of parent– subsidiary relationships. IFRS 11 Joint Arrangements identifies joint control as: “The contractually agreed sharing of control over an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control”. The investors are bound by a contractual arrangement and it is the contractual arrangement that establishes control. LO 4 19

Strategic Investments: Joint Operations Identifying joint operations: In a joint operation, the investor has a contractual right or obligation to the assets and liabilities of the operation. A joint arrangement that is not structured as a separate entity is a joint operation. However, a separate entity could still be a joint operation. A joint operation is usually a joint arrangement that involves the use of the assets and other resources of the parties, often to manufacture and sell joint products. LO 4 20

Strategic Investments: Joint Operations Accounting and reporting joint operations: The party to the joint operation is required to report its share of each asset and liability, revenue, or expense that it owns. LO 4 21

Strategic Investments: Joint Ventures Identifying joint ventures: A joint venture must be set up as a separate vehicle. This could mean that a corporation is created but it could also take other legal forms that separate the venture from the investors. A company is a party to a joint venture when it does not have the right to the assets or the obligations for the liabilities, only to the net assets. A company is a party to a joint venture if it has rights only to a share of the outcome generated by a group of assets and liabilities carrying on an economic activity (i.e., to share in the net income). LO 4 22

Strategic Investments: Joint Ventures Accounting and reporting joint ventures: The investor in the joint venture will record in its own books an investment in the joint venture equal to the fair value of the contribution made to obtain their percentage ownership. Since the investor has joint control, then all parties must have significant influence. The investor is required to report the investment using the equity method. LO 4 23

Copyright Notice Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.