ACCOUNTING PRINCIPLES SIXTH CANADIAN EDITION Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 16 Investments

Investments Classifying investments –Non-strategic versus strategic Accounting for debt investments reported at amortized cost –Money-market instruments and bonds Accounting for trading investments –Equity investments - common shares –Debt investments - bonds Accounting for strategic investments –Fair value –Equity method –Cost method Reporting of investments Copyright John Wiley & Sons Canada, Ltd. 2

STUDY OBJECTIVES: STUDY OBJECTIVES: CHAPTER 16: Investments 1.Identify reasons to invest, and classify investments. 2.Account for debt instruments that are reported at amortized cost. 3.Account for trading investments. 4.Account for strategic investments. 5.Indicate how investments are reported in the financial statements. Copyright John Wiley & Sons Canada, Ltd. 3

Classifying Investments Corporations can invest in: –Debt instruments: term deposits, treasury bills, bonds –Equity instruments: preferred and common shares of another company Reasons to invest: –Non-strategic investments: generate investment income –Strategic investments: to establish or maintain a long-term relationship with another company Copyright John Wiley & Sons Canada, Ltd. 4

Classified and reported based on: –Purpose of investment – more important –Whether investment is debt or equity IFRS and ASPE generally follow similar rules –Some differences Non-Strategic Investments Copyright John Wiley & Sons Canada, Ltd. 5

Strategic Investments Only equity securities can be strategic –Provide some level of influence over investment –Percentage ownership or degree of influence determines how investment is classified Strategic investments are always long-term Copyright John Wiley & Sons Canada, Ltd. 6

STUDY OBJECTIVES: STUDY OBJECTIVES: CHAPTER 16: Investments 1.Identify reasons to invest, and classify investments. 2.Account for debt instruments that are reported at amortized cost. 3.Account for trading investments. 4.Account for strategic investments. 5.Indicate how investments are reported in the financial statements. Copyright John Wiley & Sons Canada, Ltd. 7

Accounting for Debt Investments Reported at Amortized Cost Includes both short-term and long- term instruments –Short-term: maturity within 12 months of balance sheet date –Long-term: maturity longer than 12 months Entries required to record: –Acquisition –interest revenue and amortization of discount or premium –Sale or disposition at maturity Copyright John Wiley & Sons Canada, Ltd. 8

Accounting for Debt Investments: Money-Market Instruments Money-market instruments Term deposits, treasury bills, money-market funds, banker’s acceptances Usually pay a fixed interest rate on maturity Entry to record acquisition of treasury bill: Copyright John Wiley & Sons Canada, Ltd. 9

Accounting for Debt Investments: Money-Market Instruments 2 Accruing interest revenue: = market interest rate x instrument’s carrying value Discount is amortized over the term of the investment: –Using the effective-interest method –Debit to investment account reduces the discount Copyright John Wiley & Sons Canada, Ltd. 10

Accounting for Debt Investments: Money-Market Instruments 3 Maturity: –Update interest and amortize any discount –Record receipt of cash and remove investment Copyright John Wiley & Sons Canada, Ltd. 11

Accounting for Debt Investments: Bonds Bonds may sell at a premium or discount Acquisition: Recording interest revenue and amortizing discount or premium: Copyright John Wiley & Sons Canada, Ltd. 12

Accounting for Debt Investments: Bonds 2 Recording maturity of bonds –Amortized cost at maturity = face value Sale of bonds before maturity: –Gain or loss (if any) must be recognized Copyright John Wiley & Sons Canada, Ltd. 13

STUDY OBJECTIVES: STUDY OBJECTIVES: CHAPTER 16: Investments 1.Identify reasons to invest, and classify investments. 2.Account for debt instruments that are reported at amortized cost. 3.Account for trading investments. 4.Account for strategic investments. 5.Indicate how investments are reported in the financial statements. Copyright John Wiley & Sons Canada, Ltd. 14

Accounting for Trading Investments Debt and equity investments purchased for resale in the near future –Includes investments in shares and debt instruments such as bonds –IFRS: reported at fair value –ASPE: only investments in shares reported at fair value Fair value adjustment: adjust carrying value for any changes in fair value Copyright John Wiley & Sons Canada, Ltd. 15

Acquisition is recorded at fair value = price paid for shares Dividends are recognized as revenue when received Fair value adjustment at year end: Gain or loss (if any) recognized when shares are sold: Equity Investments - Shares Copyright John Wiley & Sons Canada, Ltd. 16

Acquisition is recorded at fair value = purchase price Interest revenue is recorded semi-annually when received and also accrued at year end Fair value adjustment at year end –Fair value will be affected by changes in market interest rates When bonds sold, record interest to date of sale and recognize gain or loss on sale: Debt Investments - Bonds Copyright John Wiley & Sons Canada, Ltd. 17

STUDY OBJECTIVES: STUDY OBJECTIVES: CHAPTER 16: Investments 1.Identify reasons to invest, and classify investments. 2.Account for debt instruments that are reported at amortized cost. 3.Account for trading investments. 4.Account for strategic investments. 5.Indicate how investments are reported in the financial statements. Copyright John Wiley & Sons Canada, Ltd. 18

Accounting for Strategic Investments Based on how much influence investor has over the issuing corporation: –< 20% ownership – insignificant influence – report investment at fair value –20% to 50% (or more) – significant influence – use equity method for accounting and reporting –≥ 50% ownership – controlling interest – report on a consolidated basis Percentages are guidelines – use judgment in assessing the degree of influence Copyright John Wiley & Sons Canada, Ltd. 19

Accounting for Equity Investments: Fair Value Investment is recorded at purchase price (cost) Revenue recognized when cash dividends are received Copyright John Wiley & Sons Canada, Ltd. 20

Investment is adjusted to fair value at the fiscal year end Companies may choose to report fair value adjustments in the statement of comprehensive income net of income tax Accounting for Equity Investments: Fair Value Copyright John Wiley & Sons Canada, Ltd. 21

Accounting for Equity Investments: Equity Method Investment is recorded at cost The value of the investment is: –Increased by investor’s share of investee’s net income, and –Decreased by dividends received investment: Copyright John Wiley & Sons Canada, Ltd. 22

Accounting for Equity Investments: Cost Method Investment is recorded at cost Dividends received are recorded as revenue –Same as investments in equity securities reported at fair value Copyright John Wiley & Sons Canada, Ltd. 23

STUDY OBJECTIVES: STUDY OBJECTIVES: CHAPTER 16: Investments 1.Identify reasons to invest, and classify investments. 2.Account for debt instruments that are reported at amortized cost. 3.Account for trading investments. 4.Account for strategic investments. 5.Indicate how investments are reported in the financial statements. Copyright John Wiley & Sons Canada, Ltd. 24

Reporting of Investments: Balance Sheet Investments Classified as Current Assets –Trading investments – management intends to sell in the near future –Short-term debt instruments – as management intends to hold to earn interest income –Under IFRS, trading investments and investments reported at amortized cost are disclosed separately –Highly liquid debt investments with a maturity < three months are included in “Cash and cash equivalents” Copyright John Wiley & Sons Canada, Ltd. 25

Reporting of Investments: Balance Sheet Non-current Investments –Long-term debt instruments Maturities within one year are classified as short-term –Equity investments purchased for strategic purposes –Separate disclosure required of: Long-term investments reported at fair value, at cost, and at amortized cost Investments accounted for using the equity method –Separate disclosure also required of investments reported at fair value: Where gains/losses reported are in other comprehensive income Where gains/losses reported are in the income statement Copyright John Wiley & Sons Canada, Ltd. 26

Reporting of Investments: Income Statement Income Statement –Interest revenue –Dividend revenue –Gains/losses on fair value adjustments –Gains/losses on sale of investment –Equity income from a strategic investment with significant influence Statement of Comprehensive Income –Only under IFRS –Gains/losses on fair value adjustments of strategic investments without significant influence (if not included above) Copyright John Wiley & Sons Canada, Ltd. 27

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 files or programs or from the use of the information contained herein. Prepared by: A. Davis, MSc, BComm, CA, CFE Copyright Copyright John Wiley & Sons Canada, Ltd.