1. Strategic Equity Investment vs. Nonstrategic Equity Investment
Strategic: Investor intends to establish or maintain a long-term operating relationship and has some level of influence over the entities decisions (non-current assets).
Non-strategic: Investors hopes for a reasonable rate of return (profit) without playing an active role in the entities decisions.
IFRS 9: requires these investments to be measure at FV regardless of if a private or public company. This replaces the previously accepted cost-based method. FV changes are reported in NI Mandatory in 2015.
Investments not held for short-term trading can initially record FV changes in OCI, therefore, gains and losses are never recycled through NI (avoids a P/L loss on a risky investment). Dividends are recorded through NI.
Type of Investment
Reporting of Unrealized Gains
1) Significant Influence
3) Joint Control through JV*
2) FVTOCI (risky investment)
No longer exists in 2015
* No venture can exercise unilateral control as determined through a contractual arrangement.
Consolidation FS are prepared meaning that the assets and liabilities of the associate are now reported on the parents FS replacing the “investment in associate” account.
Control: the power to direct the activities of another entity to generate variable returns. Usually through the holding of the majority of the voting rights.
Significant influence will usually not co-exist with control.
3. Significant Influence:
The power to participate in the financial and operating policy decisions of the investee but is not in control of those policies (≥ 20% of voting rights ≤ 50%).
Equity Method means the initial investment is recorded at cost and adjusted to include the pro-rated share of earnings/losses.
Includes unrealized gains/losses on certain equity investments and exchange gains/losses related to certain hedges of foreign currency translations and types of foreign operations.
Investments held for short-term trading with no influence.
Classified as current assets; assumed to be actively traded and sold within 1 year.
Initially and subsequently (at each reporting date) measured at FV.
Unrealized gains/losses and dividends are reported in NI.
i. When trading in investments is part of the firm’s short-term operating strategy. ii. Management should be evaluated on performance.
Investment must be shown as a current asset, whereas other investments could be current or noncurrent depending on management’s intention
(shows the best liquidity/profitability).
Note: Usually shows the highest current ratio as this is a short term trading investment.
Not held for short-term trading like previously done for AFS investments.
i. Can be recorded on initial recognition through OCI.
Initially and subsequently measured at FV.
Unrealized gains/losses are reported in OCI.
i. To avoid short-term fluctuations in NI (avoid a P/L loss). ii. Don’t evaluate management on investments which are not actively traded.
Dividend Income recorded in NI.
Cumulative unrealized gains/losses are cleared out of accumulated OCI and transferred directly to RE without recording in profit or loss.
Classified as current or non-current depending on how long management intends to hold onto these shares.
Note: Entities must group items as either recycled through NI or not recycled through NI.
7. Example – FVTPL vs. AFS vs. FVTOCI:
a. Initial investment is recorded at cost as an “Investment in Associate”.
b. Associate dividend is recorded as “Dividend Income” on a pro-rata basis.
c. At the reporting date, the unrealized gain/loss and on the gain/loss on the sale of the investment is reported through:
FVTPL = NI
AFS and FVTOCI = OCI
d. AFS and FVTOCI:
After the sale…