INVESTMENTS

INDEX
Sl. No Particular Page no

1. Investments in Associates 2

2. Investments in financial assets 2-5

2.1 Held-to-maturity
2.2 Fair value through profit or loss
2.3 Available-for sale

3. Debt securities 5-6

3.1 Unrealised gains and losses trading securities
3.2 Unrealised gains and losses available for sale debt
3.3 securities Realised gains and losses
3.4 Financial Assets reported as amortised cost

4. Fair value option 6-7

5. Equity Investment: Fair value through net income 7

5.1 Practicability exception
5.2 Valuation
5.3 Income from investment in equity security

6. Liquidating dividend 7-8

7. Equity method of accounting for investments 8-13

7.1 Equity method not appropriate
7.2 Equity method for accounting
7.3 Investment in investee common stock and preferred stock
7.4 Diff. between the purchase price and book value of the
7.5 Investee Accounting for Assets Fair Value Differences
7.6 Accounting for Equity Method Goodwill
7.7 Equity Method Impairment
7.8 Transition to the Equity method

8. Impairments of financial assets 13-14

8.1 Impairment of debt securities

9. Reclassification 14-15
9.1 Reclassification of investment in financial assets

10 Summary of accounting treatment for investments. 16

11 Concept Checkers 17-18

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1. Investment in Associates
Investment ownership of between 20% and 50% is usually considered
influential. Influential investments are accounted for using the equity method.
Under the equity method, the initial investment is recorded at cost and
reported on the balance sheet as a noncurrent asset.
In subsequent periods, the proportionate share of the investee’s earnings
increases the investment account on the investor’s balance sheet and is
recognised in the investor’s income statement. Dividends received from the
investee are treated as a return of capital and thus, reduce the investment
account. Unlike investments in financial assets, dividends received from the
investee are not recognised in the investor’s income statement. If the investee
reports a loss, the investor’s proportionate share of the loss reduces the
investment account and also lowers earnings in the investor’s income
statement. If the investee’s losses reduces the investment account to zero, the
investor usually discontinues use of the equity method. The equity method is
resumed once the proportionate share of the investee’s earnings exceed the
share of losses that were not recognised during the suspension period.

2. Investments in Financial Assets

When the investor cannot exert significant influence or control over the
operations of the investee, investments in financial assets (debt and equity) are
considered passive, IFRS and US GAAP are similar regarding the accounting for
investments in financial assets. IFRS has four basic classifications of
investments in financial assets: 1) held-to-maturity 2) fair value through profit
or loss, 3) available-for-sale, and 4) loans and receivables. Under IFRS, financial
assets classified as fair value through profit or loss includes both financial
assets held for trading and financial assets specifically designated as through
profit or loss by management. These classification determine the reporting for
the investments.
Passive investments in financial assets are initially recognised at fair value.
Dividend and interest income from investments in financial assets, regardless
of categorisation, are reported in the income statement. The reporting of
subsequent changes in fair value, however, depends on the classification of the
financial assets.
2.1 Held-to-Maturity
Held-to-Maturity investments are investments in financial assets with fixed or
determinable payments are fixed maturities (debt securities) that the investor
has the positive intent and ability to hold to maturity. Held-to-maturity
investments are exceptions from the general requirement (under both IFRS and
US GAAP) that investments in financial assets are subsequently recognised
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at fair value. Therefore strict criteria apply before this designation can be used.
Under both IFRS and US GAAP, the investor must have a positive intent and
ability to hold the security to maturity.
Reclassifications and sales prior to maturity may call into question the
company’s intent and ability. Under IFRS a company is not permitted to classify
any financial assets as held to maturity if it has, during the current or two
preceding financial reporting years, sold or reclassified more than an
insignificant amount of held-to-maturity investments before maturity unless
the sale or reclassification meets certain criteria. Similarly, under US GAAP, a
sale (and by inference a reclassification) is taken as an indication that intent
was not truly present and use of the held-to-maturity category may be
precluded for the company in the future.
IFRS require that held-to-maturity securities be initially recognised at fair value,
whereas US GAAP require held-to-maturity securities be initially recognised at
initial price paid. In most cases, however initial fair value is equal to initial price
paid so the treatment is identical. At each reporting date (subsequent to initial
recognition), IFRS and US GAAP require that held-to maturity securities are
reported at amortised cost using the effective interest rate method, unless
objective evidence of impairment exist. Any difference discount or
premium-between maturity (par) value and fair value existing at the time of
purchase is amortised over the life of the security. A discount (par value
exceeds fair value) occurs when the stated interest rate is less than the
effective rate, and a premium (fair value exceeds par value) occurs when the
stated interest rate is greater than the effective rate. Amortisation impacts the
carrying value of the security. Any interest payments received are adjusted for
amortisation and are reported as interest income. If the security is sold before
maturity, any realised gains or losses arising from the sale are recognised in
profit or loss of the period. Transaction costs are included in initial fair value for
investments that are not classified as fair value through profit or loss.
2.2 Fair value through profit or loss
Under IFRS, securities classified as fair value through profit or loss include
securities held for trading and those designated by management as carried as
fair value. US GAAP is similar; however, the classification is based on legal form
and special guidance exists for some financial assets.
Held for Trading
Held for trading investments are debt or equity securities acquired with the
intent to sell them in the near term. Held for trading securities are reported at
the fair value. At each reporting date, the held for trading investments are
remeasured and recognised at fair value with any unrealised gains and losses
arising from changes in fair value reported in profit or loss. Also included in
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profit or loss are interest received on debt securities and dividends received on
equity securities.
Designated at fair value
Both IFRS and US GAAP allow entities to initially designate investments at fair
value that might otherwise be classified as available-for-sale or held-to
maturity. The accounting treatments for investments designated at fair value is
similar to that of held for trading investments. Initially, the investments are
remeasured at fair value with any unrealised gains and losses arising from
changes in fair value as well as any interest and dividends received included in
profit or loss.
2.3 Available-for-sale
Available for sale investments are debt and equity securities not classified as
held to maturity or fair value through profit or loss. Under both IFRS and US
GAAP, investment classified as available-for-sale are initially measured at fair
value. At each subsequent reporting date, the investments are remeasured and
recognised at fair value. Unrealised gain or loss at the end of the reporting
period is the difference between fair value and the carrying amount at that
date. Other comprehensive income is adjusted to reflect the cumulative
unrealised gain or loss. The amount reported in other comprehensive income is
net of taxes. When these investments are sold the cumulative gain or loss
previously recognised in other comprehensive income is reclassified (reversed
from OCI) and reported as reclassification adjustments on the statement of
profit or loss. Interest (calculated using Effective Interest Method) from debt
securities and dividends from equity securities are included in profit or loss.

IFRS and US GAAP differ on the treatment of foreign exchange gains and losses
on available for sale debt securities. Under IFRS, for the purpose of recognising
foreign exchange gains and losses, a debt security is treated as if it were carried
at amortised cost in the foreign currency. Exchange rate difference arising from
changes in amortised costs are recognised in P&L and other changes in other
comprehensive income. In other words, the total exchange gain or loss in fair
value of an available-for-sale debt security is divided into two components. The
portion attributable to foreign exchange gains and losses is recognised on the
income statement and the remaining portion is recognised in the other
comprehensive income.
Under US GAAP, the total change in fair value of available for sale debt
securities (including foreign exchange rate gains and losses) is included in other
comprehensive income. For equity securities, under IFRS and US GAAP, the gain
or loss that is recognised in other comprehensive income arising from
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changes in fair value includes any related foreign exchange component, there is
no separate recognition of foreign exchange gains or losses.

3. Debt securities
3.1 Unrealised gains and losses (trading securities)
Unrealised holding gains and losses on debt securities classified as trading
securities are included in earnings. Therefore the unrealised gain or loss on
trading securities is recognised in NET INCOME.
Journal entry to record loss in net income.
Unrealised loss on trading securities…..dr XXX To valuation account (fair value
adjustment XXX 3.2 Unrealised gains and losses (available for sale debt
securities): Unrealised holding gains and losses on available-for-sale debt
security are recognised in OTHER COMPREHENSIVE INCOME.
Journal entry to record unrealised loss in other comprehensive income:
Unrealised loss on available-for-sale securities…..dr XXX
To Valuation account (fair value adjustment) XXX 3.3 Realised
gains and losses
Realised gains or losses are recognised when a debt security is sold and when
an available-for-sale debt security is deemed to be impaired. All realised gains
or losses are recognised in NET INCOME.
3.4 Financial Assets Reported at Amortized Cost
Held-to-maturity debt securities are reported at amortized cost. Unrealised
gains and losses on held-to-maturity securities are not recognised in the
financial statements, as held-to-maturity securities are not marked-to-market
at period end.
Classification Balance Reported Unrealised Cash flow
sheet gain/loss

Trading Current or Fair value Net income Operating

non-current or
investing*
Available-f Current or Fair value Other investing
or sale non-current comprehensi
ve income

Held-to Current or Amortize None Investing

 maturity non-current d cost

*under US GAAP trading debt security transactions are classified in operating

cash flow or investing cash flows based on the nature and purpose for which
the securities were acquired. If trading debt securities are classified as non-

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current on the balance sheet, then trading debt security transactions will be
reported as investing cash flows. If trading debt securities are classified as
current on the balance sheet, then trading debt security transactions will be
reported as operating cash flows.

4. Fair Value Option (FVO)

Entities may choose on specific election dates to measure at fair value, certain
financial instruments that are not typically measured at FV. Under FVO,
unrealized G/L are reported in earnings. FVO is irrevocable and is applied to
individual financial instruments.

Financial Instruments eligible for FVO:

Entities may elect FVO for recognized financial assets and financial liabilities
e.g. an entity can choose to measure at FV a debt investment that would
otherwise be classified as AFS, with unrealized G/L recorded in earnings rather
than OCI. Also, an entity can choose to measure at FV an equity invt. that
would otherwise be recorded for using the equity method.
Note: Financial instruments not eligible for the FVO include investments in
subsidiaries or Variable Interest Entities (VIE) that an entity is required to
consolidate, pension benefit assets or liabilities, financial assets or liabilities
recognized under leases, deposit liabilities of financial institutions, and financial
instruments classified as equity.

FV changes attributable to instrument-specific credit risk:

For financial liabilities other than derivative liabilities that are designated
under the FV option, the portion of the change in the FV that relates to a
change in instrument-specific credit risk is recognized on other comprehensive
income. Derivative liabilities recognize these changes in Net Income. Once the
financial liability is derecognized, any accumulated gains or losses in other
comprehensive income are recognized in earnings.

Election Dates:
The FVO may only be applied on specific dates, including the date that an
entity first recognizes an eligible financial instrument, the date than an
investment becomes subject to equity method accounting, or the date than an
entity ceases to consolidate an investment in a subsidiary or VIE.

Note: FVO – Eq. method: Both IFRS and US GAAP gives the investor the option to account for their
EQUITY METHOD INVESTMENT AT FAIR VALUE. Under US GAAP, this option is available to all entities;
however under IFRS, its use is restricted to venture capital organisations, mutual funds, unit trusts,
and similar entities, including investment-linked insurance funds.

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Both standards require that the election to use the fair value option occur at the time of initial
recognition and is irrevocable. Subsequent to initial recognition, the investment is reported at fair
value with unrealised gains and losses arising from change in fair value as well as any interest and
dividends received included in the investor’s profit or loss (income). Under the fair value method, the
investment accounts on the investors balance sheet does not reflect the investors proportionate share
of the investee’s profit or loss, dividends or other distributions. In addition, the excess of cost over the
fair value of the investee’s identifiable net assets is not amortised nor is goodwill created.

5. EQUITY SECURITIES: Fair value through net income (FVTNI) Equity

securities are generally carried at fair value through net income (FVTNI). This
requirement does not apply to investments accounted for under the equity
method, consolidated investees, or when the practicability exception is applied.
5.1 Practicability exception
The practicability exception allows an entity to measure an equity investment
at cost less impairment, plus/minus observable price changes (in orderly
transactions) of identical and similar investments from the same issue. This
exception is applicable for equity investments that do not have a readily
determinable fair value. Reporting entities that are broker-dealers in securities,
investment companies or post-retirement benefits plans cannot use this
exception.
5.2 Valuation
Equity securities are generally reported at fair value through net income
(FVTNI). Unrealized holding gains and losses on equity securities are included
in earnings as they occur.
Journal entry to record loss in net income:
Unrealized loss on equity security $XXX
To valuation account (fair value adjustment) $XXX 5.3
Income from investments in equity securities
Dividend income from an equity security investment is recognised in net
income, unless the dividend is a liquidating dividend.
Journal entry to record normal dividend income:
Cash $XXX
Dividend income $XXX

6. Liquidating dividend:
A liquidating dividend is a distribution that exceeds the investor’s share of the
investee’s retained earnings. A liquidating dividend is a return of capital that
decreases the investor’s basis in the investment.

Journal entry to record liquidating dividend:

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Cash $XXX
Investment in investee $XXX

Example of Liquidating Dividend

Fact: ARMADA Corporation owns a 10% interest in XENA Corporation. During
the current year, XENA Corp. paid a dividend of $10,000,000. XENA had
retained earnings of $ 8,000,000 when the dividend was declared. ARMADA will
receive a dividend of $1,000,000 ($10,000,000*10%) from XENA and will record
dividend income of $800,000 for its share of XENA’s retained earnings
($8,000,000*10%). The $200,000 difference reduces ARMADA’s investments in
XENA.
Required: prepare the journal entry that ARMADA will record for this
liquidating dividend.
Solution: journal entry to record $10,000,000*10%) dividend received from
XENA Corporation:
Cash…………… $1,000,000
To dividend income $800,000
To investment in XENA Corporation $200,000

7. Equity method of accounting for investments.

7.1 Equity method not appropriate
In the following situation, the equity method is not appropriate, even if an
investors owns 20% to 50% of the subsidiary:
• Bankruptcy of subsidiary
• Investment in subsidiary is temporary.
• A lawsuit or complaint is field.
• The investor cannot obtain the financial information necessary to apply
the equity method.
• The investor cannot obtain representation on the board of directors in
order to exercise significant influence.
7.2 Equity method for accounting
An investment in voting stock that enables the investor to exercise significant
influence (typically >20% <50% ownership) over Investee should be accounted
for by EQUITY METHOD.
Under the equity method the investment is originally recorded at the price
paid to acquire the investment. The investment account is subsequently
adjusted as the net assets of the investee change through the earning of
income and payment of dividends. The investment account increase by the
investor’s share of the investee’s net income with a corresponding credit to the
investor’s income statement account, Equity in Earnings A/c (or Eq in
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subsidiary/investee income). The distribution of dividends by the investee
reduces the investment balance. Continuing losses by an investee may result in
a decrease of the investment account to a zero balance.
Journal Entries
Three main journal entries are used to account for an equity method
investment:
Journal entry to record investment at cost (FV of consideration plus
legal fees):
Investment in investee $XXX
Cash $XXX
Journal entry to record increase in the investment by the investor’s share of the
earning of the investee:
Investment in investee $XXX
Equity in earnings/investee income $XXX
*equity in earnings is reported as income on the income statement. Journal
entry to record decrease in the investment by the investor’s share of the cash
dividends from the investee:
Cash $XXX
Investment in investee $XXX
Example 1:
On January 1 year 1 Bliss Corporation acquired a 40% interest in Smile company
for $300,000. At the date of acquisition, Smile co.’s equity (net assets) had a
book value of $750,000. Therefore, there was no difference between the
purchase price and the book value of the net assets acquired
($300,000=40%*$750,000). During year 1, Smile Co. had net income of $90,000
and paid a $40,000 dividend.
Required:

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Prepare the journal entries required in year 1 to account for the investment in
Smile Co.
Determine the investment-related amounts to be reported at year end on
Bliss’s balance sheet and income statement.
Solution
Journal entry to record the initial investment of 40%
Investment in Smile Co. $300,000
Cash $300,000
Journal entry to recognise the investee’s net income (40%*$90,000):
Investment in Smile Co $36,000
Equity in Earnings $36,000
Journal entry to recognise the dividend paid by the investee (40%*$40,000)
Cash $16,000
Investment in Smile Co. $16,000

2) On December 31, year 1, the investment account on the balance sheet

would show $320,000($300,000+$36,000-$16,000), and the income statement
would show $36,000 as Bliss’s equity in subsidiary income.

7.3 Investment in investee common stock and preferred stock If an

investor company owns both common and preferred stock of an investee
company.
The significant test is generally met by the amount of common stock owned
(which is usually the only voting stock)
The calculation of the income from subsidiary (or investee) to be reported on
the income statement includes:
Preferred of stock dividends &
Share of earnings available to common shareholders (net income reduced by
preferred dividends).
7.4 Difference between the Purchase Price and Book Value (NBV) of
the Investee’s Net Assets
Additional adjustment to the investment account under the equity method
result from difference between the prices paid for the investment and the book
value of the investee’s net assets. This difference is attributable to: Asset fair
value difference: Difference between the book value and fair value of the net
assets acquired.
Goodwill: Any remaining difference is goodwill.

7.5 Accounting for Assets Fair Value Differences

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The excess of an asset’s fair value over its book value is amortized over the life
of the asset (excess caused by land is not amortized). This additional
amortisation causes the investor’s share of the investee’s net income to
decrease.
Equity in (Investee) Earnings $XXX
Investment in Investee $XXX

7.6 Accounting for Equity Method Goodwill

The fair value excess attributable to goodwill is not subject to a separate
impairment test. However, the total equity method investment (including
goodwill) must be analysed at least annually for impairment.

Example 2: equity method with fair value difference and goodwill Facts: On
January 1, Year 1, Bliss Corporation acquired a 40% interest in Smile company
for $300,000. At the date of acquisition, Smile Co.’s equity (net assets) had a
book value of $550,000 and a fair value of $600,000.the difference between
book value and fair value relates to equipment being depreciated over a
remaining useful life of 10 years. During year 1, Smile Co. had net income of
$90,000 and paid a $40,000 dividend.
Required:
Prepare the journal entries required in year 1 to account for the investment in
Smile Co.
Compute the asset fair value difference and goodwill
Record the journal entry to depreciate the fair value difference. Determine the
investment related amounts to be reported at year end on Bliss’s balance sheet
and income statement
Solution
Journal entry to record the initial investment of 40%:
Investment in Smile Co. $300,000
Cash $300,000
Journal entry to recognised the investee’s net income (40%*$90,000)
Investment in Smile Co $36,000
Equity in (investee) Earnings $36,000
Journal entry to recognise the dividend paid by the investee (40%*$40,000)
Asset adjustment and Depreciation
Asset Adjustment: The difference between the book value and fair value of net
assets acquired:
FV of net assets acquired $240,000 (40% x 600000) Less BV of
net assets acquired (220,000) (40% x 550000) Asset adjustment
$20,000 (40% x 50000)

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Goodwill: The excess of the purchase price over the fair value of net assets:
Purchase price of the investment in Smile Co. $300,000 Less: Fair value of Bliss
Corp.’s equity in net assets of Smile Co (240,000) (40%*600,000)
Goodwill $60,000 Journal entry to record depreciation on undervalued
equipment ($20,000/10years)
Equity in (Investee) Earnings $2,000
Investment in Smile Co $2,000 On December 31, year 1, Bliss corp's investment
in Smile co.’s account would show a balance of
$318000($300,000+$36,000-$16,000-$2,000) and the income statement would
show $34,000($36,000-$2,000) equity in Earnings (investee income).

7.7 Equity Method Impairment

An impairment loss on equity method investment is recognised when the
following two conditions occur:
• The fair value of the investment falls below the carrying value of the
investment.
• The entity believes in the decline in other than temporary. If both
conditions are met, the entity reports the impairment loss on the income
statement and the carrying value of the investment is reduced to the lower fair
value on the balance sheet.
Under U S GAAP, the impairment loss is not permitted to be reversed if the fair
value of the investment increases in subsequent periods

Example Impairment
Facts: Postman Co. owns a 25% investment in Genstar Inc. Postman accounts
for the investment using the equity method. On the December 31, year 1,
balance sheet, the investment was reported at a carrying value of $5,000,000.
During year 2, Genstar reported a net loss of $80,000 and paid no dividends. At
the end of Year 2, Postman’s management estimated the fair value of its
Genstar Inc. investment at $4,000,000 due to the permanent closure of two
factories and corresponding loss of sales. This decrease in fair value is
considered to be other than temporary.
Required: calculate the impairment loss to be reported on the year 2 income
statement of Postman.
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Solution: before considering the effects of impairment, the investment in
Genstar would have a carrying value of $4,980,000 on the balance sheet of
Postman:
Year 2, beginning balance $5,000,000
+ (share of year 2 earning) (20,000) ($80,000)*25% - Share of year 2
dividends 0
Year 2, ending balance $ 4,980,000
- Fair value at the end of the year 2 (4,000,000)
Impairment loss $980,000
Postman would recognise an impairment loss of $980,000 on its year 2 income
statement.

7.8 Transition to the Equity method

When significant influence is acquired, it is necessary to record from the fair
value method to the equity method by doing the following on the date the
investment qualifies for the equity method.
1. Add the cost of acquiring the additional interest in the investee to the
carrying value of the previously held investment.
2. Adopt the equity method as of that date and going forward. Retroactive
adjustments are not required.
EXAMPLE
Facts: On January 1, year 1, Bliss Co. paid $15,000 for a 15% interest in Smile
Co. Bliss did not have significant influence over Smile. On January 1, year 2,
Bliss Co. increased its ownership in Smile Co. to 45% paying $60,000. Required:
prepare the journal entry to be recorded on January 1, year 2, to account for
the transaction to the use of the equity method for the investment in Smile Co.
Solution: journal entry to record the acquisition of the additional interest in
Smile Co. on January 1, year 2:
Investment in Smile co. $60,000
Cash $60,000

8. IMPAIRMENTS OF FINANCIAL ASSETS

If the value that can be recovered for a financial asset is less than its carrying
value and is expected to remain so, the financial asset is impaired. IFRS and US
GAAP require that held to maturity (HTM) and available for sale (AFS) securities
be evaluated for impairment at each reporting period. This is not

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necessary for held for trading and designated at fair value securities because
declines in their values are recognised on the income statement as they occur.
8.1 IMPAIRMENT OF DEBT SECURITIES
An impairment loss must be recorded when the decline in fair value below the
adjusted or amortized cost of any debt security classified as either available for
sale or held to maturity is other than temporary. Under U S GAAP if the decline
in the fair value is other than temporary, the cost basis of the individual
security is written down to fair value as the new cost basis and the amount of
the write down is accounted for as a realised loss and included in earning.
Under U S GAAP, the new cost basis should not be changed for subsequent
recoveries in fair value. Subsequent changes in fair value are not recognised if
the security is classified as held to maturity. If the security is classified as
available for sale, subsequent increase in fair value is included in other
comprehensive income. Subsequent decrease in fair value of the available for
sale securities, if not other than temporary, are also included in other
comprehensive income and accounted for as an unrealised loss.
Under U.S GAAP, a security is considered impaired if its decline in value is
determined to be other than temporary. For both HTM and AFS securities, the
write down to fair value is treated as a realised loss (i.e., recognised on the
income statement).
9. RECLASSIFICATION
Transfer between categories should occur only when justified. Transfers from
the held to maturity category should be rare and should only be made when
there is a change in the entity’s intent to hold a specific security to maturity
that does not call into question the entity’s intend to hold other debt securities
to maturity. Transfer to and from the trading category should also be rare.
Any transfer of a particular security from one group (trading, available for sale,
or held to maturity) to another group (trading available for sale or held to
maturity) is accounted for at fair value. Any unrealised holding gain or loss on
that security is accounted for as follows:
From trading category: The unrealised holding gain or loss at the date of
transfer is already recognised in earnings and shall not be reversed. To trading
category: the unrealised holding gain or loss at the date of transfer shall be
recognised in earning immediately.
Held to maturity transferred to available for sale: the unrealised holding gain or
loss at the date of transfer shall be reported in other comprehensive income.
Remember that this debt security was valued at amortized cost as a held to
maturity security and is being transferred to a category valued at fair value.

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Available for sale transferred to held to maturity: the unrealised holding gain or
loss at the date of transfer is already reported in other comprehensive income.
The unrealised holding gain or loss shall be amortized over the remaining life of
the security as an adjustment of yield in a manner consistent with the
amortization of any premium or discount.

9.1 RECLASSIFICATION OF INVESTMENT IN FINANCIAL ASSETS

IFRS typically does not allow reclassification of investments into or out of the
designated at fair value category. Reclassification of investments out of the
held for trading category is severely restricted under IFRS.
Debt security classified as available for sale can be reclassified as held to
maturity if the holder intends to (and is able to) hold the debt to its maturity
date. The security’s balance sheet value is remeasured to reflect its fair value at
the time it is reclassified. Any difference between this amount and the maturity
value, and many gain or loss that had been recorded in other comprehensive
income, is amortized over the security’s remaining life.
Held to maturity securities can be reclassified as available for sale if the holder
no longer intends or is no longer able to hold the debt to maturity. The carrying
value is remeasured to the security’s fair value, with any difference recognised
in other comprehensive income. Note that reclassifying a held to maturity
security may prevent the holder from classifying other debt securities as held
to maturity, or even require other held to maturity debt to be reclassified as
available for sale.
U S GAAP does permit securities to be reclassified into or out of held for
trading or designated at fair value. Unrealised gains are recognised on the
income statement at the time the security is reclassified. For investments
transferring out of available for sale category into held for trading category, the
cumulative amount for gains and losses previously recorded under other
comprehensive income is recognised in income. For a debt security transferring
out of the available for sale category into the held to maturity category, the
cumulative amount of gains and losses previously recorded under other
comprehensive income is amortized over the remaining life of the security. For
transferring investments into the available for sale category from the held to
maturity category, the unrealised gain/loss is transferred to comprehensive
income.

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10. Summary of accounting treatments for investments
In financial assets In associates Business In joint venture
combinations

influence Not significant significant Controlling Shared control

typical Usually < 20% usually usually > 50% or
percentage 20% to other indications
interest 50% of control

Current Classified as : Equity Consolidation IFRS: equity

financial ✓ Held to method method or
reporting ( maturity proportionate
prior to IFRS ✓ Available for consolidation
9 taking sale
effect) ✓ Fair value
through profit
or loss (held for
trading or
designated as
fair value)
✓ Loans and
receivables

Applicable IAS 39 IAS 28 IAS 27 IAS

IFRS 31(replaced
by IFRS 11)

US GAAP FASB ASC topic 320 FASB ASC FASB ASC topics FASB ASC
topic 323 805 and 810 Topic 323
New Classified as: Equity Consolidation IFRS: Equity
financial Fair value through method method
reporting profit or loss
(post IFRS 9 Fair value through
taking other comprehensive
effect) income
Amortized cost

Applicable IFRS 9 IAS 28 IAS 27 IFRS 11

IFRS IFRS 3 IFRS 12
IFRS 10 IAS 28

US GAAP FASB ASC topic 320 FASB ASC FASB ASC topics FASB ASC
topic 323 805 and 810 topic 323

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11. Concept Checkers
1. Marketable equity securities classified as trading should be reported by entities at: a.
Lower of cost or market, with holding gns and losses included in earnings. b. Lower of cost
or market, with holding gains included in earnings only to the extent of previously recognized
holding losses.
c. Fair value, with holding gains included in earnings only to the extent of previously
recognized holding losses.
d. Fair value, with holding gains and losses included in earnings.

2. Information regarding Sharon Co's available·for-sale portfolio of marketable equity

securities is as follows:
Aggregate cost as of 12/31/2016 $340,000
Market value as of 12/31/2016 $296,000
At December 31, 2015, Sharon reported an unrealized loss of $3,000 to reduce
investments to market value. This was the first such adjustment made by Sharon on
these types of securities. In its Year 2016 FS, what amount of unrealized loss should
Sharon report?
a. $60,000 b. $41,000 c. $44,000 d. $0

3. In respect of the above, in which FS would Stone report the unrealized difference:
a. Stmt of Comp. Inc b. Income Statement c. Net in BS 4. Stmt of Stockholders Eq.

4. Aksander uses the cost method to account for an investment in common stock. Dividends
received this year exceeded the Aksander's share of investee's undistributed earnings
since the date of investment. The amount of dividend revenue that should be reported
in the Aksander's income statement for this year would be:
a. The portion of the dividends received this year that were in excess of the investor's share of
investee's undistributed earnings since the date of investment.
b. The portion of the dividends received this year that were not in excess of the investor's
share of investee's undistributed earnings since the date of investment. c. The total amount of
dividends received this year.
d. Zero.

5. Phultu Co. purchased 10,000 shares (2% ownership) of Tatia Corp. on February 14, Year 1.
Phultu received a stock dividend of 2,000 shares on April 30, Year 1, when the market
value per share was $70. Tatia paid a cash dividend of $4 per share on December 15,
Year 1. In its
Year 1 income statement, what amount should Phultu report as dividend income?

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6. Biku Co. purchased 30% of Selchuk Co.'s outstanding common stock on December 31 for
$200,000. On that date, Selchuk's stockholders' equity was $500,000, and the fair
value of its identifiable net assets was $600,000. On December 31, what amount of
goodwill should Biku attribute to this acquisition?

7. On January 2, Year 3, Wellyram Co. purchased 10% of Rekhi, Inc.'s outstanding common
shares for $400,000. Wellyram is the largest single shareholder in Rekhi, and Wellyram's
officers are a majority on Rekhi's board of directors. Rekhi reported net income of
$500,000 for Year 3 and paid dividends of $150,000. In its December 31, Year 3, balance
sheet, what amount should Wellyram report as investment in Rekhi?
a. $450,000 b. $435,000 c. $400,000 d. $385,000

8. Choksi Co. acquired 40% of Sitaram, Inc.'s voting common stock on January 2, Year 1 for
$400,000. The carrying amount of Sitaram's net assets at the purchase date totaled
$900,000. Fair values equaled carrying amounts for all items except equipment, for
which fair values exceeded carrying amounts by $100,000. The equipment has a
five-year life. During Year 1, Sitaram reported net income of $150,000. What amount
of income from this investment should Choksi report in its Year 1 income statement?
a. $40,000 b. $52,000 c. $56,000 d. $60,000

9. (i) On January 1, 2011, Boss Corporation acquired a 40% interest in Soros Company for
$300,000. On Jan 1 2011, Soros Co.'s equity (net assets) had a book value of
$550,000 and FV of 600,000. Difference in BV and FV is due to machinery.
Remaining useful life of machinery is 10 years. During 2011 Soros made Net Income
of 90,000 and paid 40000 dividend.
(i) Balance in Investment account as on 31.12.2011
a. 300,000 b. 336,000 c. 320,000 d. 318,000
 a. $40,000 b. $48,000 c. $180,000 d. $188,000

(ii) Balance in Equity In Earnings account on 31.12.2011

a. 36,000 b. 30,000 c. 34,000 d. 85,000

10. Ckoksi Gems owns 25% of Vora Jewels Inc and accounts investment using Equity
method. On dec 31 2016, Investment was carried at 5,000,000. During 2017 Vora
suffered loss of 80,000. Vora would soon be in deep trouble as news of its closure is
doing rounds and Choksi estimates its investment in Vora Jewels at 4,000,000. The
decrease in FV is considered other than temporary. The impairment loss is

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a. 1,000,000 b. 980,000 c. 920,000 d. 900,000

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