17-4
5. Understand the accounting for equity
investments at fair value.
6. Explain the equity method of
accounting and compare it to the fair value method for equity investments.
7. Discuss the accounting for impairments
of debt investments.
8. Describe the accounting for transfer of
investments between categories.
After studying this chapter, you should be able to:
Investments
LEARNING OBJECTIVES
1. Describe the accounting
framework for financial assets.
2. Understand the accounting for debt
investments at amortized cost.
3. Understand the accounting for debt
investments at fair value.
4. Describe the accounting for the fair
value option.
17-5
Financial Asset
Cash.
Equity investment of another company e.g., ordinary or preference shares.
Contractual right to receive cash from another party e.g., loans, receivables, and bonds.
IASB requires that companies classify financial assets into two measurement categories
—amortized cost and fair value— depending on the circumstances.
LO 1
17-6
Measurement Basis —A Closer Look
IFRS requires that companies measure their financial assets based on two criteria:
Company’s business model for managing its financial assets; and
Contractual cash flow characteristics of the financial asset.
Only debt investments such as receivables, loans, and bond investments that meet the two criteria above are recorded at amortized cost. All other
debt investments are recorded and reported at fair value.
LO 1
17-7
Measurement Basis —A Closer Look
Equity investments are generally recorded and reported at fair value.
LO 1
ILLUSTRATION 17-1 Summary of Investment Accounting Approaches
17-8
5. Understand the accounting for equity
investments at fair value.
6. Explain the equity method of
accounting and compare it to the fair value method for equity investments.
7. Discuss the accounting for impairments
of debt investments.
8. Describe the accounting for transfer of
investments between categories.
After studying this chapter, you should be able to:
Investments
LEARNING OBJECTIVES
1. Describe the accounting framework for
financial assets.
2. Understand the accounting for
debt investments at amortized cost.
3. Understand the accounting for debt
investments at fair value.
4. Describe the accounting for the fair
value option.
17-9
Debt investments are characterized by contractual payments
on specified dates of
principal and
interest on the principal amount outstanding.
Companies measure debt investments at
amortized cost or
fair value.
LO 2
17-10
Illustration: Robinson Company purchased €100,000 of 8
bonds of Evermaster Corporation on January 1, 2015, at a discount, paying
€92,278. The bonds mature January 1, 2020
and yield 10; interest is payable each July 1 and January 1. Robinson records the investment as follows:
January 1, 2015
Debt Investments 92,278
Cash 92,278
LO 2
17-11
LO 2
ILLUSTRATION 17-2
17-12
Cash 4,000
Debt Investments 614
Interest Revenue 4,614
Debt Investments —Amortized Cost
LO 2
ILLUSTRATION 17-2
Robinson Company records the receipt of the first semiannual interest payment on July 1, 2015, as follows:
17-13
Interest Receivable 4,000
Debt Investments 645
Interest Revenue 4,645
Debt Investments —Amortized Cost
LO 2
ILLUSTRATION 17-2
Because Robinson is on a calendar-year basis, it accrues interest and amortizes the discount at December 31, 2015, as
follows:
17-14
Reporting of Bond Investment at Amortized Cost
ILLUSTRATION 17-3
Debt Investments —Amortized Cost
LO 2
17-15 ILLUSTRATION 17-2
Assume that Robinson Company sells its investment on November 1, 2017, at 99¾ plus accrued interest. Robinson
records this discount amortization as follows:
€783 x 46 = €522
LO 2
Debt Investments 522
Interest Revenue 522
17-16
Computation Gain on Sale of Bonds
Cash 102,417
Interest Revenue
46 x €4,000
2,667 Debt Investments
96,193 Gain on Sale of Debt Investments
3,557
ILLUSTRATION 17-4
Debt Investments —Amortized Cost
LO 2
17-17
5. Understand the accounting for equity