1026 Chapter 17 Investments

Principles
Briefly explain the different rationales for the different accounting and reporting rules for different types of
investments in the securities of other companies.

BRIDGE TO THE PROFESSION

Professional Research: FASB Codication
Your client, Cascade Company, is planning to invest some of its excess cash in 5-year revenue bonds issued
by the county and in the stock of one of its suppliers, Teton Co. Tetons shares trade on the over-the-counter
market. Cascade plans to classify these investments as available-for-sale. They would like you to conduct
some research on the accounting for these investments.
Instructions
If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and
prepare responses to the following. Provide Codification references for your responses.
(a) Since the Teton shares do not trade on one of the large stock markets, Cascade argues that the fair value
of this investment is not readily available. According to the authoritative literature, when is the fair
value of a security readily determinable?
(b) How is an impairment of a security accounted for?
(c) To avoid volatility in their financial statements due to fair value adjustments, Cascade debated whether
the bond investment could be classified as held-to-maturity; Cascade is pretty sure it will hold the
bonds for 5years. How close to maturity could Cascade sell an investment and still classify it as heldto-maturity?
(d) What disclosures must be made for any sale or transfer from securities classified as held-to-maturity?

Additional Professional Resources

See the books companion website, at www.wiley.com/college/kieso, for professional
simulations as well as other study resources.

IFRS

INSIGHTS

The accounting for investments is discussed in IAS 27 (Consolidated and

Separate Financial Statements), IAS 28 (Accounting for Investments in AssociCompare the accounting for
ates), IAS 39 (Financial Instruments: Recognition and Measurement), and
investments under GAAP and IFRS.
IFRS 9 (Financial Instruments). Until recently, when the IASB issued IFRS 9, the
accounting and reporting for investments under IFRS and GAAP were for the most part
very similar. However, IFRS 9 introduces new investment classifications and increases
the situations when investments are accounted for at fair value, with gains and losses
recorded in income.

LEARNING OBJECTIVE 13

RELEVANT FACTS
Following are the key similarities and differences between GAAP and IFRS related to
investments.

Similarities
GAAP and IFRS use similar classifications for trading investments.
The accounting for trading investments is the same between GAAP and IFRS. Heldto-maturity (GAAP) and held-for-collection (IFRS) investments are accounted for at

IFRS Insights 1027

amortized cost. Gains and losses on some investments are reported in other comprehensive income.
Both GAAP and IFRS use the same test to determine whether the equity method of
accounting should be used, that is, significant influence with a general guideline of
over 20 percent ownership.
GAAP and IFRS are similar in the accounting for the fair value option. That is, the
option to use the fair value method must be made at initial recognition, the selection
is irrevocable, and gains and losses are reported as part of income.
The measurement of impairments is similar under GAAP and IFRS.

Differences
While GAAP classifies investments as trading, available-for-sale (both debt and
equity investments), and held-to-maturity (only for debt investments), IFRS uses
held-for-collection (debt investments), trading (both debt and equity investments),
and non-trading equity investment classifications.
The basis for consolidation under IFRS is control. Under GAAP, a bipolar approach is
used, which is a risk-and-reward model (often referred to as a variable-entity approach,
discussed in Appendix 17B) and a voting-interest approach. However, under both systems, for consolidation to occur, the investor company must generally own 50 percent
of another company.
While the measurement of impairments is similar under GAAP and IFRS, GAAP does
not permit the reversal of an impairment charge related to available-for-sale debt
and equity investments. IFRS allows reversals of impairments of held-for-collection
investments.
While GAAP and IFRS are similar in the accounting for the fair value option, one difference is that GAAP permits the fair value option for equity method investments;
IFRS does not.

ABOUT THE NUMBERS

Accounting for Financial Assets
A financial asset is cash, an equity investment of another company (e.g., ordinary or
preference shares), or a contractual right to receive cash from another party (e.g., loans,
receivables, and bonds). The accounting for cash is relatively straightforward and is
discussed in Chapter 7. The accounting and reporting for equity and debt investments,
as discussed in the opening story, is extremely contentious, particularly in light of the
credit crisis in the latter part of 2008.
IFRS requires that companies determine how to measure their financial assets based
on two criteria:
The companys business model for managing its financial assets; and
The contractual cash flow characteristics of the financial asset.
If a company has (1) a business model whose objective is to hold assets in order to collect
contractual cash flows and (2) the contractual terms of the financial asset provides specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding, then the company should use amortized cost.
For example, assume that Mitsubishi purchases a bond investment that it intends
to hold to maturity. Its business model for this type of investment is to collect interest
and then principal at maturity. The payment dates for the interest rate and principal are
stated on the bond. In this case, Mitsubishi accounts for the investment at amortized cost.
If, on the other hand, Mitsubishi purchased the bonds as part of a trading strategy to

1028 Chapter 17 Investments

speculate on interest rate changes (a trading investment), then the debt investment is
reported at fair value. As a result, 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.
Equity investments are generally recorded and reported at fair value. Equity investments do not have a fixed interest or principal payment schedule and therefore cannot
be accounted for at amortized cost. In summary, companies account for investments
based on the type of security, as indicated in Illustration IFRS17-1.

ILLUSTRATION
IFRS17-1

Type of Investment

Summary of Investment
Accounting Approaches

Debt

Equity

Assessment of Accounting Criteria

Valuation Approach

Meets business model (held-for-collection) and

contractual cash flow tests.

Amortized cost

Does not meet the business model test

(not held-for-collection).

Fair value

Does not meet contractual cash flow test.

Fair value

Exercises some control.

Equity method

Debt Investments
Debt InvestmentsAmortized Cost
Only debt investments can be measured at amortized cost. If a company like Carrefour
makes an investment in the bonds of Nokia, it will receive contractual cash flows of
interest over the life of the bonds and repayment of the principal at maturity. If it is
Carrefours strategy to hold this investment in order to receive these cash flows over the
life of the bond, it has a held-for-collection strategy and it will measure the investment
at amortized cost.44
Example: Debt Investment at Amortized Cost. To illustrate the accounting for a debt
investment at amortized cost, assume that Robinson Company purchased $100,000 of
8 percent bonds of Evermaster Corporation on January 1, 2014, at a discount, paying
$92,278. The bonds mature January 1, 2019, and yield 10 percent; interest is payable each
July 1 and January 1. Robinson records the investment as follows.
January 1, 2014
Debt Investments
Cash

92,278
92,278

As indicated in Chapter 14, companies must amortize premiums or discounts using

the effective-interest method. They apply the effective-interest method to bond investments in a way similar to that for bonds payable. To compute interest revenue, companies compute the effective-interest rate or yield at the time of investment and apply that
rate to the beginning carrying amount (book value) for each interest period. The investment carrying amount is increased by the amortized discount or decreased by the
amortized premium in each period.
Illustration IFRS17-2 shows the effect of the discount amortization on the interest
revenue that Robinson records each period for its investment in Evermaster bonds.
44

Classification as held-for-collection does not mean the security must be held to maturity. For
example, a company may sell an investment before maturity if (1) the security does not meet
the companys investment strategy (e.g., the company has a policy to invest in only AAA-rated
bonds but the bond investment has a decline in its credit rating), (2) a company changes its
strategy to invest only in securities within a certain maturity range, or (3) the company needs
to sell a security to fund certain capital expenditures. However, if a company begins trading
held-for-collection investments on a regular basis, it should assess whether such trading is
consistent with the held-for-collection classification.

IFRS Insights 1029

8% BONDS PURCHASED TO YIELD 10%

Date

Cash
Received

Interest
Revenue

Bond
Discount
Amortization

Carrying
Amount
of Bonds

1/1/14
7/1/14
1/1/15
7/1/15
1/1/16
7/1/16
1/1/17
7/1/17
1/1/18
7/1/18
1/1/19

$ 4,000a
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000

$ 4,614b
4,645
4,677
4,711
4,746
4,783
4,823
4,864
4,907
4,952

$ 614c
645
677
711
746
783
823
864
907
952

$ 92,278
92,892d
93,537
94,214
94,925
95,671
96,454
97,277
98,141
99,048
100,000

$40,000

$47,722

$7,722

$4,000 5 $100,000 3 .08 3 6y12

$4,614 5 $92,278 3 .10 3 6y12
c
$614 5 $4,614 2 $4,000
d
$92,892 5 $92,278 1 $614
b

Robinson records the receipt of the first semiannual interest payment on July 1, 2014
(using the data in Illustration IFRS17-2), as follows.
July 1, 2014
Cash
Debt Investments
Interest Revenue

4,000
614
4,614

Because Robinson is on a calendar-year basis, it accrues interest and amortizes the

discount at December 31, 2014, as follows.
December 31, 2014
Interest Receivable
Debt Investments
Interest Revenue

4,000
645
4,645

Again, Illustration IFRS17-2 shows the interest and amortization amounts. Thus, the
accounting for held-for-collection investments in IFRS is the same as held-to-maturity
investments under GAAP.
Debt InvestmentsFair Value
In some cases, companies both manage and evaluate investment performance on a fair
value basis. In these situations, these investments are managed and evaluated based on
a documented risk-management or investment strategy based on fair value information. For example, some companies often hold debt investments with the intention of
selling them in a short period of time. These debt investments are often referred to as
trading investments because companies frequently buy and sell these investments to
generate profits in short-term differences in price.
Companies that account for and report debt investments at fair value follow the
same accounting entries as debt investments held-for-collection during the reporting
period. That is, they are recorded at amortized cost. However, at each reporting date,
companies adjust the amortized cost to fair value, with any unrealized holding gain
or loss reported as part of net income (fair value method). An unrealized holding gain
or loss is the net change in the fair value of a debt investment from one period to another.
Example: Debt Investment at Fair Value. To illustrate the accounting for debt investments using the fair value approach, assume the same information as in our previous

ILLUSTRATION
IFRS17-2
Schedule of Interest
Revenue and Bond
Discount Amortization
Effective-Interest Method

1030 Chapter 17 Investments

illustration for Robinson Company. Recall that Robinson Company purchased $100,000
of 8 percent bonds of Evermaster Corporation on January 1, 2014, at a discount, paying
$92,278.45 The bonds mature January 1, 2019, and yield 10 percent; interest is payable
each July 1 and January 1.
The journal entries in 2014 are exactly the same as those for amortized cost. These
entries are as follows.
January 1, 2014
Debt Investments
Cash

92,278
92,278
July 1, 2014

Cash
Debt Investments
Interest Revenue

4,000
614
4,614
December 31, 2014

Interest Receivable
Debt Investments
Interest Revenue

4,000
645
4,645

Again, Illustration IFRS17-2 shows the interest and amortization amounts. If the
debt investment is held-for-collection, no further entries are necessary. To apply the fair
value approach, Robinson determines that, due to a decrease in interest rates, the fair
value of the debt investment increased to $95,000 at December 31, 2014. Comparing the
fair value with the carrying amount of these bonds at December 31, 2014, Robinson has
an unrealized holding gain of $1,463, as shown in Illustration IFRS17-3.

ILLUSTRATION
IFRS17-3
Computation of
Unrealized Gain on Fair
Value Debt Investment
(2014)

Fair value at December 31, 2014

Amortized cost at December 31, 2014 (per Illustration IFRS17-2)

$95,000
93,537

Unrealized holding gain or (loss)

$ 1,463

Robinson therefore makes the following entry to record the adjustment of the debt
investment to fair value at December 31, 2014.
Fair Value Adjustment
Unrealized Holding Gain or LossIncome

1,463
1,463

Robinson uses a valuation account (Fair Value Adjustment) instead of debiting

Debt Investments to record the investment at fair value. The use of the Fair Value
Adjustment account enables Robinson to maintain a record at amortized cost in the
accounts. Because the valuation account has a debit balance, in this case the fair value of
Robinsons debt investment is higher than its amortized cost.
The Unrealized Holding Gain or LossIncome account is reported in the other income and expense section of the income statement as part of net income. This account is
closed to net income each period. The Fair Value Adjustment account is not closed each
period and is simply adjusted each period to its proper valuation. The Fair Value
Adjustment balance is not shown on the statement of financial position but is simply
used to restate the debt investment account to fair value.
45

Companies may incur brokerage and transaction costs in purchasing securities. For investments
accounted for at fair value (both debt and equity), IFRS requires that these costs be recorded in
net income as other income and expense and not as an adjustment to the carrying value of the
investment.

IFRS Insights 1031

Robinson reports its investment in Evermaster bonds in its December 31, 2014,
financial statements as shown in Illustration IFRS17-4.

ILLUSTRATION
IFRS17-4

Statement of Financial Position

Current assets
Interest receivable
Debt investments (trading)

$ 4,000
95,000

Financial Statement
Presentation of Debt
Investments at Fair Value

Income Statement
Other income and expense
Interest revenue ($4,614 1 $4,645)
Unrealized holding gain or (loss)

$ 9,259
1,463

As you can see from this example, the accounting for trading debt investments under
IFRS is the same as GAAP.

Equity Investments
As in GAAP, under IFRS, the degree to which one corporation (investor) acquires
an interest in the shares of another corporation (investee) generally determines the
accounting treatment for the investment subsequent to acquisition. To review, the
classification of such investments depends on the percentage of the investee voting
shares that is held by the investor:
1. Holdings of less than 20 percent (fair value method)investor has passive interest.
2. Holdings between 20 percent and 50 percent (equity method)investor has
significant influence.
3. Holdings of more than 50 percent (consolidated statements)investor has controlling
interest.
The accounting and reporting for equity investments therefore depend on the level
of influence and the type of security involved, as shown in Illustration IFRS17-5.

Category

Valuation

Unrealized Holding
Gains or Losses

Other Income Effects

Holdings less
than 20%
1. Trading

Fair value

Recognized in net
income

Dividends declared;
gains and losses
from sale.

2. NonTrading

Fair value

Recognized in Other
comprehensive
income (OCI) and as
separate component
of equity

Dividends declared;
gains and losses
from sale.

Holdings between
20% and 50%

Equity

Not recognized

Proportionate share
of investees net
income.

Holdings more
than 50%

Consolidation

Not recognized

Not applicable.

Equity Investments at Fair Value

When an investor has an interest of less than 20 percent, it is presumed that the investor
has little or no influence over the investee. As indicated in Illustration IFRS17-5, there
are two classifications for holdings less than 20 percent. Under IFRS, the presumption is

ILLUSTRATION
IFRS17-5
Accounting and
Reporting for Equity
Investments by Category

1032 Chapter 17 Investments

that equity investments are held-for-trading. That is, companies hold these securities to
profit from price changes. As with debt investments that are held-for trading, the general accounting and reporting rule for these investments is to value the securities at fair
value and record unrealized gains and losses in net income (fair value method).46
However, some equity investments are held for purposes other than trading. For
example, a company may be required to hold an equity investment in order to sell its
products in a particular area. In this situation, the recording of unrealized gains and
losses in income, as is required for trading investments, is not indicative of the companys
performance with respect to this investment. As a result, IFRS allows companies to
classify some equity investments as non-trading. Non-trading equity investments are
recorded at fair value on the statement of financial position, with unrealized gains and
losses reported in other comprehensive income.
Example: Equity Investment (Income). Upon acquisition, companies record equity investments at fair value. To illustrate, assume that on November 3, 2014, Republic Corporation purchased ordinary shares of three companies, each investment representing
less than a 20 percent interest.
Cost
Burberry
Nestl
St. Regis Pulp Co.
Total cost

$259,700
317,500
141,350
$718,550

Republic records these investments as follows.

November 3, 2014
Equity Investments
Cash

718,550
718,550

On December 6, 2014, Republic receives a cash dividend of $4,200 on its investment

in the ordinary shares of Nestl. It records the cash dividend as follows.
December 6, 2014
Cash
Dividend Revenue

4,200
4,200

All three of the investee companies reported net income for the year, but only Nestl
declared and paid a dividend to Republic. But, recall that when an investor owns less
than 20 percent of the shares of another corporation, it is presumed that the investor
has relatively little influence on the investee. As a result, net income of the investee is
not a proper basis for recognizing income from the investment by the investor.
Why? Because the increased net assets resulting from profitable operations may be
permanently retained for use in the investees business. Therefore, the investor recognizes net income only when the investee declares cash dividends.
At December 31, 2014, Republics equity investment portfolio has the carrying value
and fair value shown in Illustration IFRS17-6.
46

Fair value at initial recognition is the transaction price (exclusive of brokerage and other
transaction costs). Subsequent fair value measurements should be based on market prices, if
available. For non-traded investments, a valuation technique based on discounted expected cash
flows can be used to develop a fair value estimate. While IFRS requires that all equity investments
be measured at fair value, in certain limited cases, cost may be an appropriate estimate of fair
value for an equity investment.

IFRS Insights 1033

ILLUSTRATION
IFRS17-6

EQUITY INVESTMENT PORTFOLIO

DECEMBER 31, 2014
Carrying
Value

Fair Value

Unrealized Gain (Loss)

Burberry
Nestl
St. Regis Pulp Co.

$259,700
317,500
141,350

$275,000
304,000
104,000

$ 15,300
(13,500)
(37,350)

Total of portfolio

$718,550

$683,000

(35,550)

Investments

Previous fair value

adjustment balance

Computation of Fair
Value Adjustment
Equity Investment
Portfolio (2014)

Fair value adjustmentCr.

$(35,550)

For Republics equity investment portfolio, the gross unrealized gains are $15,300, and
the gross unrealized losses are $50,850 ($13,500 1 $37,350), resulting in a net unrealized loss
of $35,550. The fair value of the equity investment portfolio is below cost by $35,550.
As with debt investments, Republic records the net unrealized gains and losses
related to changes in the fair value of equity investments in an Unrealized Holding Gain
or LossIncome account. Republic reports this amount as other income and expense. In
this case, Republic prepares an adjusting entry debiting the Unrealized Holding Gain or
LossIncome account and crediting the Fair Value Adjustment account to record the
decrease in fair value and to record the loss as follows.
December 31, 2014
Unrealized Holding Gain or LossIncome
Fair Value Adjustment

35,550
35,550

On January 23, 2015, Republic sold all of its Burberry ordinary shares, receiving
$287,220. Illustration IFRS17-7 shows the computation of the realized gain on the sale.
Net proceeds from sale
Cost of Burberry shares

$287,220
259,700

Gain on sale of shares

$ 27,520

ILLUSTRATION
IFRS17-7
Computation of Gain on
Sale of Burberry Shares

Republic records the sale as follows.

January 23, 2015
Cash
Equity Investments
Gain on Sale of Equity Investment

287,220
259,700
27,520

As indicated in this example, the fair value method accounting for trading equity
investments under IFRS is the same as GAAP for trading equity investments. As shown
in the next section, the accounting for non-trading equity investments under IFRS is
similar to the accounting for available-for-sale equity investments under GAAP.
Example: Equity Investments (OCI). The accounting entries to record non-trading
equity investments are the same as for trading equity investments, except for recording
the unrealized holding gain or loss. For non-trading equity investments, companies
report the unrealized holding gain or loss as other comprehensive income (OCI).
Thus, the account titled Unrealized Holding Gain or LossEquity is used.
To illustrate, assume that on December 10, 2014, Republic Corporation purchased
$20,750 of 1,000 ordinary shares of Hawthorne Company for $20.75 per share (which
represents less than a 20 percent interest). Hawthorne is a distributor for Republic
products in certain locales, the laws of which require a minimum level of share ownership
of a company in that region. The investment in Hawthorne meets this regulatory

1034 Chapter 17 Investments

requirement. As a result, Republic accounts for this investment at fair value, with unrealized gains and losses recorded in OCI.47 Republic records this investment as follows.
December 10, 2014
Equity Investments
Cash

20,750
20,750

On December 27, 2014, Republic receives a cash dividend of $450 on its investment
in the ordinary shares of Hawthorne Company. It records the cash dividend as follows.
December 27, 2014
Cash
Dividend Revenue

450
450

Similar to the accounting for trading investments, when an investor owns less than
20 percent of the ordinary shares of another corporation, it is presumed that the investor
has relatively little influence on the investee. Therefore, the investor earns income
when the investee declares cash dividends.
At December 31, 2014, Republics investment in Hawthorne has the carrying value
and fair value shown in Illustration IFRS17-8.

ILLUSTRATION
IFRS17-8
Computation of Fair
Value Adjustment
Non-Trading Equity
Investment (2014)

Non-Trading Equity Investment

Carrying Value

Fair Value

Hawthorne Company
Previous fair value adjustment balance

$20,750

$24,000

Unrealized
Gain (Loss)
$3,250
0

Fair value adjustment (Dr.)

$3,250

For Republics non-trading investment, the unrealized gain is $3,250. That is, the fair
value of the Hawthorne investment exceeds cost by $3,250. Because Republic has classified
this investment as non-trading, Republic records the unrealized gains and losses related to
changes in the fair value of this non-trading equity investment in an Unrealized Holding
Gain or LossEquity account. Republic reports this amount as a part of other comprehensive income and as a component of other accumulated comprehensive income (reported
in equity) until realized. In this case, Republic prepares an adjusting entry crediting the
Unrealized Holding Gain or LossEquity account and debiting the Fair Value Adjustment
account to record the decrease in fair value and to record the loss as follows.
December 31, 2014
Fair Value Adjustment
Unrealized Holding Gain or LossEquity

3,250
3,250

Republic reports its equity investments in its December 31, 2014, financial statements as
shown in Illustration IFRS17-9.

ILLUSTRATION
IFRS17-9

Statement of Financial Position

Financial Statement
Presentation of Equity
Investments at Fair Value
(2014)

Investments
Equity investments (non-trading)

$24,000

Equity
Accumulated other comprehensive gain

$ 3,250

Statement of Comprehensive Income

47

Other income and expense

Dividend revenue

Other comprehensive income

Unrealized holding gain

$ 3,250

450

The classification of an equity investment as non-trading is irrevocable. This approach is

designed to provide some discipline to the application of the non-trading classification, which
allows unrealized gains and losses to bypass net income.

IFRS Insights 1035

During 2015, sales of Republic products through Hawthorne as a distributor did not
meet managements goals. As a result, Republic withdrew from these markets and on
December 20, 2015, Republic sold all of its Hawthorne Company ordinary shares,
receiving net proceeds of $22,500. Illustration IFRS17-10 shows the computation of the
realized gain on the sale.
Net proceeds from sale
Cost of Hawthorne shares

$22,500
20,750

Gain on sale of shares

$ 1,750

ILLUSTRATION
IFRS17-10
Computation of Gain on
Sale of Shares

Republic records the sale as follows.

December 20, 2015
Cash
Equity Investments
Gain on Sale of Equity Investment

22,500
20,750
1,750

Because Republic no longer holds any equity investments, it makes the following entry
to eliminate the Fair Value Adjustment account.
December 31, 2015
Unrealized Holding Gain or LossEquity
Fair Value Adjustment

3,250
3,250

In summary, the accounting for non-trading equity investments deviates from the
general provisions for equity investments. The IASB noted that while fair value provides the most useful information about investments in equity investments, recording
unrealized gains or losses in other comprehensive income is more representative for
non-trading equity investments.

Impairments
A company should evaluate every held-for-collection investment, at each reporting
date, to determine if it has suffered impairmenta loss in value such that the fair value
of the investment is below its carrying value.48 For example, if an investee experiences a
bankruptcy or a significant liquidity crisis, the investor may suffer a permanent loss. If the
company determines that an investment is impaired, it writes down the amortized
cost basis of the individual security to reflect this loss in value. The company accounts
for the write-down as a realized loss, and it includes the amount in net income.
For debt investments, a company uses the impairment test to determine whether
it is probable that the investor will be unable to collect all amounts due according to the
contractual terms. If an investment is impaired, the company should measure the loss
due to the impairment. This impairment loss is calculated as the difference between the
carrying amount plus accrued interest and the expected future cash flows discounted at
the investments historical effective-interest rate.
Example: Impairment Loss
At December 31, 2013, Mayhew Company has a debt investment in Bellovary Inc., purchased at par for $200,000. The investment has a term of four years, with annual interest
payments at 10 percent, paid at the end of each year (the historical effective-interest rate
is 10 percent). This debt investment is classified as held-for-collection. Unfortunately,
Bellovary is experiencing significant financial difficulty and indicates that it will be unable
48

Note that impairments tests are conducted only for debt investments that are held-for-collection
(which are accounted for at amortized cost). Other debt and equity investments are measured at
fair value each period; thus, an impairment test is not needed.

1036 Chapter 17 Investments

to make all payments according to the contractual terms. Mayhew uses the present
value method for measuring the required impairment loss. Illustration IFRS17-11 shows
the cash flow schedule prepared for this analysis.

ILLUSTRATION
IFRS17-11
Investment Cash Flows

Contractual
Cash Flows

Expected
Cash Flows

Loss of
Cash Flows

2014
2015
2016
2017

$ 20,000
20,000
20,000
220,000

$ 16,000
16,000
16,000
216,000

$ 4,000
4,000
4,000
4,000

Total cash flows

$280,000

$264,000

$16,000

Dec. 31

As indicated, the expected cash flows of $264,000 are less than the contractual cash flows
of $280,000. The amount of the impairment to be recorded equals the difference between
the recorded investment of $200,000 and the present value of the expected cash flows, as
shown in Illustration IFRS17-12.

ILLUSTRATION
IFRS17-12
Computation of
Impairment Loss

Recorded investment
Less: Present value of $200,000 due in 4 years at 10%
(Table 6-2); FV(PVF4,10%); ($200,000 3 .68301)
Present value of $16,000 interest receivable annually
for 4 years at 10% (Table 6-4); R(PVF-OA4,10%);
($16,000 3 3.16986)

$200,000
$136,602

50,718

Loss on impairment

187,320
$ 12,680

The loss due to the impairment is $12,680. Why isnt it $16,000 ($280,000 2 $264,000)? A
loss of $12,680 is recorded because Mayhew must measure the loss at a present value
amount, not at an undiscounted amount. Mayhew recognizes an impairment loss of $12,680
by debiting Loss on Impairment for the expected loss. At the same time, it reduces the
overall value of the investment. The journal entry to record the loss is therefore as follows.
Loss on Impairment
Debt Investments

12,680
12,680

Recovery of Impairment Loss

Subsequent to recording an impairment, events or economic conditions may change
such that the extent of the impairment loss decreases (e.g., due to an improvement in the
debtors credit rating). In this situation, some or all of the previously recognized impairment loss shall be reversed with a debit to the Debt Investments account and a credit to
Recovery of Impairment Loss. Similar to the accounting for impairments of receivables
shown in Chapter 7, the reversal of impairment losses shall not result in a carrying
amount of the investment that exceeds the amortized cost that would have been
reported had the impairment not been recognized.

ON THE HORIZON
At one time, both the FASB and IASB have indicated that they believe that all financial
instruments should be reported at fair value and that changes in fair value should be
reported as part of net income. However, the recently issued IFRS indicates that the
IASB believes that certain debt investments should not be reported at fair value. The
IASBs decision to issue new rules on investments, prior to the FASBs completion of its
deliberations on financial instrument accounting, could create obstacles for the Boards
in converging the accounting in this area.