Volume 2

17-1
 CHAPTER 17

INVESTMENTS

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

17-2
 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.
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.

17-3
 Investments

Investments in Other Reporting

Debt Investments
Equity Securities Issues

• Amortized cost • Fair value • Impairment of value

• Fair value • Equity method • Transfers between
• Fair value option • Consolidation categories

• Summary of debt • Fair value controversy

investment accounting • Summary

17-4
 Accounting for Financial Assets

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.

17-5 LO 1 Describe the accounting framework for financial assets.

 Accounting for Financial Assets

Measurement Basis—A Closer Look

Equity investments are generally recorded and reported at
fair value.

Summary of Investment Accounting Approaches Illustration 17-

1

17-6 LO 1 Describe the accounting framework for financial assets.

 Equity Investments

Equity investment represents ownership of ordinary,

preference, or other capital shares.
◆ Cost includes price of the security.

◆ Broker’s commissions and fees are recorded as

expense.

The degree to which one corporation (investor) acquires an

interest in the common stock of another corporation
(investee) generally determines the accounting treatment for
the investment subsequent to acquisition.

17-7 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments
Illustration 17-15
Levels of Influence
Determine Accounting Methods

17-8 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments
Illustration 17-16
Accounting and Reporting for
Equity Investments by Category

17-9 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Under IFRS, the presumption is that equity investments

are held-for-trading.
General accounting and reporting rule:
◆ Investments valued at fair value.
◆ Record unrealized gains and losses in net income.

17-10 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

IFRS allows companies to classify some equity

investments as non-trading.
General accounting and reporting rule:
◆ Investments valued at fair value.
◆ Record unrealized gains and losses in other
comprehensive income.

17-11 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration: November 3, 2011, Republic Corporation

purchased ordinary shares of three companies, each
investment representing less than a 20 percent interest.

Republic records these investments as follows:

17-12 LO 5 Understand the accounting for equity investments at fair value.

 Equity
Investments
at Fair Value

Republic records these investments as follows:

Equity Investments 718,550

Cash 718,550

On December 6, 2011, Republic receives a cash dividend of

€4,200 on its investment in the ordinary shares of Nestlé.

Cash 4,200
Dividend Revenue 4,200

17-13 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

At December 31, 2011, Republic’s equity investment portfolio has

the carrying value and fair value shown.
Illustration 17-
17

17-14 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration 17-
17

Unrealized Holding Gain or Loss—Income 35,550

Securities Fair Value Adjustment 35,550

17-15 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

On January 23, 2012, Republic sold all of its Burberry ordinary

shares, receiving €287,220.

Cash 287,220
Equity Investments 259,700
Gain on Sale of Equity Investment 27,520

17-16 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

In addition, assume that on February 10, 2012, Republic purchased

€255,000 of Continental Trucking ordinary shares (20,000 shares
€12.75 per share), plus brokerage commissions of €1,850.
Republic’s equity investment portfolio as of December 31, 2012.

Illustration 17-
19

17-17 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration 17-
19

Securities Fair Value Adjustment 101,650

Unrealized Holding Gain or Loss—Income 101,650

17-18 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

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.
Report the unrealized holding gain or loss as other
comprehensive income.

17-19 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration: On December 10, 2011, Republic Corporation

purchased 1,000 ordinary shares of Hawthorne Company for
€20.75 per share (total cost €20,750). The investment 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 requirement.
Republic accounts for this investment at fair value.

Equity Investments 20,750

Cash 20,750

17-20 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration: On December 27, 2011, Republic receives a cash

dividend of €450 on its investment in the ordinary shares of
Hawthorne Company. It records the cash dividend as follows.

Cash 450
Dividend Revenue 450

17-21 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration: At December 31, 2011, Republic’s investment in

Hawthorne has the carrying value and fair value shown
Illustration 17-
21

Securities Fair Value Adjustment 3,250

Unrealized Holding Gain or Loss—Equity 3,250

17-22 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration 17-21
Financial Statement Presentation

Securities Fair Value Adjustment 3,250

Unrealized Holding Gain or Loss—Equity 3,250

17-23 LO 5 Understand the accounting for equity investments at fair value.

 Equity Investments at Fair Value

Illustration: On December 20, 2012, Republic sold all of its

Hawthorne Company ordinary shares receiving net proceeds of
€22,500.
Illustration 17-
22

Cash 22,500
Equity Investments 20,750
Gain on Sale of Equity Investment 1,750
Unrealized Holding Gain or Loss—Equity 3,250
Securities Fair Value Adjustment 3,250
17-24 LO 5
 Equity Method

An investment (direct or indirect) of 20 percent or more of the

voting shares of an investee should lead to a presumption that
in the absence of evidence to the contrary, an investor has the
ability to exercise significant influence over an investee.

In instances of “significant influence,” the investor must

account for the investment using the equity method.

LO 6 Explain the equity method of accounting and compare it

17-25
to the fair value method for equity investments.