Investments

Financial Accounting
 Chapter Objectives
• Explain and describe the nature of investments
• Identify and describe the different classes and
classification of investment in equity and debt
securities
• Determine the method of accounting for
investments
• Account for changes in classification of investment
in securities
• Account for impairment and valuation
 Nature of Investments
• Financial instrument (asset)
• Are recognized when the entity becomes a
party to the contractual provisions of the
instrument
 Classification of Investments
• Corporations can invest in:
– Debt securities: money-market, bonds,
commercial paper
– Equity securities: preferred and common shares
• Reasons to invest:
– Passive investments: use excess cash, generate
investment income
– Strategic investments: to influence or control
another company
 Investments

• Equity Security – representing ownership (stock) in a

company or rights to acquire ownership interest at
an agreed upon or determinable price

• Debt Security – representing a creditor relationship

with an enterprise

Substance over Form

Dividends – cash dividends

7
 Corporation Investor

Cash Dividend

Bonus Issue

Other Stock Type

Property Dividend
 Equity Securities
Less than 20% 20% - 50%
PFRS
PAS 32
7 and 39
9 ––Financial
FinancialInstruments
Instruments PAS 28 – Investment in
Standard
Financial
TS Asset at FVPL
FVTPL AFSOCI
FA – FV Associate
irrevocable
Initial PP or FMV PP or FMV FMV + TC Cost
Subsequent FMV FMV FMV Equity Accounting
Changes to PL Changes to PL Changes to OCI

Dividends: Dr. Cash Dr. Cash Dr. Cash Dr. Cash

Cash Cr. Income Cr. Income Cr. Income Cr. Investment
Bonus Issue Memo Memo Memo Memo
Other Stocks Transfer Value Transfer Value Transfer Value

Property FV - Income FV - Income FV - Income

Dr. Investment
Net income X X X Cr. Share in Net Income
Impairment / Objective Objective
Reversal X X Evidence Evidence
(reversal
RE insteadtoof
OCI not
PL PL)
 Debt Securities
TS FVTPL AFS HTM

Initial FMV FMV FMV + TC FMV + TC

Subsequent FMV FMV FMV Amortized cost

Changes to PL Changes to PL Changes to OCI (effective interest)

Financial Asset at FVPL FA at amortized cost

Initial FMV FMV FMV + TC FMV + TC

Subsequent FMV FMV FMV Amortized cost

Changes to PL Changes to PL Changes to OCI (effective interest)
 Reclassifications
FVTPL AFS HTM Investment in
Associates
To or from irrevocable
FVTPL

To and from cost equity

PAS 28 accounting accounting
FVTLP / AFS rare
to Loans circumstances

HTM to AFS No longerrule

tainting applicable
of 2 years

FV
Nobecomes CV to
longer applicable
AFS to HTM
calculate amortized cost