ACCOUNTING
PRINCIPLES
SIXTH CANADIAN EDITION
Chapter 16
Investments
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
Investments
• Classifying investments
– Non-strategic versus strategic
• Accounting for debt investments reported at
amortized cost
– Money-market instruments and bonds
• Accounting for trading investments
– Equity investments - common shares
– Debt investments - bonds
• Accounting for strategic investments
– Fair value
– Equity method
– Cost method
• Reporting of investments
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CHAPTER 16:
Investments
•STUDY
OBJECTIVES:
1. Identify reasons to invest, and classify
investments.
2. Account for debt instruments that are reported at
amortized cost.
3. Account for trading investments.
4. Account for strategic investments.
5. Indicate how investments are reported in the
financial statements.
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Classifying Investments
• Corporations can invest in:
– Debt instruments: term deposits,
treasury bills, bonds
– Equity instruments: preferred and
common shares of another company
• Reasons to invest:
– Non-strategic investments: generate
investment income
– Strategic investments: to establish or
maintain a long-term relationship with
another company
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Non-Strategic Investments
• Classified and reported based on:
– Purpose of investment – more important
– Whether investment is debt or equity
• IFRS and ASPE generally follow similar rules
– Some differences
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Strategic Investments
• Only equity securities can be strategic
– Provide some level of influence over
investment
– Percentage ownership or degree of
influence determines how investment is
classified
• Strategic investments are always
long-term
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CHAPTER 16:
Investments
•STUDY
OBJECTIVES:
1. Identify reasons to invest, and classify
investments.
2. Account for debt instruments that are reported at
amortized cost.
3. Account for trading investments.
4. Account for strategic investments.
5. Indicate how investments are reported in the
financial statements.
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7
Accounting for Debt Investments
Reported at Amortized Cost
• Includes both short-term and longterm instruments
– Short-term: maturity within 12 months of
balance sheet date
– Long-term: maturity longer than 12
months
• Entries required to record:
– Acquisition
– interest revenue and amortization of
discount or premium
– Sale or disposition at maturity
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Accounting for Debt Investments:
Money-Market Instruments
Money-market instruments
• Term deposits, treasury bills, money-market
funds, banker’s acceptances
• Usually pay a fixed interest rate on maturity
• Entry to record acquisition of treasury bill:
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Accounting for Debt Investments:
Money-Market Instruments 2
• Accruing interest revenue:
= market interest rate x instrument’s carrying value
• Discount is amortized over the term of the
investment:
– Using the effective-interest method
– Debit to investment account reduces the
discount
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Accounting for Debt Investments:
Money-Market Instruments 3
• Maturity:
– Update interest and amortize any discount
– Record receipt of cash and remove investment
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Accounting for Debt Investments:
Bonds
• Bonds may sell at a premium or discount
• Acquisition:
• Recording interest revenue and amortizing
discount or premium:
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Accounting for Debt Investments:
Bonds 2
• Recording maturity of bonds
– Amortized cost at maturity = face value
• Sale of bonds before maturity:
– Gain or loss (if any) must be recognized
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CHAPTER 16:
Investments
•STUDY
OBJECTIVES:
1. Identify reasons to invest, and classify
investments.
2. Account for debt instruments that are reported at
amortized cost.
3. Account for trading investments.
4. Account for strategic investments.
5. Indicate how investments are reported in the
financial statements.
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14
Accounting for Trading
Investments
• Debt and equity investments
purchased for resale in the near future
– Includes investments in shares and debt
instruments such as bonds
– IFRS: reported at fair value
– ASPE: only investments in shares
reported at fair value
• Fair value adjustment: adjust carrying
value for any changes in fair value
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Equity Investments - Shares
• Acquisition is recorded at fair value = price paid for
shares
• Dividends are recognized as revenue when received
• Fair value adjustment at year end:
• Gain or loss (if any) recognized when shares are sold:
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Debt Investments - Bonds
• Acquisition is recorded at fair value = purchase price
• Interest revenue is recorded semi-annually when
received and also accrued at year end
• Fair value adjustment at year end
– Fair value will be affected by changes in market interest rates
• When bonds sold, record interest to date of sale and
recognize gain or loss on sale:
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17
CHAPTER 16:
Investments
•STUDY
OBJECTIVES:
1. Identify reasons to invest, and classify
investments.
2. Account for debt instruments that are reported at
amortized cost.
3. Account for trading investments.
4. Account for strategic investments.
5. Indicate how investments are reported in the
financial statements.
Copyright John Wiley & Sons Canada, Ltd.
18
Accounting for Strategic
Investments
• Based on how much influence investor has
over the issuing corporation:
– < 20% ownership – insignificant influence –
report investment at fair value
– 20% to 50% (or more) – significant influence –
use equity method for accounting and reporting
– ≥ 50% ownership – controlling interest – report
on a consolidated basis
• Percentages are guidelines – use judgment
in assessing the degree of influence
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Accounting for Equity Investments:
Fair Value
• Investment is recorded at purchase price (cost)
• Revenue recognized when cash dividends are
received
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Accounting for Equity Investments:
Fair Value
• Investment is adjusted to fair value at the
fiscal year end
• Companies may choose to report fair
value adjustments in the statement of
comprehensive income net of income tax
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Accounting for Equity Investments:
Equity Method
• Investment is recorded at cost
• The value of the investment is:
– Increased by investor’s share of investee’s net
income, and
– Decreased by dividends received investment:
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Accounting for Equity
Investments: Cost Method
• Investment is recorded at cost
• Dividends received are recorded as
revenue
– Same as investments in equity securities
reported at fair value
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CHAPTER 16:
Investments
•STUDY
OBJECTIVES:
1. Identify reasons to invest, and classify
investments.
2. Account for debt instruments that are reported at
amortized cost.
3. Account for trading investments.
4. Account for strategic investments.
5. Indicate how investments are reported in the
financial statements.
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24
Reporting of Investments:
Balance Sheet
Investments Classified as Current Assets
– Trading investments – management intends to
sell in the near future
– Short-term debt instruments – as management
intends to hold to earn interest income
– Under IFRS, trading investments and
investments reported at amortized cost are
disclosed separately
– Highly liquid debt investments with a maturity <
three months are included in “Cash and cash
equivalents”
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Reporting of Investments:
Balance Sheet
Non-current Investments
– Long-term debt instruments
• Maturities within one year are classified as short-term
– Equity investments purchased for strategic
purposes
– Separate disclosure required of:
• Long-term investments reported at fair value, at cost,
and at amortized cost
• Investments accounted for using the equity method
– Separate disclosure also required of
investments reported at fair value:
• Where gains/losses reported are in other
comprehensive income
• Where gains/losses reported are in the income
statement
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Reporting of Investments:
Income Statement
Income Statement
–
–
–
–
–
Interest revenue
Dividend revenue
Gains/losses on fair value adjustments
Gains/losses on sale of investment
Equity income from a strategic investment with
significant influence
Statement of Comprehensive Income
– Only under IFRS
– Gains/losses on fair value adjustments of
strategic investments without significant
influence (if not included above)
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Copyright
Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights
reserved. Reproduction or translation of this work beyond
that permitted by Access Copyright (the Canadian copyright
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Department, John Wiley & Sons Canada, Ltd. The purchaser
may make back-up copies for his or her own use only and
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assume no responsibility for errors, omissions, or damages
caused by the use of these files or programs or from the use
of the information contained herein.
Prepared by:
A. Davis, MSc, BComm, CA, CFE
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