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Financial Instruments
Investments
MGT 2250 Fall 2014

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MGT 2250 Fall 2014

Investments
• Kieso Chapter 9
• ASPE 3051, 3856
• IAS 28, 39
• IFRS 9 issued but mandatory adoption date 2018 – may adopt early – use Jan
2014 version (i.e. not the 2018 version)

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MGT 2250 Fall 2014

Objectives
• At the end of this module you will be able to

▫ Understand why companies hold investments and the difference between debt and equity investments
▫ Understand the various options for measuring investments (cost, amortized cost, fair value and equity method)  Apply the equity method for significant influence investments
 Apply bond accounting (amortization tables, effective interest method) ▫ Assess the impact of various measurement options on net income and comprehensive income
▫ Understand how to measure and when to recognize impairment on investments
▫ Understand the various options for measurement under ASPE and IFRS

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MGT 2250 Fall 2014

Principles
• Presentation/Classification

▫ FVTPL versus AFS versus HTM versus equity method
▫ Investments in debt versus equity securities

• Measurement
▫ Cost/amortized cost versus FV-NI versus FVOCI versus equity method
▫ Impairment models – incurred loss, expected loss versus fair value
▫ Transaction costs – capitalize versus expense
• Recognition of resulting gains/losses – comprehensive versus net income
• Use most informative labels (no need to use
FVTPL/AFS/HTM as identified under IAS 39)

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MGT 2250 Fall 2014

Debt versus equity
• Debt – principal, interest, term, may be secured • Equity – residual, dividends
• May be traded in a capital market or not
(trading helps measure)
• Differing business models result in the existence, amounts and use of investments 6
MGT 2250 Fall 2014

Strategic long-term equity investments • Common shares
• Voting rights
• Intent to establish or maintain a longterm operating relationship with the entity in which the investment is made
• Will discuss later – equity method

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MGT 2250 Fall 2014

Accounting models: summary
Cost/Amortized
Cost Model

FV-NI

FV-OCI

At acquisition, measure at

Cost (fair value + transaction costs) Fair value

Fair value
(include
transaction costs)

At each reporting date, measure at

Cost or amortized cost Fair value

Fair value

Unrealized holding gains/losses reported in

Not applicable

Net income

OCI

Net income

Transfer total realized to net income (recycling), or to retained earnings/equity

Realized holding gains/losses reported in

Net income

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MGT 2250 Fall 2014

Fair value option
• May elect to measure any financial instrument at fair value (3856.13, IAS
39.9b and IFRS 9.4.1.5)
• Under IFRS only where results in more relevant information because
▫ Eliminates/reduces measurement/recognition inconsistency
(mismatch) or
▫ Group of FI managed/performance evaluated on FV basis

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MGT 2250 Fall 2014

Cost/amortized cost model – investments in debt instruments
• Amortized cost model for investments in debt securities of another entity
1. Recognize cost of investment at fair value (plus direct transaction costs)
2. Report at amortized cost as well as interest receivable (unless impaired)
3. Recognize interest income as earned, and also amortize any discount/premium by adjusting carrying amount of investment
4. When dispose of investment, first bring accrued interest and discount/premium amortization up to date (derecognize investment and report a gain/loss on disposal in net income)

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MGT 2250 Fall 2014

Amortized cost model - example
Face amount:
$100,000
Purchase date:
January 1, 2011
Maturity date:
January 1, 2016
Interest paid:
July 1st and January 1st
Coupon (stated) rate of interest: 8%
Market (effective) rate of interest: 10%
What is the approximate purchase price?
PV of $100,000 (n=10, i=5%) + PVA of ($100,000 X 4%) where n=10, i = 5%
PV is approximately equal to $92,278

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MGT 2250 Fall 2014

Amortized cost model - example
The entry to record this purchase is:
Investment in Bonds
Cash

92,278
92,278

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