What are passive investments and what are they governed by?
Investments held to enhance the value of excess cash by earning a return on that investment until the cash is needed.
- < 20% ownership (?)
- Governed by IFRS 9 Financial Instruments
What are the 4 categories of strategic investments?
- Subsidiary (control) - investor (parent) has control over the investee (subsidiary)
- Joint operations - joint control of assets and liabilities of the investee
- Joint venture - joint control of the net assets (equity)
- Associates - investor has significant influence over investee
What is control as defined by IFRS 10 (Consolidated Financial Statements)?
The investor’s (parent’s) ability to affect the returns of the investee (subsidiary) through its power to govern the policies of the investee.
- Established by holding or having rights to hold greater than 50% of voting shares
What are 2 types of joint arrangements?
- Joint operations - joint control of assets and liabilities of the investee
- Joint ventures - joint control of the net assets (equity)
The rights and obligations of the parties determine which one it should be. These are assessed by looking at: the structure, legal form, contractual terms and other facts and circumstances.
Is a partnership a joint operation or joint venture?
Joint operation.
Partnerships give the joint operators rights to the joint arrangement’s assets and liabilities, rather than net assets. Therefore, a joint arrangement structured as a partnership is a joint operation.
Is an incorporated company a joint operation or joint venture?
Joint venture
Incorporated companies give the parties a claim on the net assets of the company, rather than specific assets therefore joint venture… unless there are contractual terms that say otherwise.
How are the joint arrangements accounted for?
- Joint operations: using a modified form of proportionate consolidation
- Joint venture: using equity method
What is significant influence with respect to associates?
The power to participate in the financial and operating policy decisions but not control (subsidiary) or jointly control (joint arrangement) those policies.
- Investor holds 20-50% of voting stock
- Representation on Board of Directors
- Participation in policy making
- Material transactions between investor and associate
- Interchange of managerial personnel
- Provision of technical information
What is another name for the equity method?
One-line consolidation
Because it essentially collapses income earned from the investment into one line itme in the statement of comprehensive income and similiarly reports the investors’ ownership interest in the individual assets and liabilities of the associate in one line on the statement of financial position.
What is initially recognized with the equity method?
Initially recognized at cost.
- The fair value of consideration paid plus transaction costs.
How is investor’s interest in associates and joint ventures subsequently measured?
Recognize investor’s proportionate share of investee’s comprehensive income/loss for the year, adjusted for:
- Amortization of acquisition differential
- Impairment losses
- Gains/losses from upstream and downstream sales
What are upstream and downstream sales?
Upstream sales: sales by investee to investor
Downstream sales: sales by investor to investee
What is a financial instrument?
Contract giving rise to:
- financial asset of one enterprise; and
- either a financial liability or equity instrument of another
Financial assets are financial instruments.
What is a bargain purchase?
Where the acquisition price is less than fair value of identifiable net assets.
- Recognize difference in investor’s profit or loss
What to do if If the period-end statement date of the investee differs from that of the investor (contemporaneous period ends)?
Use interim reports or adjust for significant events
What to do if losses exceed investment balance?
Reduce investment account to zero
Only report additional losses (creating a liability) to extent that investor has an obligation.
What is a financial asset?
Any asset that is:
- Cash
- Equity instrument of another entity (e.g., investment in the shares of another company)
- Contractual right to receive cash, or another financial asset from another enterprise
- Contractual right to exchange financial instruments with another entity under conditions that are potentially favourable
- Specified contracts that will or may be settled in the entity’s own financial instruments
Are property, plant and equipment a financial asset?
No
As they do not give a right to receive cash or another financial asset, though it would be expected that they would ultimately generate cash. Similarly, intangible assets, such as brands and patents, are not financial assets.
What are the 3 classes of financial instruments?
- Financial assets measured at amortized cost
- Financial assets measured at fair value through other comprehensive income (FVOCI)
- Financial assets measured at fair value through profit or loss (FVPL)
When can you measure financial assets at amoritized cost?
When:
- The objective of the business model is to collect contractual cash flows (by holding the asset); and
- The contractual cash flows are paid on specified dates and are solely of principal and interest (such as loans receivable, bonds and mortgage investments).
When can you measure financial assets at fair value through OCI (FVOCI)?
When:
- The objective of the business model is to collect contractual cash flows and to sell the asset; and
- The contractual cash flows are paid on specified dates and are solely of principal and interest (such as loans receivable, bonds and mortgage investments).
When do you classify financial assets through profit or loss (FVPL)?
When:
- Assets are not measured at amortized cost or at FVOCI (for example, investment in equities).
- Any securities that are held for trading are automatically classified as FVPL.
- An entity can classify any item as FVPL.
What is held for trading?
An asset that is acquired principally for the purpose of selling in the near term
What is an exception to FVPL for equity instruments?
Entity may make an irrevocable election to classify as fair value through OCI, provided the asset is not held for trading (FVOCI-elect).
- Applied on an investment by investment basis.
- Dividends from these investments are recognized in profit or loss.
