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ACCT351 (ch.7)
Intercorporate Investments
| Question | Answer |
|---|---|
| what is a non-strategic investment? | an investment where the reason for investing is to increase company income using cash not required for normal business operations |
| what are strategic investments? | investments where the primary reason is to enhance the company's operations (i.e. influence manufacturers, wholesalers, or a customer company through voting shares) |
| what are the two examples of financial instruments that serve as intercorporate investments? | - debt instruments of another company (bonds, convertible debt) - equity instruments of another company (common/preferred shares, options) |
| what measurement type is typically used to initially measure intercorporate investments? | fair value (acquisition price) |
| what are the 6 classifications of intercorporate investments? | - FVNI - FCOVI - AC - significant influence - subsidiary - joint arrangement |
| how are investments classified between AC, FVOCI, and FVNI for IFRS? | AC - held to collect solely principle and interest cash flows FVOCI - held to collect principle/interest cash flows and later sell FVNI - all else |
| what are unrealized gains/losses? | FMV of investments going up or down while held (reported in net income for non-strategic investments) |
| what is a valuation allowance? | a separate account to record gains/losses on investments while preserving original cost |
| when does remeasurement of FVNI and FVOCI investments happen? (IFRS) | at year-end or prior to sale |
| how are brokerage/transaction fees treated for FVNI and FVOCI investments? (IFRS) | FVNI - expenses separately FVOCI - added to investment costs |
| when should gains on FVOCI be reclassified from AOCI to retained earnings? (IFRS) | when the unrealized gains are realized through the investment being sold |
| what's the difference in how FVNI investments are treated under ASPE and IFRS? | they are treated the same |
| how are transaction/brokerage fees treated for AC investments? (ASPE) | they are included in the cost of the investment |
| when are AC investments remeasured? (ASPE) | they are not remeasured at year-end |
| when can bonds be included in FVNI investments? | if fair market rates are determinable |
| how are premiums and discounts on bonds treated? | they are amortized over the life of the bonds generally using the effective interest method |
| what are the two yearly adjusting entries for FVNI bonds at a discount or premium? | 1. interest that has accrued since last payment 2. fair value adjustment |
| how are brokerage fees treated for FVNI bonds? | they are expenses separately |
| what type of asset are FVNI investments? | current assets |
| what must be done to an FVNI bond before recording sale of FV adjustment? | must update premium/discount for passage of time |
| when can bond premiums/discounts be amortized using the straight-line method? | it can be done under ASPE |
| what type of asset are AC investments? | long-term |
| are bonds remeasured to fair value when reporting AC investments? | no they are not |
| what model is used to test impairment of AC bonds? | the incurred loss model |
| are recoveries of impairment available for FVNI bonds? | yes they are permissible, but limited to previous amount impaired |
| how are FVOCI bonds recorded? | at present value of future cash flows (face value plus interest annuity) |
| how are brokerage/transaction fees applied for FVOCI bonds? | they are added to the investment cost account |
| what reclassification is required when FVOCI investments are sold? | realized gains are reclassified from AOCI to net income |
| how are unrealized gains/losses on FVOCI bonds recorded during the year until they are reclassified? | they are credited/debited to a temporary OCI account to allow proper reporting of OCI and total comprehensive income (temporary OCI accounts are closed to AOCI at year end if not realized) |
| what must be done to investments price in foreign currencies before they can be reported? | they must be converted to canadian currency (done using exchange rate at time of purchase, may have to include foreign exchange gain (loss) from FV adjustment amount) |
| how is the reclassification of unrealized gains (losses) from FVOCI different between debt and equity instruments? | debt - AOCI reclassified to net income equity - AOCI reclassified to retained earnings |
| what are the three approaches for impairment of receivables/investments? | 1. credit adjusted approach 2. simplified approach 3. general approach |
| what is the credit adjusted approach for impairment of receivables and investments? | - applies only rarely for investments impaired at acquisition (like deeply discounted investments from a high risk investee company) - uses cumulative change in lifetime ECL |
| what is the simplified approach for impairment of receivables and investments? | - intended specifically for trade receivables where there is not a strong interest component - based on lifetime ECL |
| what is the general approach for impairment of receivables and investments? | - applies to all financial instruments not covered by credit adjusted, and simplified approaches - based on 12 month ECL unless credit risk increases significantly |
| why do AC investments always have a possibility of impairment? | because FMV isn't used. This means investments should be assessed for impairment at the end of each period |
| how are AC investments reduced due to impairment under ASPE? | reduced carrying value to the higher of: - PV of impaired future cash flows using current market interest rate - NRV either through sale or by exercising the entity's rights to sell any collateral |
| can impairments be reversed? | yes they can |
| what level of influence does an investor have with an associate strategic investment? | significant influence (20-50% ownership) |
| what level of influence does an investor have with a subsidiary strategic investment? | control (50-100% ownership) |
| what level of influence does an investor have with a joint arrangement strategic investment? | various % ownership |
| what do the guidelines for non-strategic investments assume? | investors ownership in shares is less than 20% |
| what is the term "investment in associates? | IFRS term for significant influence (20-50% ownership) |
| what is a joint arrangement? | a type of strategic investment that involves contractually-agreed sharing of control by 2 or more investors |
| what methods can management choose for valuing investment in associates under ASPE? | can choose between equity method, FVNI, or cost method if no active market exists |
| how are transaction costs treated for investments in associates under the equity, FV, and cost methods? | - expensed for equity, FV methods - added to cost for cost method |
| what type of asset in investments in associates? | a long-term investment |
| what are the subsequent measurements to the investment in associates account after the initial value is recorded? | - proportionate share of investees - net income (loss) adjusted for any inter-company transactions - dividends - amortization of any FV differences in investees capital assets - impairments, if any - proceeds of sale |
| what is the equity method also referred to? | one-line consolidation |
| what method is used to report investment in subsidiaries? | the equity method (ASPE has choice between equity, equity, cost methods) |
| how are two companies treated in a subsidiary situation? | one economic unit |
| what additional information must be reported by the investor in a subsidiary situation? | non controlling interest (because parent reports 100% of each asset/liability on their balance sheet) |
| what is non-controlling interest? | % of ownership of subsidiary not owned by parent company |
| what are the two types of joint arrangements? | - joint operations (investor rights to assets & liab. of obligations. investors include assets/liabilities, revenue/expense, that they have interest in) - joint ventures (investor rights to net assets. Joint entity shown on net basis in SFP inv. account) |
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