Investments

Chapter
17­1
 Learning Objectives
1. Identify the three categories of debt securities and
describe the accounting and reporting treatment for each
category.
2. Understand the procedures for discount and premium
amortization on bond investments.
3. Identify the categories of equity securities and describe the
accounting and reporting treatment for each category.
4. Explain the equity method of accounting and compare it to
the fair value method for equity securities.
5. Describe the disclosure requirements for investments in
debt and equity securities.
6. Describe the accounting for transfer of investment
securities between categories.

Chapter
17­2
 What are Financial Instruments?
Any contract that gives rise to a financial
asset of one entity and a financial liability
or an equity instrument of another entity.
● Financial Assets- asset that is cash, or a contractual right
to receive cash or another financial asset from another
entity, or a contractual right to exchange instrument with
another entity under conditions that are potentially
favorable, or an equity instrument of another entity.
● Financial Liability- any liability that is: a contractual
obligation: to deliver cash or another financial asset to
another entity; or. to exchange financial assets orfinancial
liabilities with another entity under conditions that are
potentially unfavourable to the entity
Chapter
17­3
 Investments

Investments in Investments in Other Reporting

Debt Securities Equity Securities Issues

• Trading securities • Holdings of less than • Financial statement

• FVPL 20% presentation

• FVOCI • Holdings between 20% • Impairment of value

and 50% • Transfers between
• Holdings of more than categories
50% • Fair value
controversy

Chapter
17­4
 Investments

Different motivations for investing:

• To earn a high rate of return.

• To secure certain operating or financing

arrangements with another company.

Chapter
17­5
 Investments in Debt Securities

Debt securities (creditor relationship):

Type Category
• U.S. government
securities • Held for trading
• Municipal • FVPL
securities
• FVOCI
• Corporate bonds
• Convertible debt
• Commercial paper
Chapter
17­6
 Investments in Debt Securities

Accounting for Debt Securities by Business Model:

a. Held for trading
b. Held for collecting contractual cash flows
c. Held for collecting contractual cash flows and sell
the asset

Chapter
17­7
 Investments in Equity Securities

Represent ownership of capital stock.

Cost includes:
price of the security, plus
broker’s commissions and fees related to purchase.

The degree to which one corporation (investor)

acquires an interest in the common stock of another
corporation (investee) generally determines the
accounting treatment for the investment subsequent
to acquisition.
Chapter
17­8
 Investments in Equity Securities
Ownership Percentages

0 --------------20% ------------ 50% -------------- 100%

No Significant Control
significant influence usually exists
influence usually exists
usually exists
Investment Investment Investment valued on
valued using valued using parent’s books using
Cost Method Equity Acquisition Method
Method (investment eliminated in
Consolidation)
Chapter
17­9
 Holdings of Less Than 20%

Accounting Subsequent to Acquisition

Market Price Market Price

Available Unavailable
Value and report the Value and report the
investment using the investment using the
fair value method. cost method.*

* Securities are reported at cost. Dividends are recognized when

received and gains or losses only recognized on sale of securities.

Chapter
17­10
 Holdings Between 20% and 50%-
Investment in Associate
An investment (direct or indirect) of 20 percent or
more of the voting stock of an investee should lead
to a presumption that in the absence of evidence
to the contrary, an investor has the ability to
exercise significant influence over an investee.

In instances of “significant influence,” the investor

must account for the investment using the equity
method.

Chapter LO 4 Explain the equity method of accounting and compare

17­11
it to the fair value method for equity securities.
 Holdings Between 20% and 50%

Equity Method
Record the investment at cost and
subsequently adjust the amount each period
for
the investor’s proportionate share of the
earnings (losses) and
dividends received by the investor.
If investor’s share of investee’s losses exceeds the carrying
amount of the investment, the investor ordinarily should
discontinue applying the equity method.
Chapter
17­12
 Holdings Between 20% and 50%

E17-17 (Equity Method) On January 1, 2007,

Pennington Corporation purchased 30% of the common
shares of Edwards Company for $180,000. During the
year, Edwards earned net income of $80,000 and paid
dividends of $20,000.
Instructions
Prepare the entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2007.

Chapter LO 4 Explain the equity method of accounting and compare

17­13
it to the fair value method for equity securities.
 Holdings Between 20% and 50%

E17-17 Prepare the entries for Pennington to record

the purchase and any additional entries related to this
investment in Edwards Company in 2007.

Investment in Associate 180,000

Cash 180,000

Investment in Associate 24,000

Investment Revenue 24,000 x 30%)
($80,000

Cash 6,000
Investment in Associate 6,000 x 30%)
($20,000

Chapter
17­14
 Holdings of More Than 50%

Controlling Interest - When one corporation

acquires a voting interest of more than 50
percent in another corporation
Investor is referred to as the parent.
Investee is referred to as the subsidiary.
Investment in the subsidiary is reported on
the parent’s books as a long-term investment.
Parent generally prepares consolidated
financial statements.
Chapter LO 4 Explain the equity method of accounting and compare
17­15
it to the fair value method for equity securities.
 Financial Statement Presentation

Disclosures Required under the Equity Method

1. Name of each investee and percentage ownership.
2. Accounting policies of the investor.
3. Difference between amount in the investment account
and amount of underlying equity in the net assets of
the investee.
4. The aggregate value of each identified investment
based on quoted market price (if available).
5. When material, present information concerning assets,
liabilities, and results of operations of the investees.

Chapter LO 5 Describe the disclosure requirements for

17­16
investments in debt and equity securities.
 Fair Value Controversy

Major Unresolved Issues

• Measurement Based on Intent

• Gains Trading
• Liabilities Not Fairly Valued
• Subjectivity of Fair Values

Chapter
17­17
 Investment Property

Defined as property (land or building or

both) held by an owner or by the lessee
under a finance lease to earn rentals or
capital appreciation or both.

Chapter
17­18
 Investment Property is not held:

a. For use in the production or supply of

goods or services or for
administrative purposes.
b. For sale in the ordinary course of
business.
Why? Owner-Occupied Property

Chapter
17­19
 Partly investment property and partly
owner occupied:
a. If could be sold or lease out separately-
account as investment property and owner
occupied separately
b. If could not be sold separately
- investment property – only insignificant
portion is held for manufacturing or
administrative purposes

Chapter
17­20
 Initial Measurement:

- Cost = Purchased Price plus any directly

attributable transaction costs
Costs excluded:
a. Start up costs, unless necessary to bring the
property to its intended use
b. Operating losses incurred before achieving
the planned level of occupancy
c. Abnormal amounts of wasted material, labor
or other resources incurred in developing or
constructing the property.
Chapter
17­21
 Subsequent Measurement:

- Fair Value Model

- Cost Model = carrying amount less any
accumulated depreciation and any
impairment losses. Fair Value should be
disclosed.

Chapter
17­22