10-400-13 Lecture Notes - Lecture 7: Air Canada, Aeroplan, Minority Interest
Using Accounting Information – 1-902-15A
Session 9
Updated – February 2011 Page 1
INVESTMENTS
Long-term investments
Long-term investments can be classified in four major categories. Each category receives a separate
accounting treatment in terms of its presentation:
1. Financial instruments: Any long-term investment that does not meet the requirements for
associates, joint ventures or subsidiaries is designated as a financial instrument. In general,
investments that confer 20% or less of the issuing corporation’s voting rights are portfolio
investments, unless there is proof to the contrary.
These investments can be classified as being held to maturity, held for trading or available for
sale. If management has the intention and capacity to keep the investments until their maturity,
they will be considered as being held to maturity and initially presented in the statement of
financial position at their original cost and maintained at that value thereafter. If management
has the intention to sell them in the short term, they will be considered to be held for trading and
will appear in the statement of financial position at their FV at year-end. Changes in FV from
one year to the next (which constitute profits or losses on the re-evaluation of the investment)
are recognized in income (in the calculation of net income). In other situations, the investments
will be considered as available for sale and will appear in the statement of financial situation at
their FV at year-end. The increases or decreases in FV will nevertheless be reported in the
income statement (after net income).
2. Investments in associates (affiliated companies): These investments involve holding enough
securities that offer ownership rights (shares) to allow for the exercise of significant influence
over the issuing entity. In general, when the participating company holds between 20% and
50% of the voting shares of the issuing corporation, it can be assumed, barring proof to the
contrary, that the issuing corporation is an associate of the participating company.
The following conditions may be indicators of significant influence:
▪ one or more representatives on the board of directors
▪ scale of inter-corporation transactions
▪ exchange of executives
▪ extent of ownership of other shareholders in the issuing corporation
▪ participation in the establishment of strategic policies for operations, finance and
investment
Investments in associates must be recorded using the equity method. The investments are
therefore shown in the consolidated financial statements and adjusted based on the share of the
retained earnings of the associate since its acquisition.
3. Investments in joint ventures: These investments involve holding enough securities that offer
ownership rights (shares) to allow for the exercise of joint control over an entity through a
contractual agreement. These investments must be consolidated proportionally or presented
using the equity method. Using proportional consolidation, the entry representing the
investment does not appear in the financial statements, because it is replaced by a share of the
net assets of the joint venture. Using the equity method, the investments do appear in the
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Using Accounting Information – 1-902-15A
Session 9
Updated – February 2011 Page 2
consolidated financial statements and are adjusted based on the share of the retained earnings of
the joint venture since its acquisition.
4. Investment in subsidiaries: These investments involve holding enough securities that offer
ownership rights (shares) to allow for the exercise of control over the issuing entity. There is
control over the issuing entity when the participating corporation is able to define, on a long-
term basis and without the help of a third party, the strategic policies of the issuing corporation
in terms of operations, investments and financing. In general, the participating corporation
controls the issuing corporation when it owns the majority of the voting shares, that is, more
than 50%.
The investment entry is eliminated from the financial statements and replaced by the net assets
of the subsidiary at the time of consolidation.
In terms of general presentation, these four categories of long-term investments must be
subdivided to differentiate them from one another.
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Using Accounting Information – 1-902-15A
Session 9
Updated – February 2011 Page 3
Presentation of examples and comments
Based on the excerpts of the financial statements of ACE Aviation, please explain in detail the
various long-term investments that the corporation held on December 31, 2007, describing, for each
one:
A) The type of investment, based on the typology described in class
B) The type of influence or control that ACE Aviation exercises, if any
C) The accounting method for these investments, in both the statement of financial position and the
income statement
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Document Summary
Long-term investments can be classified in four major categories. Each category receives a separate accounting treatment in terms of its presentation: financial instruments: any long-term investment that does not meet the requirements for associates, joint ventures or subsidiaries is designated as a financial instrument. In general, investments that confer 20% or less of the issuing corporation"s voting rights are portfolio investments, unless there is proof to the contrary. These investments can be classified as being held to maturity, held for trading or available for sale. If management has the intention to sell them in the short term, they will be considered to be held for trading and will appear in the statement of financial position at their fv at year-end. Changes in fv from one year to the next (which constitute profits or losses on the re-evaluation of the investment) are recognized in income (in the calculation of net income).
