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Lecture

BUS 322 Lecture Notes - Equity Method, Cash Flow, Interest Rate


Department
Business Administration
Course Code
BUS 322
Professor
Maureen Fizzell

Page:
of 1
Chapter 9
Financial Asset
Cash
Equity instrument of another entity
Contractual right
o To receive cash of other financial asset
o To exchange financial asset/liabilities with another party in favour of the entity
Investment Models
Cost/Amortized Cost
FV-NI
FV-OCI
At acquisition
Cost
+ transaction
Fair Value
Fair Value
+ transaction
At Reporting date
Cost/Amortized Cost
Fair Value
Fair Value
Unrealized Gain/Loss
N/A
NI
OCI
Realized Gain/Loss
NI
NI
Recycling: NI
Not Recycling: RE
Equity Method
The investor recognizes investment income as the investee earns income by debiting Investment
account (A) and crediting Investment income (SE). When cash is received, cash is debited and
investment account is credited.
Any payment in excess of (or less than) the investor’s share of book value:
If caused by long-lived assets: amortize
Unexplained: goodwill
Because the equity method recognizes and reports the investor’s share of the associate’s income,
the type of income reported should remain the same: i.e. income reported in OCI in another
entity must also be reported in OCI.
Impairment Models
Incurred Loss
Expected Loss
FV Lose
Triggering Indicators
required?
Yes
No
Yes
Revised carrying
amount is
discounted updated
expected cash flow
with original effective
rate or current market
rate
discounted updated
expected cash flow
with original effective
rate
Fair Value with
current discount rate
Impairment loss is
Carrying amount
- PV cash flows
Carrying amount
- PV cash flows
Carrying amount
- Fair Value
Impairment recognize
In NI
In NI
In NI
Interest rate
Rate used to discount
the impaired cash
flows
Original Effective
Rate
Original Effective
Rate or Current Rate