Advanced Financial Accounting I
ADMS 4520 – Winter 2012 – Patrice Gelinas
Lecture 1 Part 2 – Investments in Equity Securities – Jan 6
Equity Investments: The Big Picture
Companies invest in the shares of other companies for:
o Strategic reasons: intending to maintain a longterm relationship, and
o Nonstrategic reasons: intending to hold for profit.
Starting January 1, 2013 IFRS 9 requires all nonstrategic investments to be reported at
fair value including private companies which do not have a quoted market value.
o IFRS is developing a standard for fair value measurement.
Strategic Investments NonStrategic Investments
Significant influence Fair value through profit and loss (FVTPL)
Control Availableforsale (AFS)
Market value available
market value not available
Reporting methods for investments in equity securities.
Type Reporting Method Reporting Unrealized Gains
Significant influence Equity method Not applicable
Control Full consolidation Not applicable
Joint control Proportionate consolidation Not applicable
FVTPL Fair value method In net income
Fair value method. In OCI.
FMV not available.
Cost method. Not applicable.
When IFRS 9 becomes mandatory in 2013, the availableforsale investment category
However an entity will still be able to elect to report fair value changes on an equity
investment that is not held for shortterm trading in other comprehensive income (OCI).
o This is the same treatment presently allowed for AFS investments.
o However, unlike current treatment, when such investments are sold accumulated
gains or losses in OCI are cleared directly to retained earnings, not net income.
Directly related IFRSs: o IAS 27 – Consolidated and Separate Financial Statements
If J Company controls K Company then J is the ‘parent’ and must
consolidate K the ‘subsidiary’ by replacing J’s investment in K with the
assets and liabilities from K’s balance sheet.
• Control exists if J has the power to direct the activities of K to
generate returns for J.
• Refer to IAS 28, IAS 31 and IAS 39 if control does not exist.
o IAS 28 – Investment in Associates
An associate is an investee over which the investor exercises significant
influence and is reported using the equity method.
• Significant influence allows the investor to affect the strategic
operating and financing policies of the investee but does not
convey control or joint control.
• An investment of between 20% and 50% of the voting shares,
without control being present, is presumed to be significant
influence in the absence of contrary evidence.
o IAS 31 – Joint Arrangements
Joint arrangements (‘ventures’) have two or more owners (‘ventures’) that
have a contractual arrangement among themselves to exercise joint control
over the venture and therefore no venture can exercise unilateral control.
Report using either proportionate consolidation or the equity method.
o IFRS 9 – Financial Instruments – Classification and Measurement
Nonstrategic equity investments are valued at fair value with changes
reported in profit or loss.
• For equity instruments not held for shortterm trading an entity can
elect on initial recognition to record fair value changes in OCI,
while recording dividends received in income. Under this election,
gains and losses on sale of the investment are cleared from OCI
directly to retained earnings without being reported in profit or
Other related IFRSs:
o IAS 39 – Financial Instruments – Recognition and Measurement
Indicates how and when hedge accounting standards can be applied to
report gains and losses on hedged and hedging items in the same period.
o IFRS 3 – Business Combinations
A business can obtain control either by investing in voting shares or
purchasing the net assets of another business.
o IFRS 8 – Operating Segments
Disclosure of operating segments within consolidated financial statements.
o IAS 1 – Presentation of Financial Statements
Financial statements include balance sheet (statement of financial
position), and statements of comprehensive income, changes in equity, and
o IFRS 12 – Income Taxes Refer to chapter 6 and 9.
o IAS 21 – The Effects of Changes in Foreign Exchange Rates
Addresses translation of the financial statements of foreign investees,
subsidiaries, and joint arrangements. [Chapter 10 and 11]
o IAS 36 – Impairment of Assets
Applies impairment tests to all assets including investments in associates,
goodwill, and intangibles. [Chapter 5]
o IFRIC 16 – Hedges of a Net Investment in a Foreign Operation
Refer to Chapter 11.
o SIC 12 – Consolidation – Special Purpose Entities
Refer to Chapter 9.
o SIC 13 – Jointly Controlled Entities – Nonmonetary Contributions by Venturers
Guidance in determining the gain that a venture can recognize when
contributing nonmonetary assets to a joint arrangement [Chapter 9].
Investments Valued at Fair Value
Fair value through profit and loss (FVTPL) investments
o Include investment held for shortterm trading and any other investments the
reporting entity wishes to designate as FVTPL.
o Classified as current assets since they actively trade and are intended to be sold