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Chapter 9

Chapter 9 - Investments.docx

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Department
Accounting
Course
ACC 414
Professor
Else Grech
Semester
Fall

Description
Chapter 9 - Investments ACCOUNTING MODELS  Major models of accounting for investments\ o Cost/ Amortized cost model o Fair value through net income model (FV-NI) o Fair value through other comprehensive income model (FV-OCI) Cost/Amortized cost Fair value through Fair value through OCI model model net income model At acquisition, measure at: Cost (equal to fair valueFair value Fair value + transaction cost) At each reporting date, measure at: Cost or amortized cost Fair value Fair value Report unrealized holding Not applicable In net income In OCI gains/losses (changes in fair value): Report realized holding In net income In net income Transfer total realized gains/losses gains/losses: to net income or directly to R/E COST/AMORTIZED COST MODEL  Amortized cost mode: This model applies only to investments in debt instruments Both Cost-Based and long-term notes and loans receivable Methods  Cost mode: may be applied to investments n equity intruments of other companies  Investments in shares of other entities (through the cost model) o (1) Recognize cost of investment at fair value of shares acquired + costs to acquire shares o (2)Report investment at its cost at each balance sheet date (unless impaired) o (3)Recognize dividend income when the entity has a claim to the dividend o (4)When shares are disposed of, derecognize them and report gain/loss on disposal (NI)  Investments in Debt securities of other entities (Amortized cost model) any difference between acquisition cost recognized and the face value of the security is amortized over the period to maturity o (1)Recognize cost of investment at fair value of debt instrument acquired + cost to acquire investment o (2)Report investment at amortized cost + any outstanding interest receivable at each balance date (unless impaired) 1 o (3)Recognize interest income as earned, amortizing discount/premium at the same time by adjusting carrying amount of investment o (4)When investment is disposed of:  Bring accrued interest and discount/premium up to date  Derecognize the investment, reporting gain/loss on disposal (NI)  Income under the amortized cost model o Interest bearing  the party holding the investment on the interest payment date receives all the interest since the last interest payment date o Non-interest bearing  the price of the bond or other instrument adjusts to its present value at the date of the transaction and no additional amount is paid  Any interest to date is incorporated in the investment’s fair value o Effective interest method: results in recognizing interest income at a constant yield rate on the investment each period. o Straight line amortization of bond premium discount: the discount is evenly amortized to interest income from the date of acquisition to maturity FAIR VALUE THORUGH NET INCOME (FV-NI) MODEL  also known as fair value throught profit or loss (FVTPL)  Measurement at acquisition  Recognized at fair value, transaction costs incurred in acquiring such assets are expensed when incurred  Measurement after acquisition  carrying amount is adjusted to its current fair value at each reporting date o All holding gains/losses are reported in net income along with any dividends or interest income earned  Income from investments o Total income on any investment is always the net cash flow from investment (gain/loss plus interest/dividend) o Dividend and interest income not reported seperately  Non-interest-bearing debt investment  difference between the instrument’s purchase price and iits maturity value or the proceeds on its disposal.  As FV-NI investment, the shares are remeasured to their fair value at each balance sheet date ith the change in fair value also recognized in the investment income.loss account  When sold, the carrying amount is removed form the account and the investment income is recognized o Dividend and interest income reported separately  When a dividend is received, it is recognized in an account such as dividend income (FV-NI)  When the investment is adjusted to its current fait value at each reporting date, the change in value is recognized in a separate gain/loss account (FV-NI)  Any discount or premium must be amortized before the change in fair value is recognized  The investment account is maintained at fair value and the necessary amortized
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