AFM291 Chapter Notes - Chapter 7: Debits And Credits, Equity Method, Financial Statement
26 Jun 2018
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The 2 consolidated methods included the individual line items (assets, liabilities, revenue and
expenses) of the subsidiary, the equity method nets out liabilities against assets and expenses
against revenue
o 3 methods are equivalent on a net basis (same net income) but differ in terms of the
individual line items
For accounting purposes, the value of the investment does not have a direct connection to the
market price of the shares in the investee
Non-Strategic Investments
1. Fair Value Through Profit/Loss (FVPL)
Other than the strategic reasons investing in equity, firms can also buy equity with the intent
from benefiting from the changes in the value
IFRS requires investments where the management intends to trade for a profit to be categorized
as FVPL so that the changes in investment values are recognized in net income because the
intention to trade for a profit implies that the trading in activity is part of the entity’s regular
operating activities
FVPL includes equities, derivatives and any financial assets that are not classified into one of the
other categories (i.e. debt not classified in FVOCI or amortized cost)
o Some companies do have short term investments in bond to earn a return that would
otherwise be held as cash
The fair value is the relevant measure because financial statement readers find it useful to know
for how much these investments could be sold since they are likely to be sold in the new future
Changes in fair value are also called unrealized gains and losses where unrealized refers to the
fact the investments have not yet been sold and will flow through net income.
See exhibit on page 304
In practice (not in this text), enterprises will use a valuation account such as valuation
adjustments on FVPL investments, which is similar to creating a contra account.
o ^this allows the records to reflect fair value adjustments while preserving cost
information, which is required to compute gains/losses for tax purposes when the
enterprise later sells the investments
o Important: valuation account can be positive/negative whereas the ADA must have a
credit balance.
2. Fair Value through other comprehensive income (FVOCI)
Includes debt securities included in a business model with which the entity intends to:
o Profit from changes in value and
o Collect cash flows to which the entity is entitled
Equity investments and derivatives cannot be classified as FVOCI
On the balance sheet the FVOCI is recorded at fair value and the changes flow through OCI in
the statement of comprehensive income.
FVPL and FVOCI have the same reporting outcomes on the balance sheet but different on the
statement of comprehensive income
Document Summary
For accounting purposes, the value of the investment does not have a direct connection to the market price of the shares in the investee. Non-strategic investments: fair value through profit/loss (fvpl) Other than the strategic reasons investing in equity, firms can also buy equity with the intent from benefiting from the changes in the value. The fair value is the relevant measure because financial statement readers find it useful to know for how much these investments could be sold since they are likely to be sold in the new future. Changes in fair value are also called unrealized gains and losses where unrealized refers to the fact the investments have not yet been sold and will flow through net income. Important: valuation account can be positive/negative whereas the ada must have a credit balance: fair value through other comprehensive income (fvoci)
