RSM321H1 Chapter Notes - Chapter 2: Equity Method, Fair Value, Basis Of Accounting

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Published on 17 Oct 2017
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Chapter 2
Equity investments are investments in shares of another company.
There are two main categories of equity investments: strategic and nonstrategic. For strategic
investments, the investor intends to establish or maintain a long-term operating relationship with
the entity in which the investment is made and has some level of influence over the strategic
decisions of the investee company. The level of influence varies between full control, joint control,
or significant influence. For nonstrategic investments, the investor is hoping for a reasonable rate
of return without having the ability to play an active role in the strategic decisions of the investee
company.
As of January 1, 2016, there are five different types of share investments classified as either a
strategic investment, or a nonstrategic investment. The following chart displays the reporting
methods for investments in equity securities.
REPORTING METHODS FOR INVESTMENTS IN EQUITY SECURITIES
Type of Investment
Reporting Method
Reporting of Unrealized Gains
Strategic investments
• Significant influence
Equity method
Not applicable
• Control
Full consolidation
Not applicable
• Joint control
Equity method
Not applicable
Nonstrategic investments
• Fair value through profit or
loss (FVTPL)
Fair value method
In net income
• Other — elect fair value
through OCI (FVTOCI)
Fair value method
In other comprehensive income
In 2011, the IASB introduced a new accounting standard, IFRS 13 Fair Value Measurement. It
replaced the fair value measurement guidance previously contained in individual IFRSs with a
single, unified definition of fair value and a framework for measuring it. It also details the required
disclosures about fair value measurements. Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (i.e., an exit price). It would reflect the highest and best use for a
nonfinancial asset.
IFRS 9 Financial Instruments deals with two types of equity investments: fair value through profit
or loss (FVTPL) and fair value through OCI (FVTOCI).
FVTPL investments include investments held for short-term trading. These investments are
classified as current assets on the basis that they are actively traded and intended by management
to be sold within one year. FVTPL investments are initially and subsequently measured at FV at
each reporting date. The unrealized holding gains and losses are reported in net income along with
dividends received or receivable.
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Document Summary

Equity investments are investments in shares of another company. There are two main categories of equity investments: strategic and nonstrategic. For strategic investments, the investor intends to establish or maintain a long-term operating relationship with the entity in which the investment is made and has some level of influence over the strategic decisions of the investee company. The level of influence varies between full control, joint control, or significant influence. For nonstrategic investments, the investor is hoping for a reasonable rate of return without having the ability to play an active role in the strategic decisions of the investee company. As of january 1, 2016, there are five different types of share investments classified as either a strategic investment, or a nonstrategic investment. The following chart displays the reporting methods for investments in equity securities. Strategic investments: significant influence, control, joint control. Nonstrategic investments: fair value through profit or loss (fvtpl, other elect fair value through oci (fvtoci)

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