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Canada (161,878)
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ADMS 3585 (22)
Liona Lai (6)
Chapter 9-2

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Administrative Studies
ADMS 3585
Liona Lai

Impairment Models  Incurred Loss Model  Expected Loss Model  Fair Value Loss Model Summary of Impairment Models Assume a company purchased an investment in AB Ltd. bonds for $100,000 at par value at the beginning of the year. The bonds pay interest on December 31 each year. AB Ltd. is experiencing financial difficulties. The company determines that the existence of financial difficulties provides objective evidence of impairment and represents a triggering or loss event. The present value of the discounted revised cash flows is $80,000 using the original effective interest rate and $70,000 using the current market interest rate (which is higher). The market value of the bonds is $70,000 less commissions. Accounting for Impairment under ASPE and IFRS Strategic Investments  Less than significant influence – less than 20% ownership  Associate or significant influence – 20 – 50% ownership  Subsidiary – more than 50% ownership Investments in Associates - equity method of accounting (IFRS) - equity or cost method (ASPE) - fair value approach if quoted in active market Significant influence - power to participate in the financial and operating policy decisions of an entity, but not control (IASB) Equity Method - initial measurement: cost of acquired shares - subsequent measurements: carrying amount adjusted each period for investor’s proportionate share of changes in investee’s net assets Assume that Maxi Corp. purchases a 20% interest in Mini Corp. and has the ability to exercise significant influence over Mini's financial and operating policies. 1. On January 2, 2013, Maxi Corp. acquires 48,000 shares (20% of Mini Corp. common shares) at a cost of $10 a share. ASPE/IFRS Equity Method: Investment in Associate (48,000 x $10) 480,000 Cash 480,000 ASPE FV-NI: FV-NI Investments (48,000 x $10) 480,000 Cash 480,000 ASPE Cost Model: Other Investments (48,000 x $10) 480,000 Cash 480,000 2. For the year 2013, Mini Corp. reports net income of $200,000; Maxi Corp.'s share is 20%, or $40,000. ASPE/IFRS Equity Method: Investment in Associate 40,000 Investment Income or Loss 40,000 ASPE FV-NI: n/a ASPE Cost Model: n/a 3. At December 31, 2013, the 48,000 shares of Mini Corp. have a fair value of $12 a share, or $576,000. ASPE/IFRS Equity Method: n/a ASPE FV-NI: FV-NI Investments (576,000 – 480,000) 96,000 Unrealized Gain or Loss 96,000 ASPE Cost Model: n/a 4. On January 28, 2014, Mini Corp. announces and pays a cash dividend of $100,000; Maxi Corp. receives 20%, or $20,000. ASPE/IFRS Equity Method: Cash 20,000 Investment in Associate 20,000 ASPE FV-NI: Cash 20,000 Investment Income or Loss 20,000 ASPE Cost Model: Cash 20,000 Investment Income or Loss 20,000 5. For the year 2014, Mini Corp. reports a net loss of $50,000; Maxi Corp.'s share is 20%, or $10,000. ASPE/IFRS Equity Method: Investment Income or Loss 10,000 Investment in Associate 10,000 ASPE FV-NI: n/a ASPE Cost Model: n/a 6. At December 31, 2014, the 48,000 Mini Corp. shares have a fair value of $11 a share, or $528,000. The investment value is not considered impaired. ASPE/IFRS Equity Method: n/a ASPE FV-NI: Unrealized Gain or Loss 48,000 FV-NI Investments (576,000 – 528,000) 48,000 ASPE Cost Model: n/a Additional Complexities in Application of Equity Method:  Differences between what was originally paid for the investment and the investor's share of the associate's book value need to be identified and accounted for according to the reason for the extra payment. o Any payment in excess of (or less than) the investor's share of book value is part of the cost of the investment, and after acquisition, it has to be accounted for appropriately  The major classifications of the income reported by the associate are retained and reported in the same way on the investor's income statement. o portion that is the investor's share of the associate's discontinued operations is reported separately from the investor's share of income before discontinued operations o investor's portion of the associate's other comprehensive income, changes in accounting policy reported in retained earnings, and capital charges Example: Assume that on January 1, 2014, Investor Company purchases 250,000 of Investee Company's one million outstanding common shares for $8.5 million. Investor has therefore acquired a 25% interest in Investee. The book value (net assets) of Investee Company on this date is $30 million and Investor's proportionate share is 25% of this, or $7.5 million. Investor Company therefore has paid $1 million in excess of its share of the book value. Assume that part of the reason is because Investee's depreciable assets are undervalued on the books by $2.4 million. This explains $600,000 (25% x $2.4 million) of the excess, because Investor would only pay more in proportion to its ownership interest. Investor Company estimates the remaining life of the depreciable assets to be eight years, so the $600,000 excess payment included in the Investment account will have to be amortized over this future period. The remaining $400,000 is unexplained and therefore is determined to be unrecorded goodwill. Investor will have to assess the carrying amount of the balance of the Investment account each year to determine whether there has been any impairment in its value. Analysis of Acquisition of Associate Company Cost of 25% investment in Investee Co. shares 8,500,000 25% of book value of Investee Co. represented by investment (25% x 30,000,000) 7,500,000 payment in excess of share of book value 1,000,000 fair value allocation to depreciable assets (25% x 2,400,000) 600,000 unexplained excess assumed to be goodwill 400,000 annual amortization of excess payment for capital assets (600,000/8) 75,000 Investee Company later reports net income of $2.8 million for its 2014 fiscal year, including a loss on discontinued operations of $400,000. Income before discontinued operations, therefore, is $3.2 million. Dividends of $1.4 million are declared and paid by Investee Company on December 31, 2014. Jan 1/14 Investment in Associate 8,500,000 Cash 8,500,000 (To record acquisition of 25% of Investee Co.) Dec 31/14 Cash 350,000 Investment in Associate 350,000 (To record dividend from Investee Co. [25% x 1,400,000]) Dec 31/14 Investment in Associate 700,000 Loss from Discontinued Operations (25% x 400,000) 100,000 Investment Income or Loss (25% x 3,200,000) 800,000 (To record investment income from Investee Co. [25% x Investee Co. income]) Investment Income or Loss 75,000 Investment in Associate 75,000 (To record amortization of fair value difference, depreciable assets) Analysis of Acquisition of Associate Co
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