BUS 343 Chapter 7

a method of accounting where the balance sheet amount equals the purchase cost of the investment adjusted for amortization of any premium or discount on the investment

an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture

a category of financial investments, excluding derivatives, that an entity has designates as available for sale, or that has not been otherwise classified as one of the other 6 categories of financial assets

an asset arising from contractual agreements on future cash flows

not equipment, land, buildings, or inventory which are  ''real'' assets

• and contract that gives rise to
• –(i) a financial asset for one
• entity and

• – (ii) a financial liability or equity
• instrument for another entity

a contract that gives the holder of the residual interest in an entity after deducting all of its liabilities, such as a common share


can be: subsidiary, joint venture, associate, HFT, AFS

• a financial instrument with all of the three characteristics
• i) its value changes according to a specified variable such as stock price
• ii) it requires no initial net investment or a small investment relative to a non-derivative contracts with similar exposure to the specified variable
• iii) it is settled at a future date

are only HFT

• any financial instrument that is not an equity instrument or a derivative
• ex. Bonds

can be: HFT, AFS, HTM, loans & receivables

• - an entity that controls another entity
• - the investor
• - controls the subsidiary

• an entity that is controlled by another entity
• - controlled by the parent
• - accounting treatment - consolidation

• power to govern the financial and operating policies
• - presume control if investor holds more than 50% of voting power

• a method of combining the financial statements of two or more companies that are controlled by the same owners, reporting one set of financial statements
• - 100% of the assets, liabilities, revenues, and expenses or each subsidiary are added to the parent company's accounts

- eliminate: investment in subsidiary on the parent's books, shareholders equity on the subsidiary's books, intercompany transaction such as loans or sales

• contractual arrangement whereby two or more parties undertake and economic activity
• - subject to joint control

• accounting treatment
• - proportionate consolidation
•         where you only consolidate your percentage of the joint ventures assets and liabilities
• -equity methoed

• contractually agreed sharing of control over any economic activities
• - strategic decisions require unanimous consent

power to participate in financial and operating policy decisions of investee

• entity over which investor has significant influence
• - presumed significant if holding 30-50% of voting power

• –Balance sheet value = cost + investor’s share
• of post-acquisition change in net assets of associate

• –Income = investor’s share of associate’s
• income

• •The initial investment is
• recorded at cost.

•Adjustments are made to the investment account for the investor’s pro rata share of income or loss.

• •Dividends decrease the investee’s owners’ equity and so it also reduces the
• investor’s investment

purchase + share of income - share of dividends

•Acquired for purpose of selling in the near term

•Management intends to trade and make profit

•Derivatives are only treated as HFT investments

–Are high risk and speculative

•Accounting treatment – fair value through profit or loss (part of net income)

•Report at fair value on the balance sheet

•Any changes reported in the income statement

–Unrealized gain and losses

• –Trading activity part of regular operating
• activities

–Part of net income (not OCI)

•Fair value the relevant measure

–An active market supports fair value

• •Entity has designated investments
• as available for sale (AFS)

–But no active intention to sell unlike in HFT

• –Might sell them soon, might hold them for
• quite awhile

•Investment accounted for as AFS by default

• –An investment not classified as one of the
• other six categories of financial assets

A catch all category

•Accounting treatment—fair value through other comprehensive income (OCI)

•Report at fair value on the balance sheet

–Same as HFT investments

•Any changes reported in the income statement

–Unrealized gain and losses part of OCI (not net income)

–Trading activity not part of regular operating activities

–When sold…

•Unrealized gain and losses in OCI need to be reversed

Realized gains and losses are part of net income (not OCI

•xed or determinable payments

•Fixed maturity

•Entity intends to hold to maturity

•Accounting treatment – amortized cost

• –the purchase cost of the investment is
• adjusted for amortization of any premium or discount on the purchase of the investment

–At maturity, the book value = maturity value

•Applies to investments in debt instruments only

•Fixed or determinable payments

–Fixed maturity not required

•No active market       no readily obtainable price

•Exceptions:

• –intends to sell in the near term which should
• be classified as HFT

–has designated as AFS when first acquired

•Accounting treatment— amortized cost (Ch. 5)

• •Effective interest method - calculates the present
• value of the asset’s cash flows discounted at the effective (market) interest rate or yield

• when the bond price (market value) is higher than the face
• value

• when the bond price (market value) exactly equals the face or
• par value

• when the bond price (market value) is
• lower than the face value