Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 16 Investments Chapter 16 Investments

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Investments Classifying investments Classifying investments Non-strategic versus strategicNon-strategic versus strategic Accounting for debt investments reported at amortized cost Accounting for debt investments reported at amortized cost Money-market instruments and bondsMoney-market instruments and bonds Accounting for trading investments Accounting for trading investments Equity investments - common sharesEquity investments - common shares Debt investments - bondsDebt investments - bonds Accounting for strategic investments Accounting for strategic investments Fair valueFair value Equity methodEquity method Reporting of investments Reporting of investments

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Classifying Investments Corporations can invest in: Corporations can invest in: Debt instruments: money-market, bonds, commercial paperDebt instruments: money-market, bonds, commercial paper Equity instruments: ownership in a company: preferred and common sharesEquity instruments: ownership in a company: preferred and common shares Reasons to invest: Reasons to invest: Non-strategic investments: generate investment incomeNon-strategic investments: generate investment income Strategic investments: to establish or maintain a long-term relationship with another companyStrategic investments: to establish or maintain a long-term relationship with another company

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Non-Strategic Investments Classified and reported based on: Classified and reported based on: Purpose of investment – more importantPurpose of investment – more important Whether investment is debt or equityWhether investment is debt or equity Amortized cost = maturity value +/- unamortized premium/discountAmortized cost = maturity value +/- unamortized premium/discount

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Strategic Investments Only equity securities can be strategic Only equity securities can be strategic Provide some level of influence over investmentProvide some level of influence over investment Percentage ownership or degree of influence determines how investment is classifiedPercentage ownership or degree of influence determines how investment is classified Strategic investments are always long- term Strategic investments are always long- term

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Debt Investments Reported at Amortized Cost Includes both short-term and long-term instruments Includes both short-term and long-term instruments Short-term: maturity within 12 months of balance sheet dateShort-term: maturity within 12 months of balance sheet date Long-term: maturity longer than 12 monthsLong-term: maturity longer than 12 months Entries required to record: Entries required to record: AcquisitionAcquisition interest revenue and amortization of discount or premiuminterest revenue and amortization of discount or premium Sale or disposition at maturitySale or disposition at maturity

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Debt Investments: Money-Market Instruments Money-market instruments Term deposits, treasury bills, money-market funds, banker’s acceptances Term deposits, treasury bills, money-market funds, banker’s acceptances Usually pay a fixed interest rate on maturity Usually pay a fixed interest rate on maturity Entry to record investment in term deposit: Entry to record investment in term deposit:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Debt Investments: Money-Market Instruments 2 Accruing interest revenue: Accruing interest revenue: Maturity: Maturity:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Debt Investments: Money-Market Instruments 3 Treasury Bills Short-term debt instruments issued by the federal government Short-term debt instruments issued by the federal government Sold at a discount: difference between purchase price and value at maturity is the interest earned Sold at a discount: difference between purchase price and value at maturity is the interest earned Entry to record investment: similar to term deposits Entry to record investment: similar to term deposits Entry to record interest revenue (using effective interest method: Entry to record interest revenue (using effective interest method:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Debt Investments: Bonds Bonds may sell at a premium or discount Bonds may sell at a premium or discount Purchase: Purchase: Recording interest revenue and amortizing discount or premium: Recording interest revenue and amortizing discount or premium:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Debt Investments: Bonds 2 Recording maturity of bonds Recording maturity of bonds Amortized cost at maturity = face valueAmortized cost at maturity = face value Sale of bonds before maturity: Sale of bonds before maturity:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Trading Investments Debt and equity investments purchased for resale in the near future Debt and equity investments purchased for resale in the near future Includes investments in shares and debt instruments such as bondsIncludes investments in shares and debt instruments such as bonds Reported at fair value, not amortized costReported at fair value, not amortized cost Fair value adjustment: investment’s carrying value must be adjusted for any changes in fair value Fair value adjustment: investment’s carrying value must be adjusted for any changes in fair value

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Equity Investments - Shares Acquisition is recorded at fair value = price paid for shares Acquisition is recorded at fair value = price paid for shares Dividends are recognized as revenue when received Dividends are recognized as revenue when received Fair value adjustment at year end: Fair value adjustment at year end: Gain or loss (if any) recognized when shares are sold: Gain or loss (if any) recognized when shares are sold:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Debt Investments - Bonds Acquisition is recorded at fair value = purchase price Acquisition is recorded at fair value = purchase price Interest revenue is recorded semi-annually when received and also accrued at year end Interest revenue is recorded semi-annually when received and also accrued at year end Fair value adjustment at year end Fair value adjustment at year end Fair value will be affected by changes in market interest ratesFair value will be affected by changes in market interest rates When bonds sold, record interest to date of sale and recognize gain or loss on sale: When bonds sold, record interest to date of sale and recognize gain or loss on sale:

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Strategic Investments Based on how much influence investor has over the issuing corporation: Based on how much influence investor has over the issuing corporation: < 20% ownership – little influence – report investment at fair value< 20% ownership – little influence – report investment at fair value 20% to 50% (or more) – significant influence – use equity method for accounting and reporting20% to 50% (or more) – significant influence – use equity method for accounting and reporting ≥ 50% ownership – controlling interest – report on a consolidated basis≥ 50% ownership – controlling interest – report on a consolidated basis Percentages are guidelines – use judgment in assessing the degree of influence Percentages are guidelines – use judgment in assessing the degree of influence

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Equity Investments: Fair Value Investment is recorded at purchase price (cost) Investment is recorded at purchase price (cost) Revenue recognized when cash dividends are received Revenue recognized when cash dividends are received

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Equity Investments: Fair Value Investment is adjusted to fair value at the fiscal year end Investment is adjusted to fair value at the fiscal year end May be reported in the statement of comprehensive income net of income tax or reported in profit May be reported in the statement of comprehensive income net of income tax or reported in profit

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Equity Investments: Equity Method Investment is recorded at cost Investment is recorded at cost Investor’s share of investee’s net income is recognized as an increase in the value of the investment Investor’s share of investee’s net income is recognized as an increase in the value of the investment

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Equity Investments: Equity Method Dividends received are recognized as a decrease in the value of the investment Dividends received are recognized as a decrease in the value of the investment

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reporting of Investments: Balance Sheet Investments Classified as Current Assets Trading investments – management intends to sell in the near futureTrading investments – management intends to sell in the near future Short-term debt instruments – as management intends to hold to earn interest incomeShort-term debt instruments – as management intends to hold to earn interest income Trading investments and investments reported at amortized cost are disclosed separatelyTrading investments and investments reported at amortized cost are disclosed separately Highly liquid investments with a maturity < three months are included in “Cash and Cash Equivalents”Highly liquid investments with a maturity < three months are included in “Cash and Cash Equivalents”

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reporting of Investments: Balance Sheet Long-Term Investments Long-term debt instrumentsLong-term debt instruments Maturities within one year are classified as short-termMaturities within one year are classified as short-term Equity investments purchased for strategic purposesEquity investments purchased for strategic purposes Separate disclosure required of:Separate disclosure required of: Long-term investments reported at fair value and amortized costLong-term investments reported at fair value and amortized cost Investments accounted for using the equity methodInvestments accounted for using the equity method Separate disclosure also required of investments:Separate disclosure also required of investments: Where gains/losses reported are in other comprehensive incomeWhere gains/losses reported are in other comprehensive income InvestmentsInvestments

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reporting of Investments: Income Statement Income Statement Interest revenueInterest revenue Dividend revenueDividend revenue Gains/losses on fair value adjustmentsGains/losses on fair value adjustments Gains/losses on sale of investmentGains/losses on sale of investment Equity income from a strategic investment with significant influenceEquity income from a strategic investment with significant influence Statement of Comprehensive Income Gains/losses on fair value adjustments of strategic investments without significant influence (if not included above)Gains/losses on fair value adjustments of strategic investments without significant influence (if not included above)

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Reporting of Investments: When a Company Controls Another Company When a company (parent) controls another company (subsidiary): When a company (parent) controls another company (subsidiary): Owns more than 50% of another company, orOwns more than 50% of another company, or Other factors that indicate controlOther factors that indicate control Consolidated financial statements are also required Consolidated financial statements are also required Present the total assets and liabilities controlled by the parent companyPresent the total assets and liabilities controlled by the parent company In addition to financial statements of each separate companyIn addition to financial statements of each separate company

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. GAAP for Canadian Private Enterprises All investments are reported at amortized cost Only those equity investments where there is a quoted market price are reported at fair value No gains or losses are reported in other comprehensive income

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