FAR #17-20 Investments

What is a standstill agreement and how would it affect the accounting tretament for an investment with 40% ownership interest?

A standstill agreement is a written agreement between two firms whereby certain actions between the firms are limited. If a standstill agreement exists between the investor and the investee, the investor cannot exercise significant influence over the investee and would not use the equity method to carry and report the investment. Instead, the investor likely would use fair value to account for the investment.

Are transfers between Held-to-maturity to held-for-trading and Held-for-trading to held-to-maturity classifications of investments (which do not give the investor significant influence) possible?

Both transfers can occur in the accounting for investments where the investor does not have significant influence over the investee.

Why would the fair value method be the least likely to be to report an investment in a corporate joint venture?

Even though an investment in a joint venture is a financial asset, and financial assets generally are eligible to be reported at fair value at the election of the holder (investor), such an option is not likely to be available for joint ventures because (1) if the joint venture is to be consolidated, it is not eligible for fair value measurement and (2) even if it is not to be consolidated, the nature of joint ventures (e.g., not traded in a public market) makes it unlikely that a readily determinable fair value will be available.

How to treat when dividend income included only part of the dividend received from investee and the balance of the dividend reduced the investment carrying amount?

Fair Value method, and only a portion dividends represent earnings after acquisition. Under the equity method, all dividends are treated as a reduction in the investment account. No dividends received are treated as income under the equity method.

What method is used when 2004 dividend income included only part of the dividend received from its investment. The balance of the dividend reduced carrying amount for investment?

Fair Value method, as liquidating dividend. Example would receive $500 dividends in total, but only $400 are attributable to earnings during the period as a shareholder. Under the cost/equity methods, liquidating dividends are treated as a reduction in the investment.

T/ F - If a corporation participates as an owner of a corporate joint venture, it will consolidate the joint venture in its consolidated financial statements

False

T/F - An entity may use the cost method to measure and report some investment property and the fair value method to measure and report other investment property.

False

T/F - An investment in equity securities gives the investor the right to receive dividends.

False

T/F - An investment that gives an investor more than 50% ownership of the voting stock of an investee will be treated as giving the investor significant influence.

False

T/F - Investment property can include land, buildings, and equipment.

False

T/F - Property used by its owner while awaiting appreciation in property value can be classified as investment property.

False

T/F - Stock rights can be classified as held-to-maturity investments.

False

T/F - The cost of purchasing investments held-for-trading should be shown as a use of cash in the Cash Flows from Investing Activities section of the Statement of Cash Flows.

False

T/F - Under IFRS No. 9, all changes in the fair value of investments in equity securities must be reported through profit or loss.

False

T/F - Under IFRS No. 9, investments in equity securities that have no ready market should be accounted for at cost

False

T/F - Under IFRS, an entity must carry and report its investment in a jointly controlled entity using the equity method of accounting.

False

T/F - Under IFRS, an entity will recognize a gain, but not a loss, on the difference between the fair value of an asset contributed to the jointly controlled entity and the carrying value of that asset.

False

T/F - Under the equity method of accounting for investments, the investor recognizes cash dividends from the investee as Dividend Income.

False

T/F - When an owner occupies any part of a property, no part of the property may be treated as investment property.

False

T/F - When nonmonetary assets are contributed in the formation of a corporate joint venture, a related gain or loss would be recognized.

False

T/F -When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated

False. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must be restated

When would the investor be required to recognize the associate's (investee's) losses that exceed the investor's investment?

If the investor has obligations or commitments to make payments on behalf of the associate, it may continue to recognize its share of losses to the extent of those obligations

Should goodwill amortization related to purchase reduce investment income?

No. Goodwill resulting from an investment in another entity (i.e., the excess of the cost of the investment over the investor's share of the fair value of the investee's identifiable assets) is not amortized. Further, under the equity method goodwill resulting from an investment is not separately assessed for impairment, rather, the entire investment is assessed for impairment at least annually.

Is Redeemable preferred stock considered an equity investment for investment accounting purposes?

No. Redeemable preferred stock is not considered an equity security for investment accounting purposes. Redeemable preferred stock, also known as callable preferred stock, may be reacquired by the issuing corporation under prescribed conditions.

Is Redeemable preferred stockconsidered an equity investment for investment accounting purposes?

No. Redeemable preferred stock, also known as callable preferred stock, may be reacquired by the issuing corporation under prescribed conditions.

Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment is accounted for under which of the cost/equity methods?

No. Stock dividends are not recognized in the accounts at receipt, at fair value or any other value. Rather, they reduce the cost per share under both methods. The original cost is spread over more shares. The investor's percentage of the firm has not changed as a result of the stock dividend, but the investor has more shares (as do all investors). When the shares received as a dividend are sold, the reduction in cost basis increases the gain or reduces the loss.

When would the unrealized gain/loss would start to be count in owner's equity when transferring an equity security from held-for-trading to available-for-sale?

On the date of the reclassification. Prior to that, the changes in cost to fair value would be considered in current income.

How to treat permanent and temporary losses in available-for-sale securities?

Permanent losses on securities available-for-sale (SAS) are recognized in earnings as if they were realized. This is an example of conservatism. If the market value is not expected to recover, a loss is probable and therefore should be recognized in earnings. This is in contrast to the treatment for temporary losses, which for SAS, are treated as direct reductions to owners' equity.

T/F - A lessee can treat property leased under a financial (capital) lease as investment property.

True

T/F - A stock dividend will reduce the per share carrying value of the investment.

True

T/F - Amounts recognized in profit or loss for the period resulting from investment property rental income must be separately disclosed.

True

T/F - Assets contributed to the formation of a corporate joint venture are generally measured at carrying value.

True

T/F - Both a stock dividend and a stock split result in the investor receiving additional shares of stock.

True

T/F - If an investment classified as held-for-trading is reclassified to available-for-sale, a holding gain or loss may be recognized.

True

T/F - If an investor pays more in the market for a portion of the stock of a company than the book value of shareholders' equity acquired, the excess payment is included as part of the cost of investment.

True

T/F - If an investor properly switches from the fair value method to the equity method of accounting for an investment, the net income of prior periods must be adjusted.

True

T/F - In the absence of other circumstances, an investor that owns less than 20% of the voting stock of an investee is presumed not to have significant influence over the investee.

True

T/F - The forming parties of a corporate joint venture are generally the shareholders in the corporation.

True

T/F - The recorded cost of an investment includes brokerage fees incurred to acquire the securities.

True

T/F - Under IFRS No. 9, investments in equity securities cannot be transferred between classifications

True

T/F - When a debt investment is an element of an accounting mismatch, under IFRS No. 9, the investor may elect to measure the investment at fair value if that would significantly reduce the mismatch.

True

T/F - When depreciable investment property is measured at cost, the property will be depreciated

True

T/F - Only investments in debt securities may be transferred between categories

True. Only investments in debt securities may be transferred between categories; equity securities may not be transferred between categories

What characteristics must be met to transfer investments in debt securities from amortized cost to fair value and vice-versa?

Under IFRS No. 9, investments in debt securities may be (1) transferred from amortized cost (when the investment originally meets both the business model test and the cash flow characteristic test) to fair value when the investment fails to continue to meet both the business model test and the cash flow characteristic test and (2) transferred from fair value to amortized cost when an investment that originally fails to meet both the business model test and the cash flow characteristic test subsequently meets both tests.

Does it qualify as significant influence if Investor acquires 18% of investee voting common stock and is the primary buyer of the investee's output?

Yes. Although the acquisition of 18% of an entity's voting common stock is less than the 20% normally required to presume significant influence over the investee, the fact that the investor has material transactions with the investee (together with the 18% ownership) is presumed to give the investor sufficient means for exercising significant influence.