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CA 17.5
Since Fontaine Company purchased 40% of Knoblett Company’s outstanding ordinary shares,
Fontaine is considered to have significant influence over Knoblett Company. Therefore, Fontaine will
account for this investment using the equity method. The investment is reported on the December 31
CA 17.6
Memo on accounting treatment to be accorded Investment in Spoor Corporation:
Selig Company should follow the equity method of accounting for its investment in Spoor Corporation
because Selig Company is presumed to be able to exercise significant influence over the operating and
financial policies of Spoor Corporation due to the size of its investment (40%).
CA 17.7
(a) Classifying the investments as they propose will indeed have the effect on net income that they
(b) What each proposes is unethical since it is knowingly not in accordance with IFRS. The financial
(c) The act of selling certain investments (those with gains or those with losses) is management’s
FINANCIAL REPORTING PROBLEM
(a) M&S reports both current and non-current “other financial assets,” along
(b) M&S’s investments are valued at fair value for trading and non-trading,
while held-for-collection investments are valued at amortized cost. If
COMPARATIVE ANALYSIS CASE
adidas and Puma (in millions)
adidas
Puma
(a)
Cash used in (for) investing activities
€(591)
€(61.7)
(d) (1) adidas reported no equity method investments on its December
(2) adidas reported available-for-sale investments of €100 million in its
December 31, 2015 statement of financial position. It did not report
Note to instructors: adidas & Puma have not yet adopted IFRS No. 9.
FINANCIAL STATEMENT ANALYSIS CASE
UNION PLANTERS
(a) While banks are primarily in the business of lending money, they also
need to balance their asset portfolio by investing in other assets. For
(b) Fair value is the amount for which an asset could be exchanged
(c) Investments are reported in different categories because these different
categories reflect the likelihood that any unrealized gains and losses
will eventually be realized by the company. That is, trading investments
(d) The answer to this involves selling your “winner” investments in your
portfolio at year-end. Union Planters could have increased reported
net income by $108 million (clearly, a material amount when total
reported income was $224 million), if unrealized gains go through
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
(a) Instar’s investment in Dorsel Corp. bonds should be classified as held-
for-collection because they plan to hold the bonds to collect contractual
cash flows until maturity.
Instar’s investment of idle cash in equity investments should be
For similar reasons as those for Instar’s investment in its supplier,
Instar’s investment in Forter Corp. shares should be classified as non-
trading.
(b) To record interest on the Dorsel bonds:
Cash ........................................................................... 32,000
Interest Revenue ($320,000 X 10%) ................... 32,000
To record the decline in value of the investment in Forter Co.:
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
To record the income of the equity-method investee:
Investment in Slobbaer Co. ...................................... 75,000
ANALYSIS
The total effect on net income is $120,000 + 32,000 + $75,000 = $227,000.
PRINCIPLES
The rationale for reporting held-for-collection securities at amortized cost
is that if management intends to hold the investments to maturity, fair
values are not relevant for evaluating the cash flows associated with these
investments.
RESEARCH CASE
(a) According to IFRS 13, paragraph,
B37 The fair value of an asset or a liability might be affected when
there has been a significant decrease in the volume or level of
activity for the asset or liability, an entity shall evaluate the
significance and relevance of factors such as the following:
(a) There are few recent transactions.
(b) Price quotations are not developed using current
information.
(e) There is a significant increase in implied liquidity risk
premiums, yields or performance indicators (such as
delinquency rates or loss severities) for observed
transactions or quoted prices when compared with the
entity’s estimate of expected cash flows, taking into
account all available market data about credit and other
non-performance risk for the asset or liability.
RESEARCH CASE (Continued)
B38 If an entity concludes that there has been a significant decrease
(b) According to IFRS 9, paragraph 4.1.2(c) to 4.1.4 (Examples),
A business model whose objective is to hold assets in order to collect
contractual cash flows
B4.1.2C Financial assets that are held within a business model whose
objective is to hold assets in order to collect contractual cash flows are
managed to realise cash flows by collecting contractual payments over the
life of the instrument. That is, the entity manages the assets held within the
B4.1.3 Although the objective of an entity's business model may be to
hold financial assets in order to collect contractual cash flows, the entity
RESEARCH CASE (Continued)
B4.1.3A The business model may be to hold assets to collect
contractual cash flows even if the entity sells financial assets when there is
an increase in the assets' credit risk. To determine whether there has been
an increase in the assets' credit risk, the entity considers reasonable and
B4.1.3 B Sales that occur for other reasons, such as sales made to
manage credit concentration risk (without an increase in the assets' credit
risk), may also be consistent with a business model whose objective is to
hold financial assets in order to collect contractual cash flows. In
particular, such sales may be consistent with a business model whose
RESEARCH CASE (Continued)
B4.1.4 The following are examples of when the objective of an entity's
business model may be to hold financial assets to collect the contractual
s
GAAP CONCEPTS and APPLICATION
GAAP 17.1 Similarities include:
• U.S. GAAP and IFRS use similar classifications for financial assets: cash, loans and
receivables, investments, and derivatives.
• Both IFRS and U.S. GAAP require that financial assets be sorted into specific
categories for measurement and classification purposes.
the option to use the fair value method must be made at initial recognition, the
selection is irrevocable, and gains and losses are reported as part of income.
• Under both U.S. GAAP and IFRS, credit losses are recognized in income.
Differences include:
• While U.S. GAAP classifies debt investments as trading, available-for-sale, and held-
• U.S. GAAP generally does not permit the reversal of an impairment charge related to
held-to-maturity debt investments and equity investments. IFRS allows reversals of
impairments of held-for-collection investments.
• While U.S. GAAP and IFRS are similar in the accounting for the fair value option, one
difference is that U.S. GAAP permits the fair value option for all financial assets; IFRS
allows the fair value option if doing so reduces an accounting mismatch.
GAAP 17.2 (a) Under U.S. GAAP, Ramirez makes no entry, because
impaired held-to-maturity investments may not be written up if they
GAAP 17.3 At one time, both the FASB and IASB indicated that they
believed that all financial instruments should be reported at fair value
and that changes in fair value should be reported as part of net
income. Through recent standards in this area, the Boards continue to
