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Int. Acc. FA LECT 8: CH 19+17 part 2: Investments (Accounting for…
Int. Acc. FA LECT 8: CH 19+17 part 2: Investments
Accounting for financial assets(II)
Financial Assets:
Equity investment of another company
(e.g., ordinary or preference shares).
Contractual right to receive cash from another party
(e.g., loans, receivables, and bonds).
Cash
IFRS rules require that companies classify financial assets into two measurement categories –
amortized (historical) cost and fair value
- depending on the circumstances.
Asset
(recall from lecture 1): A resource controlled by the entity from which future economic benefits are expected to flow to the company
Accounting for financial assets(III)
IFRS requires that companies measure their financial assets based on two criteria:
Company’s business model for managing its financial assets:
Does the company hold the financial assets to collect contractual cash flows? Or does it hold it for hedging/speculation/trading purposes?
Contractual cash flow characteristics of the financial asset:Do the cashflows consist of principal and interest on the amount outstanding at contractually specified dates?
Accounting for financial assets(IV)
For example
Company A holds a bond to maturity. Interest and principal payments are at fixed dates specified on the bond.
Company B purchased the bond to speculate on changing interest rates.
Company A: use amortized cost
Company B: use fair value.
Only debt investments such as receivables, loans, and bond investments that meet the two criteria above (slide 21) are recorded at
“amortized cost”.
All other debt investments are recorded and reported at
fair value
.
Accounting for financial assets(V)
Equity investments are generally recorded and reported at fair value
No fixed interest/ payment schedule
Debt investments
If business model is to collect contractual cash flows and hold the debt until maturity:
Held-for-collection -->
Amortized cost
If criteria not met:
Held-for-trading / not held-for-collection -->
Fair value
Debt investments – characteristics:
Contractual payments
Specified dates of payment of principal amount and interest on principal