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Int. Acc. FA LECT 8: CH 19+17 part 1: Investments (Accounting for…
Int. Acc. FA LECT 8: CH 19+17 part 1: Investments
Agenda
This lecture (first part of Ch 17):
Debt
investments
Accounting for debt investments
“Fair value option”
Impairments
Next lecture:
Equity
investments (second part of Ch 17)
Porsche & Volkswagen illustration
Types of investments based on ownership interests
Fair value accounting
Equity method
Consolidation
(not in the book!)
Investments – Chapter 17 -->“Financial assets”
Fair value vs historical cost
Historical cost:
Assets/liabilities reported at original value (adjusted for depreciation/amortization)
Fair value:
Amount for which an asset could be exchanged between two independent parties
Accounting rules somewhat shift from a more historical cost (HC) based approach towards more fair value (FV) based accounting
HC argued to be mainly backward-looking
FV more forward looking
Fair value vs historical cost
If no market available:
Downsides of FV:
How do we measure fair value?
Accounting for financial assets
Instead of blaming bankers for making poor investment decisions, accounting was blamed by some high-profile people:
“Fair value” accounting for complex financial instruments was blamed for intensifying the financial crisis and accelerating bank problems because of the required recognition of unrealized losses on investments
“Shoot the messenger”?
Fair value accounting and the accounting for financial assets has become a topic of heavy debate around the globe after the 2008 banking crisis
IFRS has the following standards that deal with financial instruments:
IFRS 7: Financial instruments: disclosure (01/01//2007)
IFRS 9: Financial instruments (01/01/2018)
IAS 39: Financial instruments: recognition and measurement
IFRS 13: Fair value measurement (01/01/2013)
IAS 32: Financial instruments: presentation