Question

Problem - Stanhope Associates accounts for the following investments under IFRS No. 9: Required: For cach investment, indicate: (a) the accounting approach that will be used to account for the investment, and briefly explain why that approach is appropriate (trading, available for sale or held-to-maturity)and (b) the effect on earnings (Net Income) of an increase in the fair value of the investment in the period following acquisition of the investment, assuming that Stanhope does not sell the investment 1. 10 shares of Blackstone equity, held for long-term investment 2. 10 shares of Erickson equity, held for working capital noods 3. 10 shares of AT&E equity, held for immediate resale 4. 10 bonds (consisting of only interest and principal) issued by Filo Inc., held for long-term collection of cash flows 5. 10 bonds (consisting of only interest and principal) of SimSung, held for unexpected working capital needs in the next few years, but also might be sold 6. TO bonds (consisting of only interest and principal) issued by Attachi, held for immediate resale

Answer 1

IFRS 9 provides the following accounting treatment :

Scenario No Investment Option of Fair held for cash value to flows of eliminate Prinicpal and accounting Interest on that Mis match Business Model Test principal ITreatment Investment in Bonds held to Collect Cash flows FairValue recognised thorough Profit Yes Loss FairValue recognised thorough Profit & Loss Amortised Cost FairValue recognised thorough Profit Loss Investment in Bonds held to Collect Cash flows and FairValue recognised thorough Profit to Sell LOSS FairValue recognised thorough Profit & Loss FairValue recognised through Other Comprehensive Income FairValue recognised thorough Profit Loss Investment in Equity FairValue recognised thorough Profit Loss if Intial recognizd FairValue recognised through Other Comprehensive Income if Intially recognized

1. 10 share of Blackstone equity held for long term investment to earn only dividend income if any to will have to be recognised in P/L. Since the intention not for immediate gains any change in fair value will not be in Profit and loss to determine the true and fair measurement of financial instrument of long term investment. It is recognised at fair value through OCI as it's not for trading and immediate sale in the period subsequent to the acquisition
2. 10 share of Erickson equity held for working capital requirement so it can be sold whenever need arises so the changes in fair value will be recognised through profit and loss. Since the intention not for holding for long period any changes in fair value will be in Profit and loss to determine the true and fair measurement of financial instrument of short term requirement of working capital.
3. 10 share of AT&E equity held for immediate sale not for earning dividends but immediate gains so the changes in fair value will be recognised through profit and loss as its available for sale in immediate future. Since the intention not for holding for a long period, any changes in fair value will be in Profit and loss to determine the true and fair measurement of financial instruments of immediate needs.
4. 10 Bonds of Filo Inc for long term collection of cash flow fall in criteria 3 and accordingly recognised at amortised cost. The long term nature indicates long term investment with the intention of earning cash flows and not earning through changes in fair value over the period.
5. 10 Bonds of SimSung for long term collection of cash flow fall in criteria 7 and accordingly recognised at Fair value through Other Comprehensive Income. The short term nature indicates earning cash flows or sale for the working capital needs and not holding over the period
6. 10 Bonds of Attachi for immediate sell fall in criteria 2 and accordingly recognised at fair value through Profit and loss. The short term nature determined by available for sale should be valued at fair value to give a true and fair presentation in the financial statement as it will be realised in the near short term.