Question

COX Limited is a multinational telecommunications company owned by a Canadian businesswoman. It has numerous long-term investments in a wide variety of equity instruments.

Some investments have to be measured at fair value at each reporting date. In turn, the unrealized gains will be reported in either net income or other comprehensive income. Since COX has considerable external financing through a number of Canadian banks, it applies IFRS for public companies in its general-purpose financial statements.

The CFO of COX has heard about the new reporting standards for equity investments under IFRS 9 but has had limited time to study them in detail. He would like you to prepare a presentation on the reporting requirements. He wants to understand how equity investments should be reported. More specifically, he wants to know

• which investments must be measured at fair value and what the main rationale for this method of reporting is;
• how to determine whether the unrealized gains are to be reported in net income or other comprehensive income and what the main rationale for the difference in reporting is; and
• which investments, if any, will still be reported using the cost method, using the equity method, or on a consolidated basis.

Required:

Present the report of (1) FVTPL, (2) FVTOCI, (3) cost method, (4) investments in associates and (5) investment in subsidiaries.

Answer 1

PART (1) & PART(2): Equity investments have to be measured at fair value in the statement of financial position. As with financial assets that are debt instruments, the default position for equity investments is that the gains and losses arising are recognised in income (FVTPL).

However, there is an election that equity investments can at inception be irrevocably classified and accounted as FVTOCI, so that gains and losses arising are recognised in other comprehensive income, thus creating an equity reserve, while dividend income is still recognised in income. Such an election cannot be made if the equity investment is acquired for trading. On disposal of an equity investment accounted for as FVTOCI, the gain or loss to be recognised in income is the difference between the sale proceeds and the carrying value. Gains or losses previously recognised in other comprehensive income cannot be recycled to income as part of the gain on disposal.IFRS 9, Financial Instruments, only financial assets measured at amortised cost will be subject to impairment reviews. It is also proposed that an expected loss model towards impairment reviews be introduced when reviewing these financial assets. The expected loss model requires that entities determine and account for expected credit losses when the asset is originated or acquired rather than wait for an actual default. This is achieved by making an allowance for the initial expected losses over the life of the asset by considering a reduction in the interest revenue.

PART(3):Under the cost method, the stock purchased is recorded on a balance sheet as a non-current asset at the historical purchase price, and is not modified unless shares are sold, or additional shares are purchased. Any dividends received are recorded as income, and can be taxed as such.The equity method of accounting should generally be used when an investment results in a 20% to 50% stake in another company, unless it can be clearly shown that the investment doesn't result in a significant amount of influence or control.Under the equity method, the investment is initially recorded in the same way as the cost method. However, the amount is subsequently adjusted to account for your share of the company's profits and losses. Dividends are not treated as income under this method. Rather, they are considered a return of investment, and reduce the listed value of your shares.

PART(4):Investments in Associates outlines the accounting for investments in associates. An associate is an entity over which an investor has significant influence, being the power to participate in the financial and operating policy decisions of the investee (but not control or joint control), and investments in associates are, with limited exceptions, required to be accounted for using the equity method.

OBJECT:

• in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.
• in accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.