Question

Feherty, Inc., accounts for its investments under IFRS No. 9 and purchased the following investments during December 2018:

1. Fifty of Donald Company’s $1,000 bonds. The bonds pay semiannual interest, return principal in eight years, and include no other cash flows or other features. Feherty plans to hold 10 of the bonds to collect contractual cash flows over the life of the investment and to hold 40, both to collect contractual cash flows but also to sell them if their price appreciates sufficiently. Subsequent to Feherty’s purchase of the bonds, but prior to December 31, the fair value of the bonds increased to $1,040 per bond, and Feherty sold 10 of the 40 bonds. Feherty also sold 5 of the 10 bonds it had planned to hold to collect contractual cash flows over the life of the investment. The fair value of the bonds remained at $1,040 as of December 31, 2018.

2. $25,000 of Watson Company common stock. Feherty does not have the ability to significantly influence the operations of Watson. Feherty elected to account for this equity investment at fair value through OCI (FVOCI). Subsequent to Feherty’s purchase of the stock, the fair value of the stock investment increased to $30,000 as of December 31, 2018.

Required:

1. Indicate how Feherty would account for its investments when it acquired the Donald bonds and Watson stock.

2. Calculate the effect of realized and unrealized gains and losses associated with the Donald bonds and the Watson stock on Feherty’s net income, other comprehensive income, and comprehensive income for the year ended December 31, 2018. Ignore interest revenue and taxes.

Answer 1

Debt and Equity Investments:

Debt investments: The investments in debt an instrument that are issued by the company for which the company pays predetermined interest and the debt amount is repaid on the maturity date are known as debt investments. For example, corporate bonds, government bonds, certificate of deposits.

Equity investments: The investments in financial instruments that indicate ownership of the stockholder in the company which states that the stockholder has a claim in the profits and the assets of the company are referred to as equity investments.

(1)

According to IFRS Number: 9, the investment of Incorporation F in Company D’s 10 bonds is classified as amortized cost for the following reasons:

• The bonds pay only interest and principal payments.

• The intention of Incorporation F is to collect the contractual cash flows solely as interest and principal payments and hold the bonds till maturity.

• The investment recorded at amortized cost is accounted as the held-to-maturity securities.

According to IFRS Number: 9, the investment of Incorporation F in Company D’s 40 bonds is classified as fair value through other comprehensive income (FVOCI) for the following reasons:

• The bonds pay only interest and principal payments.

• The intention of Incorporation F is to collect the contractual cash flows solely as interest and principal payments and sell the bonds when they are priced potentially.

• The investment classified as FVOCI is accounted as the available-for-sale securities.

According to IFRS Number: 9, the investment of Incorporation F in Company W’s common stock is classified as fair value through other comprehensive income (FVOCI) for the following reasons:

• Incorporation F chose to include unrealized gains and losses on Company W’s common stock in other comprehensive income (OCI).

• Therefore, Incorporation F has irrevocably elected to classify the Company W’s common stock as FVOCI.

(2)

Effect of realized and unrealized gains (losses) of 10 bonds of Company D:

• Since these 10 bonds are recorded at amortized cost, there are no unrealized gains and losses due to fair value adjustment.

• Compute realized gain on sale of 5 bonds as follows:

Effect of realized gains (losses) of 10 of 40 bonds of Company D:

The realized gain computed as follows would be included in the net income and eventually in the comprehensive income:

Effect of unrealized gains (losses) of remaining 30 of 40 bonds of Company D:

• The increase of $1,200 is recorded by debiting net unrealized holding gains and losses on the statement of comprehensive income as other comprehensive income (OCI) or would be recorded on a separate statement of comprehensive income.

• This amount is closed or reversed to accumulate other comprehensive income (AOCI) on balance sheet.

Working Notes:

Calculate the net unrealized holding gain (loss) as on December 31, 2018.

Effect of unrealized gains (losses) of equity stock of Company W:

Reporting on income statement: