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2018, Study Session # 5, Reading # 16

HFT =Held-for-Trading PV = Present Value
HTM =Held-to-Maturity INTERCORPORATE INVESTMENTS HC = Historical Cost
AFS =Available-for-Sale VIE = Variable Interest Entity
I.S=Income Statement T.C = Transaction Cost
C.A =Contingent Assets B.S: Balance Sheet CF =Cash Flow A&L = Asset & Liability
C.L = Contingent Liabilities FV: Fair Value CV = Carrying Value R&E = Revenue & Expense
N.I = Net Income R.E = Retained Earnings G/W =Goodwill SPE = Special Purpose Entity
B.C = Business Combinations R&D = Research & Development DFV =Designated at Fair Value T.A =Total Assets
B.V = Book Value F.G = Financial Guarantee P.P = Purchase Price T.L= Total Liabilities
JCE = Jointly Controlled Entities D&E = Debt & Equity P/L = Profit or Loss MV: Market Value
G/L=Gain & Loss JCO = Jointly Controlled Operations CFO = Cash Flow from Operations OCI = Other Comprehensive Income
FVPL = Fair Value through Profit JCA = jointly Controlled Assets QSPE = Qualifying Special Purpose Entity FVOCI = Fair Value through Other
& Loss Comprehensive Income
FA = Financial Assets
1. INTRODUCTION

2. BASIC CORPORATE INVESMENT CATEGORIES

Financial assets Investment in associates Business combinations Joint venture

No significant control Significant influence over investees Control over investees Shared control
(ownership < 20%) operations (ownership 20%-50%) operations (ownership > 50%)

Ownership % is only a guideline; ultimate category is based on investors ability to influence.

3. INVESTMENTS IN FINANCIAL ASSETS: STANDARD IAS 39 (AS OF DECEMBER 2012)

IFRSHTM, AFS, FV Through P/L, loans & receivables

3.1 Held-to-Maturity 3.5 Reclassification of Investments

IFRS U.S. GAAP

Debt Securities Balance Sheet Income
Long term Amortized cost Statement
Cannot be reclassified into & out of DFV & out of
From AFS
HFT = cumulative
initially FV (IFRS) (original cost Interest HFT. or unrealized G/L in I.S
Price paid (U.S.GAAP) Discount/premium). income.
IFRSnot permitted to classify HTM if company
sold significant HTM investment during current or
two preceding years (certain exceptions).
3.2 Fair value through Profit or Loss

AFS debt to HTM, with FV at B.S & difference b/w
Debt security of AFS into HTM
fair & maturity value & G/L in other cumulative G/L amortize

IFRS Include securities held for trading & designated at FV. comprehensive income amortized over security over security life.

U.S. GAAP similar classification (except for some financial life.
assets).

HTM to AFS, with FV at B/S & difference b/w fair
HTM to AFS = unrealized G/L
& CV is in other comprehensive income. to comprehensive income.

Debt instruments from HFT or AFS to loans &
3.2.1 Held for Trading
Receivables (foreseeable future holding)

Short term debt & equity securities. 3.2.2 Designated at Fair Value

Reported at FV.

Unrealized G/L in I.S.
Investment initially recognized at FV (under both IFRS &

Interest & dividend received in I.S U.S.GAAP) that might otherwise be classified as AFS or HTM.

Accounting treatment is similar to HFT.
3.3 Available-for-Sale

D&E Securities Balance Sheet Income Statement

Neither HTM Fair value, Realized G/L.
nor FVPL unrealized Foreign currency
Initial & later G/L in equity. unrealized G/L (Debt
recog at FV Sec IFRS).

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2018, Study Session # 5, Reading # 16

3. INVESTMENTS IN FINANCIAL ASSETS: STANDARD IAS 39 (AS OF DECEMBER 2012)

IFRSHTM, AFS, FV Through P/L, loans & receivables

3.4 Loans & Receivables 3.6 Impairments

Non derivative financial assets with fixed or determinable

IFRS U.S. GAAP
payments.

Evaluate HTM & AFS securities for
Evaluate HTM & AFS securities for

IFRS at amortized cost (unless designated as AFS or FVPL).
impairment. impairment.

U.S. GAAP if meet the definition of debt security, then
classified as HFT, AFS or HTM
Debt security is impaired if one loss event
Security is impaired if decline is not
occurred, equity security is impaired if FV < temporary.
CV.

HTM & loans & receivables investment
AFS Subsequent increase is
impaired, B/S value is PV of future C.F, loss reported in OCI.
in I.S & reversal is allowed.

AFS security impaired, unrealized loss in I.S.
equity cannot be reversed.

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2018, Study Session # 5, Reading # 16

4. INVESTMENTS IN FINANCIAL ASSETS: IFRS 9 (AS OF DECEMBER 2012)

IASB has updated standard IFRS 9 (financial instruments).

Effective date is Jan 1 15 (early adoption permitted).

Terms AFS & HTM no longer appear in IFRS 9.

Financial assets must meet two criteria to be measured at amortized cost.

Business model test.

Cash flow characteristic test.

4.1 Classification and Measurement

All FA measured at FV when initially acquired.

Subsequent treatment FV or amortized cost.

FA meeting above two tests of sec 4, are generally measured at amortized
cost (management can choose FVPL).

Equity investment HFT must be measured at FVPL.

Other equity investments, FVPL or FVOCI (irrevocable choice).

Derivatives are measured at FVPL (except hedging instruments).

Debt Equity

Yes
Yes
Yes

Is the business objective for financial Held for Trading
assets to collect contractual cash
No
flows? And No

Are the contractual cash flows solely
Yes
for principal and interest on Designated at FYOCI?
principal?

Yes No

Yes
Designated at FVPL?

No

Amortized Cost Changes in fair Changes in fair value

value recognized in recognized in OCI.
P/L.

Reference: Level II Curriculum, Volume 2, Reading 18.

4.2 Reclassification of Investments

Reclassification of equity instruments is not permitted.

Debt instrument reclassification FVPL to amortized cost (vice versa)
only if objective for holding FA significantly affects operations.

No restatement of prior periods.

From amortized cost to FVPL assets FV, G/L in P&L.

From FVPL to amortized cost FV become carrying value.

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2018, Study Session # 5, Reading # 16

6. BUSINESS COMBINATIONS
5. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

IFRS U.S.GAAP

Joint venture ventures undertaken & controlled by two or
No distinction among B.C Merger A+B=A
more parties.
Acquisition A+B=A+B

Equity method of accounting is required (Both, IFRS &
Consolidation A+B=C
U.S.GAAP).

Characteristics of JVs (IFRS)

Contractual arrangement b/w two or more ventures.
Two component consolidation model (U.S.GAAP).

Joint control.
Variable interest component (consolidate VIE regardless
of voting interest).

Control component.
5.1 Equity Method of Accounting: Basic Principles
Acquisition method replaces the purchases method &

differences b/w IFRS & U.S.GAAP.

Initial investment Investees earnings Dividends received 6.1 Pooling of Interests and Purchase Methods
At cost as Increase investment Decrease Term
noncurrent asset. A/C, non operating investment A/c. U.S.GAAP IFRS
income & vice versa Pooling of interests Uniting of interests
in case of loss.
Assets & liabilities at B.V, pre comb. R.E included.

No new accounting basis & continuity of ownership.
Purchase method: Net assets @ FV, Add.Dep., lower reported earnings.
5.2 Investment Costs That Exceed the Book Value of the
Investee

Excess of purchase price over book value is allocated to 6.2 Acquisition Method
FV of A&L, any remainder is G/W.
Both IFRS & U.S. GAAP require the acquisition Method.
IFRS U.S.GAAP
FV or HC (less Acc.Dep.) HC only (less Acc.Dep.) 6.2.1 Recognition and Measurement of Identifiable Assets and Liabilities

Identifiable assets & liabilities at F.V.

Acquirers recognize A&L not previously recognize by acquiree (e.g. brand
5.3 Amortization of Excess Purchase Price name).

Investor recognizes expense based on excess amounts &
consistent with investees expense recognitions. 6.2.2 Recognition and Measurement of Contingent Liabilities
Acquirer recognize contingent liability if

Present obligation arise from past events
5.4 Fair Value Option
Measured reliably

Investment A/c at FV through irrevocable election.
IFRS U.S.GAAP

U.S. GAAP all entities, IFRS restricted.
Fair value can be reliably measured. Probable & reasonably estimated.

No prop. Share in B/S.

No goodwill, G/L, Div.in B/S.
6.2.3 Recognition and Measurement of Indemnification of Assets

Acquirer recognize assets If acquiree indemnifies.
5.5 Impairment

FV < CV investment is impaired, B/S fair value, loss I.S, reversal not 6.2.4 Recognition and Measurement of Financial Assets and Liabilities
allowed.
Acquirer can reclassify financial A&L of acquiree on basis of certain
conditions.

5.6 Transactions with Associates 6.2.5 Recognition and Measurement of Goodwill

Profit from upstream (investee to investor) or downstream must IFRS U.S.GAAP
be deferred until confirmed through use or sale to a third party. Partial G/W (PP-Acquirers share of FV). Full G/W
Full G/W (FV of acquisition-FV of ident.net assets).
5.7 Disclosure

About A&L & results of equity method. 6.2.6 Recognition and Measurement When Acquisition Price Is Less than Fair
Value

Contingent consideration at FV & subsequent changes in I.S.
5.8 Issues for Analysts IFRS U.S.GAAP
Difference b/w PP & F.V of Treatment is same as IFRS.
acquired net assets immediately
Higher earnings Ratios impact C.F. problem in I.S.
Dividend payout Improves certain Earnings may not
is < 100%. ratios. in form of C.F.

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2018, Study Session # 5, Reading # 16

6.3 Impact of the Acquisition Method on Financial Statements, Post-Acquisition 6.6. VARIABLE INTEREST AND SPECIAL PURPOSE ENTITIES

Financial statements continue to be affected.
To accommodate specific needs of the sponsor.

Transfer A & L from sponsoring companys B.S. as sale.
6.4 The Consolidation Process
Improve certain ratios of sponsor by avoiding consolidation.

Combine the results of operations IFRS U.S.GAAP

Intercompany transactions are eliminated to avoid double
Revise the definition to
More general term VIE as compare to
counting encompass many SPEs SPE (IFRS).

Difference b/w IFRS & US GAAP must be considered to avoid
IFRS 10 is applicable from
VIE includes other entities besides
inconsistency Jan113 SPEs.

SPEs involved in structured
Primary beneficiary must consolidate
6.4.1 Business Combination with Less than 100 Percent Acquisition financial transaction will VIE if controls (certain indicators).

Merger or consolidation Acquire 100% equity. require an evaluation of
Entity absorb losses must consolidate

Acquisition < 100% (parent, subsidiary relationship). purpose, design and risks. (if other entity will receive residual
return).

NCI in VIE also be shown in I.S & B.S.
6.4.2 Non-controlling (Minority) Interests: Balance Sheet

Subsidiarys equity held by third parties.

Separate component of equity (both IFRS & U.S.GAAP converged)
6.6.1 Illustration of an SPE for a Leased Asset
Measurement
SPE borrow debt buy asset lease it to repay debt & return to
IFRS U.S.GAAP equity holders.
Full G.W method Full G.W method
Sponsor bear default risk, asset ownership, so consolidate.
Partial G.W method

6.6.2 Securitization of Assets

6.4.3 Non-controlling (Minority) Interests: Income Statement
Example

A line item reflecting allocation of P&L.

Intercompany transactions are eliminated in full.

Impact on ratios would be diff. under full G/W & partial G/W.
6.7 Additional Issues in Business Combinations That Impair Comparability

Value of noncontrolling interest on parents B/S will change.

6.7.1 Contingent Assets and Liabilities

6.4.4 Goodwill Impairment
IFRS U.S.GAAP

Impairment test annual or more frequent.

Cost of acquisition
Contractual contingent A&L at FV at

Written down G/W. cannot be later restored. allocated to F.V of A,L & acquisition

Impairment loss is separate line item in I.S (both IFRS & U.S.GAAP). contingent L.
Non-contractual recognize only if
G/W assignment & impairment Test
C.L at F.V ( Initially) meet the def. of A or L at acquisition.
IFRS U.S.GAAP
> of amount recognized&
Subsequently
Assignment Cash- Assignment Reporting unit amount req. to settle C.L > of initial amount or estimate
generating unit (subsequent) of loss.
Impairment test (one step) Impairment test (2step)
Contingent assets not C.A< F.V or future settlement

Rec. amount < C.V= loss
C.V> F.V= impairment occurred. recognized. amount.

Loss reduced G/W & other
[C.V implied FV] of Goodwill =
assets when G/W = 0. amount of impairment Loss. 6.7.2 Contingent Consideration

Loss reduced G/W but not other
May negotiated as part of acquisition price.
assets.
Initially measured at F.V either A,L or Equity (both IFRS &
U.S.GAAP)
6.5 Financial Statement Presentation Subsequent to the Business
Can also classify as asset (U.S.GAAP). Subsequent changes in I.S.
Combination
Not remeasured equity classified.(both IFRS & U.S.GAAP)

Presentation is similar under IFRS & U.S.GAAP.
6.7.3 In-Process R&D

A separate intangible asset at FV (both IFRS & GAAP).

Subject to amortization or impairment.

6.7.4 Restructuring Costs

Expense in the period the costs are incurred.

Not a part of cost of acquisition (both standards).

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