17 Investments

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting framework for financial assets.
2. Understand the accounting for debt investments at amortized cost.
3. Understand the accounting for debt investments at fair value.
4. Describe the accounting for the fair value option.

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 ACCOUNTING FOR FINANCIAL ASSETS

Financial Asset
 Cash.

 Equity investment of another company (e.g., ordinary or

preference shares).

 Contractual right to receive cash from another party

(e.g., loans, receivables, and bonds).

IASB requires that companies classify financial assets into two

measurement categories—amortized cost and fair value—
depending on the circumstances.

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 ACCOUNTING FOR FINANCIAL ASSETS

Measurement Basis—A Closer Look

IFRS requires that companies measure their financial
assets based on two criteria:
 Company’s business model for managing its financial
assets; and

 Contractual cash flow characteristics of the financial

asset.

Only debt investments such as receivables, loans, and bond

investments that meet the two criteria above are recorded at amortized
cost. All other debt investments are recorded and reported at fair value.

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 ACCOUNTING FOR FINANCIAL ASSETS

Measurement Basis—A Closer Look

Equity investments are generally recorded and reported at
fair value.

ILLUSTRATION 17-1
Summary of Investment Accounting Approaches

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 DEBT INVESTMENTS

Debt investments are characterized by contractual

payments on specified dates of
 principal and
 interest on the principal amount outstanding.

Companies measure debt investments at

 amortized cost or
 fair value.

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 Debt Investments—Amortized Cost

Illustration: Robinson Company purchased €100,000 of 8%

bonds of Evermaster Corporation on January 1, 2015, at a
discount, paying €92,278. The bonds mature January 1, 2020
and yield 10%; interest is payable each July 1 and January 1.
Robinson records the investment as follows:

January 1, 2015

Debt Investments 92,278

Cash 92,278

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 Debt Investments—Amortized Cost
ILLUSTRATION 17-2

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 Debt Investments—Amortized Cost
ILLUSTRATION 17-2

Robinson Company records the receipt of the first semiannual

interest payment on July 1, 2015, as follows:

Cash 4,000
Debt Investments 614
Interest Revenue 4,614

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 Debt Investments—Amortized Cost
ILLUSTRATION 17-2

Because Robinson is on a calendar-year basis, it accrues

interest and amortizes the discount at December 31, 2015, as
follows:
Interest Receivable 4,000
Debt Investments 645
Interest Revenue 4,645
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 Debt Investments—Amortized Cost

Reporting of Bond Investment at Amortized Cost

ILLUSTRATION 17-3

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 ILLUSTRATION 17-2

Assume that Robinson Company sells its investment on

November 1, 2017, at 99¾ plus accrued interest. Robinson
records this discount amortization as follows:

Debt Investments 522

Interest Revenue 522
(€783 x 4/6 = €522)
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 Debt Investments—Amortized Cost

Computation Gain on Sale of Bonds

ILLUSTRATION 17-4

Cash 102,417
Interest Revenue (4/6 x €4,000) 2,667
Debt Investments 96,193
Gain on Sale of Debt Investments 3,557

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 Debt Investments—Fair Value

Debt investments at fair value follow the same

accounting entries as debt investments held-for-collection
during the reporting period. That is, they are recorded at
amortized cost.

However, at each reporting date, companies

 Adjust the amortized cost to fair value.

 Any unrealized holding gain or loss reported as part of

net income (fair value method).

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 Debt Investments—Fair Value

Illustration: Robinson Company purchased €100,000 of 8

percent bonds of Evermaster Corporation on January 1, 2015,
at a discount, paying €92,278. The bonds mature January 1,
2020, and yield 10 percent; interest is payable each July 1 and
January 1.

The journal entries in 2015 are exactly the same as those for
amortized cost.

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 Debt Investments—Fair Value

Entries are the same as those for amortized cost.

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 Debt Investments—Fair Value

To apply the fair value approach, Robinson determines that,

due to a decrease in interest rates, the fair value of the debt
investment increased to €95,000 at December 31, 2015.
ILLUSTRATION 17-5
Computation of Unrealized Gain on Fair
Value Debt Investment (2015)

Fair Value Adjustment 1,463

Unrealized Holding Gain or Loss—Income 1,463

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 Debt Investments—Fair Value

ILLUSTRATION 17-6
Financial Statement Presentation
of Debt Investments at Fair Value

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 Debt Investments—Fair Value

At December 31, 2016, assume that the fair value

ILLUSTRATION 17-7
of the Evermaster debt investment is €94,000. Computation of
Unrealized Gain on
Debt Investment (2016)

Unrealized Holding Gain or Loss—Income 2,388

Fair Value Adjustment 2,388

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 Debt Investments—Fair Value

ILLUSTRATION 17-8
Financial Statement Presentation
of Debt Investments at Fair Value (2016)

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 Debt Investments—Fair Value

Illustration (Portfolio): Wang Corporation has two debt

investments accounted for at fair value. The following illustration
identifies the amortized cost, fair value, and the amount of the
unrealized gain or loss. ILLUSTRATION 17-10
Computation of Fair Value Adjustment (2015)

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 Debt Investments—Fair Value

Illustration (Portfolio): Wang makes an adjusting entry at

December 31, 2015 to record the decrease in value and to
record the loss as follows.

Unrealized Holding Gain or Loss—Income 9,537

Fair Value Adjustment 9,537

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 Debt Investments—Fair Value

Illustration (Sale of Debt Investments): Wang Corporation

sold the Watson bonds (from Illustration 17-10) on July 1, 2016,
for ¥90,000, at which time it had an amortized cost of ¥94,214.

ILLUSTRATION 17-11
Computation of Loss on
Sale of Bonds

Cash 90,000
Loss on Sale of Debt Investments 4,214
Debt Investments 94,214

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 Debt Investments—Fair Value

Wang reports this realized loss in the “Other income and

expense” section of the income statement. Assuming no other
purchases and sales of bonds in 2016, Wang on December 31,
2016, prepares the information:

ILLUSTRATION 17-12
Computation of Fair
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 Debt Investments—Fair Value

Wang records the following at December 31, 2016.

ILLUSTRATION 17-12

Fair Value Adjustment 4,537

Unrealized Holding Gain or Loss—Income 4,537

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 Debt Investments—Fair Value

Financial Statement Presentation

ILLUSTRATION 17-13
Reporting of Debt
Investments at Fair Value
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 Fair Value Option

Companies have the option to report most financial assets at

fair value. This option
 is applied on an instrument-by-instrument basis and

 is generally available only at the time a company first

purchases the financial asset or incurs a financial liability.

If a company chooses to use the fair value option, it

measures this instrument at fair value until the company no
longer has ownership.

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 Fair Value Option

Illustration: Hardy Company purchases bonds issued by the

German Central Bank. Hardy plans to hold the debt investment
until it matures in five years. At December 31, 2015, the
amortized cost of this investment is €100,000; its fair value at
December 31, 2015, is €113,000. If Hardy chooses the fair
value option to account for this investment, it makes the
following entry at December 31, 2015.

Debt Investment (German bonds) 4,537

Unrealized Holding Gain or Loss—Income 4,537

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 Summary of Debt Investment Accounting

ILLUSTRATION 17-14
Summary of Debt
Investment Accounting

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