FC_03_2808

Reporting of investmentsin financial instruments :Reporting of investmentsin financial instruments


PURPOSES OF INVESTMENTS :PURPOSES OF INVESTMENTS Corporation may have excess cash. To generate earnings from investment income. For strategic reasons.


FINANCIAL INSTRUMENTSclassifications :FINANCIAL INSTRUMENTSclassifications Debt investments Equity investments Hybrid instruments


EQUITY INVESTMENTaccounting methods :EQUITY INVESTMENTaccounting methods 0 --------------20% ------------ 50% -------------- 100% No significant influence usually exists Significant influence usually exists Control usually exists Investment valued using Cost Method Investment valued using Equity Method Investment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation) The accounting depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation. Ownership Percentages


HOLDINGS OF LESS THAN 20% :HOLDINGS OF LESS THAN 20% Cost Method Cost includes all expenditures necessary to acquire investment, such as price paid plus brokerage fees (commissions). Revenue recognized only when cash dividends are received.


HOLDINGS BETWEEN 20% AND 50% :HOLDINGS BETWEEN 20% AND 50% Equity Method Record investment at cost and subsequently adjust amount each period for investor’s proportionate share of earnings (losses) and dividends received by investor.


HOLDINGS OF MORE THAN 50% :HOLDINGS OF MORE THAN 50% Controlling Interest - When one corporation acquires a voting interest of more than 50 percent in another corporation Investor is referred to as the parent. Investee is referred to as the subsidiary. Investment in the subsidiary is reported on parent’s books as a long-term investment. Parent generally prepares consolidated financial statements


MEASUREMENT :MEASUREMENT For the value and reporting purpose, securities (both debt and equity) are classified as Trading securities Available-for-sale securities Held-to-maturity securities Applies to all debt securities and all stock investments in which the holdings are less than 20%.


TRADING SECURITIES :TRADING SECURITIES Held with intention of selling in a short period. Trading means frequent buying and selling. Report at fair value, and report changes from cost as part of net income.


AVAILABLE-FOR-SALE SECURITIES :AVAILABLE-FOR-SALE SECURITIES Held with intent of selling sometime in the future Classified as current assets or as long-term assets, depending on intent of management Report at fair value, and report changes from cost as a component of stockholders’ equity section


BALANCE SHEET PRESENTATION :BALANCE SHEET PRESENTATION Short-Term Investments (also called marketable securities), are securities held by a company that are readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.\ Long-term investments Investments that do not meet both criteria above


DISCLOSURE REQUIREMENTS :DISCLOSURE REQUIREMENTS Large number of detailed disclosure requirements required by the accounting standard A direct consequence of large losses incurred by many organisations Purpose of disclosure requirements to enhance understanding of significance of financial instruments; and to assist in assessing amounts, timing and certainty of cash flows


Slide 13 :There are various disclosures related the ‘risks’ associated with financial instruments Risk to be disclosed relate to: Credit risk (the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation) Liquidity risk (the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities) Market risk (the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices) DISCLOSURE REQUIREMENTS