Fair Value Accounting for Investments
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Dianna Rose VicoFair Value Accounting for Investments
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Dianna Rose Vico- Problem 2
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Common questions
Powered by AIUnder PFRS 9, stock rights are initially measured at fair value and reported as an asset on the balance sheet. For Chris Company, the stock rights were valued at P50,000 (10,000 rights x P5 each), and this amount should be reported in the September 30, 2016 statement of financial position .
Goodwill is not amortized in investment accounting for associates because it represents the future economic benefits arising from assets that are not individually identified and separately recognized. Instead, the appropriate accounting treatment is impairing goodwill if it is determined that its carrying amount exceeds the recoverable amount .
Gains for financial instruments measured at FVOCI are recognized in other comprehensive income and accumulated in equity, not affecting the profit or loss until the asset is sold. In contrast, gains from trading securities are recognized directly in profit or loss. For Mintaro Company, the P800,000 unrealized gain was recorded in other comprehensive income, illustrating this distinction .
The unrealized gain or loss for marketable securities classified as 'trading' is calculated based on the difference between the year-end market value of the securities and their acquisition cost. For Levea Company, the year-end market value was P5,500,000, and the acquisition cost was P5,000,000, resulting in a P500,000 unrealized gain, which should be reported in the 2019 income statement .
Under the equity method, dividends received are considered a return on investment and reduce the carrying amount of the investment. Investment income is recognized for the investor’s share of the investee's net income. For Bonus Company, although dividends received from Bill Company reduce the carrying amount of the investment, they do not affect the investment income recognized, which is based on the share of net income post significant influence acquisition .
Dividends should be classified as a reduction of investment when the investor holds a significant influence or control, generally indicated by holding 20% or more of the investee's shares, and uses the equity method of accounting. In the case of Care Company, dividends from Shark Company, where Care owns a 25% interest, are considered a reduction of investment rather than dividend revenue .
Unrecognized losses on financial assets at fair value through other comprehensive income are reported directly in the statement of comprehensive income under the 'Other Comprehensive Income' section. For Fay Company, the unrealized loss of P400,000 in 2021 was included as a component of other comprehensive income .
When a financial instrument is classified as an asset at fair value through other comprehensive income (FVOCI), acquisition costs such as commissions and transaction fees should be added to the purchase price to determine the initial cost basis. Mintaro Company's total acquisition cost, including the direct acquisition costs of P700,000, resulted in a total cost of P4,700,000 .
A company is deemed to have significant influence over another when it owns 20% to 50% of the voting power, potentially indicated by criterion such as participation in policy decisions or strong representation on the board. This significant influence allows the investor to exert substantial sway over the investee's operating and financial strategies, reflected in accounting for subject entities like Elite's investment in Craze Company .
The equity method may be considered appropriate even with less than 20% ownership if the investor can exert significant influence over the investee. This influence can arise through other factors like having major representation on the investee's board. This scenario is often practical when the investor has significant participation in policy-making processes, evidenced by shared management personnel, as with some of Care Company’s interests .
