Investments Questions For Review of Key Topics: Question 8-1

Chapter 8: Investments
Questions for Review of Key Topics
In application of IFRS 9, the three measurement bases are:

Question 8-1
1. amortized cost basis (“AC”),
2. fair value through profit or loss (“FVTPL”), or
3. fair value through other comprehensive income (“FVOCI”).
In determining the measurement bases of financial assets, IFRS 9 requires responses
Question 8-2to a few critical questions:
1. Is the contractual cash flows from the instrument solely principal and interest on
principal outstanding? We describe this test as the contractual cash flow test (CCF
test);
a. If the instrument passes the contractual cash flow test, is that the objective of the
business model in managing the contractual cash flows of the instrument? In
short, we refer to this as the business model test (BM test);
b. If the instrument passes the CCF test and hold the instrument to collect
contractual cash flows or hold the instrument to collect contractual cash flows
and to sell, is there an accounting mismatch?
c. If there is an accounting mismatch, does the investor chooses to apply the fair
value option?
2. If the instrument fails the contractual cash flow test, is the instrument equity in
nature?
a. If the instrument is equity in nature, is it held for trading?
b. If the instrument is not held for trading, does the investor chooses the irrevocable
option to measure the instrument at FVOCI?
For a pure debt instrument, the contractual cash flows are solely for the payment of
Question 8-3principal and interest on principal. The elements of interest consist of:
1. time value of money,
2. credit risk premium,
3. basic lending costs, and
4. profit margin for lending.
The three business models for debt instruments that passed the contractual cash flow
Question 8-4(CCF) test are as follows:
1. “Hold to collect CCF”. In this business model, investors hold their investments simply to
collect coupon interest payments during the tenure of the debt instruments.
2. “Hold to collect CCF and to sell”. In this business model, investors hold instrument to
collect CCF but is willing to sell if the right opportunity occurs.
3. “All others”. It is mostly implied that the remaining business model is to hold to sell.
Investors using this business model capitalized on the fair value differences of debt
instrument within a short period and focus less on coupon payments.
8-1
Debt instruments held in the business model to collect contractual cash flow is
Question 8-5measured at amortized cost. Since sales before maturity are infrequent and
exceptional, fair value information is less relevant to depict future cash flows.
Debt instruments held in the business model to collect contractual cash flow and to sell is
measured at fair value with changes in fair value taken to other comprehensive income. In this
business model, fair value will be more informative than amortized cost in depicting expected cash
flows from assets presented on the Statement of Financial Position. However, since instruments are
not held for trading purposes, IASB requires the changes in fair value to be taken to other
comprehensive income. The cumulative fair value adjustment is “recycled” to income statement
upon sale of instrument.
Debt instrument held in other models is measured at fair value through profit or loss. In this
business model, fair value information is important in the management of the investment and in
reflecting the expected future cash flows. Due to their implied short-term holdings, taking their fair
value change to the income statement will provide the most relevant information to investors.
The fair value option allows investment to be measured at FVTPL even
Question 8-6though it is classified as an AC or FVOCI investment. The fair value option is only
permitted when there is an “accounting mismatch,” for example, where the
measurement basis of financial asset is inconsistent with other related assets or liabilities. Upon
electing the fair value option, the investment will be measured in the same manner as if it is a
trading (FVTPL) investment.
Equity instruments do not provide a contractual right to a fixed or
Question 8-7determinable amount of cash or the right to exchange financial instruments under
conditions that are potentially favorable to the holder. On the other hand, the holder
of a debt instrument has a contractual right to receive a fixed or determinable amount of cash or
financial instruments from the counterparty. For debt instruments, the issuer will have a financial
liability if it has a contractual obligation to pay ash or transfer financial instrument to the counter
party under conditions that are potentially disadvantageous to the issue. Upon default on the
payments, the investors of debt instruments can take legal action against the issuer to claim the
rights to payment. The same right of recourse does not apply to equity holders who are residual risk
takers.
The default measurement basis for all equity instrument is fair value through
Question 8-8 profit or loss (“FVTPL”). FVTPL is used for trading and non-trading equity
instruments.
An equity instrument that is not held for trading qualifies to be measured at

Question 8-9fair value through other comprehensive income (FVOCI) if the investor opts
irrevocably to measure the instrument at FVOCI. This option allows investors who
are risk averse to recognize changes in fair value in other comprehensive income (OCI) and not net
income. This approach prevents excessive volatility in the income statement. However, the investor
is not permitted to recycle the fair value change from OCI to net income on disposal.
To qualify for the fair value to OCI option, the investor must demonstrate that the equity
instrument is not held for trading. If the answer to any one of the following questions is “yes,” the
investment is held for trading and the investor would not be able to adopt the FVOCI option for the
equity instrument:
Held for trading holding intention meets one of the following criteria in IFRS 9:
1. Is equity instrument acquired primarily for purposes of selling in the near term?
8-2
2. Is equity instrument part of and managed within a larger portfolio of identified financial
instruments where there is evidence of recent and actual pattern of speculative activity? Or
3. Is equity instrument a derivative?
The primary differences between debt instruments and equity instruments

Question 8-10measured at FVOCI relates to the accounting treatment on disposal of the
instruments and impairment testing.
Upon sale of FVOCI debt instrument, cumulative fair value changes are reclassified to the
income statement. However, when an FVOCI equity instrument is sold, cumulative fair value
changes are never reclassified to income statement but are left permanently in OCI or transferred, at
the investor’s discretion, to another equity account. Hence, the OCI from equity instruments must
never be taken to income statement on disposal of the investment.
FVOCI debt instrument is subjected to impairment tests, with impairment losses or their
reversal taken to income statement immediately. As for FVOCI equity instrument, they are not
subjected to impairment tests. Fair value changes, whether impairment or otherwise, are taken to
OCI for equity investments irrevocably designated at FVOCI.
Amortized cost debt investments are subject to impairment loss reviews.
Question 8-11Expected credit loss is subject to a three-stage credit loss model. A significant rise
in credit risk since purchase date or a loss event is a trigger for recognizing the
lifetime expected credit loss in stage 2 and stage 3 scenarios, respectively. Hence, the reason for the
rise of the market interest rate has to be ascertained. When market rates of interest rise after fixed-
rate security is purchased as a result of a significant increase in credit risk of the issuer or a loss
event, investors will have to recognize an impairment loss in the income statement even if they
believe that the values of investment will recover. This will result in a corresponding credit in the
investment account resulting in a decrease in value.
However, if market rates of interest falls instead and fair value of investment increases, the
investors will not recognize a gain in the investment measured at amortized cost and there is no
effect on the investment account. An exception to not recognizing a gain in fair value is when the
gain relates to a reversal of an impairment loss that was previously recognized. Such a gain is
described as an “impairment gain” in IFRS 9.
IFRS 13 Fair Value Measurement provides guidance to help financial
Question 8-12 statement users assess the quality of fair value measurements. IFRS 13 provides a
fair value hierarchy (levels 1, 2, or 3) where level 1 is the most objective measure
and level 3 the least objective.
Level 1 requires the use of quoted prices or publicly available prices in active markets of
financial instruments such those traded on a securities exchange, futures exchange, or other active
markets. An example of level 1 fair values is the quoted price of a security traded on the London
Stock Exchange. Level 2 fair valuation requires the use of observable inputs in the valuation of an
instrument when quoted prices are unavailable for that instrument. An example of level 2 valuation
is a privately traded bond that is not traded in an active market but whose fair value can be derived
from interest rates that are observable. Level 3 fair value uses unobservable inputs to determine fair
value measurements. An example of level 3 valuation relates to private equity shares that requires
the use of subjective assumptions and estimates in its valuation.
Disclosures of level 1, 2, and 3 valuation are required by IFRS 7 Financial Instruments:
Disclosures. Investors and other users of financial information would be able to assess the quality
and reliability of the fair value information in the financial statements and make appropriate
decisions in response to their assessment of the quality of information. For example, if level 3
8-3
financial assets report large gains, investors would be more cautious in relying on the income
numbers resulting from these large gains.
For investments held for an unspecified period of time, it is likely that
Question 8-13investors will sell these investments when the market prices are in their favor. As
such fair value will be more informative than amortized cost in depicting expected
future cash flow from assets presented on the Statement of Financial Position.
Question 8-14 FVOCI instruments are reported at fair value, and resulting gains and losses
are not included in the determination of income for the period. Rather, they are
reported as part of other comprehensive income. Other comprehensive income is reported
separately from net income in the Statement of Profit or Loss and Other Comprehensive Income.
Comprehensive income is a more all-encompassing view of changes in
Question 8-15shareholders’ equity than net income. It includes the net income and other
comprehensive income (OCI). OCI are all income items that bypass income
statement and that do not arise form transaction with owners. Items can be recognized in OCI only
when they are permitted or required by an IFRS. An example of OCI is the fair value change from a
financial asset that is permitted or required to be carried at FVOCI.
An investment-related income that is not included in net income is the fair value change from
an FVOCI equity instrument. It is never reclassified to net income on sale or impairment. Fair value
from an FVOCI debt instrument is recognized in OCI but is reclassified to net income on sale or
impairment.
Unrealized gains or losses on FVTPL securities are reported in the income

Question 8-16statement as if they actually had been realized. FVTPL securities under IFRS 9 are
either held-for-trading investments or debt investments that the investor chooses to
measure at FVTPL (when an accounting mismatch exists). By default, all equity investments are
measured at FVTPL unless the investor opts for the FVOCI option for non-trading investments.
Typically, FVTPL securities that are held for trading are actively managed in a trading account
with the express intent of profiting from short-term market price changes. So, any gains and losses
that result from holding securities during market price changes are suitable measures of success or
lack of success in achieving that goal.
When an accounting mismatch occurs, for example, when a financial asset is measured at
amortized cost and related financial assets or liabilities measured at FVTPL, measuring all items at
FVTPL will provide more relevant information to the stakeholders.
On the other hand, unrealized gains or losses on FVOCI securities are not reported in the
income statement. By definition, these securities are not acquired for the purpose of profiting from
short-term market price changes, so gains and losses from holding these securities while prices
change are less relevant performance measures to be included in earnings.
In this scenario, the financial asset held is equity in nature. Harris Corporation
Question 8-17has opted to measure the equity investment at FVOCI under the irrevocable
option. The drop in the market price of the shares is a significant decline that is
attributable to a major and persistent loss of revenue. Although the loss is “impairment” in nature,
the loss is not recognized in the income statement but in other comprehensive income. Equity
investments measured at FVOCI give rise to changes in fair value that are held in OCI and which
are not reclassified to income statement on sale or impairment. Gains and losses on FVOCI equity
investments are captured in OCI and do not affect net income.
8-4
Answers to Questions (continued) Unsecured bonds would have pass the contractual cash
flow test where its cash flow are mainly the interest and
Question 8-18 principal repayment. Depending on the business model,
there will be different measurement basis used to measure
the unsecured bonds. If the business model is not to hold to collect contractual cash flows or the
mixed model of holding to collect contractual cash flows and to sell, the unsecured bonds will be
measured at FVTPL. However, even if business model falls under these two business models, the
investor can adopt the fair value option to permit FVTPL measurement for the unsecured bonds.
To adopt the fair value option for the unsecured bonds, there has to be an accounting mismatch,
where the measurement basis of the financial asset is inconsistent with other related assets or
liabilities.
The default measurement basis for all equity instruments is FVTPL. It is likely that the equity
shares are held for trading since it was purchase for resale in the short term. As such, the
irrevocable option under IFRS 9 should not be adopted.
When an investor elects the irrevocable option to measure non-trading equity
Question 8-19instrument at FVOCI, IFRS 7 Financial Instruments: Disclosures paragraphs 11A
and 11B require disclosures on (1) reasons for using this presentation alternative,
(2) information on dividends, (3) transfers of the cumulative gain or loss within equity with
reasons, and (4) reasons for disposing the investment and cumulative gain or loss on disposal.
When a company elects the fair value option for a pure debt investment that
Question 8-20would otherwise have been classified as amortized cost or FVOCI investments, it
simply presents those investments as fair value through profit or loss and accounts
for them as if it is a trading security.
The equity method is used when an investor can’t control but can
Question 8-21“significantly influence” the investee. For example, if effective control is absent,
the investor still might be able to exercise significant influence over the operating
and financial policies of the investee if the investor owns a large percentage of the outstanding
shares relative to other shareholders. By voting those shares as a block, the investor often can sway
decisions in the direction desired. We presume, in the absence of evidence to the contrary, that the
investor exercises significant influence over the investee when it owns between 20 percent and 50
percent of the investee's voting shares.
The equity method, like consolidation, views the

investor and investee as a special type of single entity. By
the equity method, though, the investor doesn’t include
separate financial statement items of the investee on an
Answers to Questions (continued) item-by-item basis as in consolidation. Rather, by the
equity method, the investor reports its equity interest in the
Question 8-22 investee as a single investment account. That single
investment account is periodically adjusted to reflect the
effects of consolidation, or the investor’s share of the post-acquisition change in net assets without
actually consolidating financial statements.
The investor should account for dividends from the investee as a reduction in
Question 8-23the investment account. Since investment revenue is recognized as the investee
earns it, it would be inappropriate to again recognize revenue when earnings are
distributed as dividends. Rather, the dividend distribution is considered to be a reduction of the
8-5
investee’s net assets, indicating that the investor’s ownership interest in those net assets declines
proportionately.
Question 8-24
The equity method attempts to approximate the effects of accounting for the purchase of the
investee as a consolidation. Consolidated financial statements report acquired net assets at their fair
values as of the date the investor acquired the investee. The accounting in the consolidated financial
statements subsequent to the acquisition date is based on those fair values. So, if Finest had
consolidated its acquisition of Penner, Penner’s depreciable assets would have been put on Finest’s
statement of financial position in their respective asset accounts at their fair value on the date of
acquisition and then depreciated over 10 years. Under the equity method, Finest’s investment in
Penner is shown in a single investment account. Therefore, for the equity method to approximate
consolidation, it would reduce both investment revenue (as if depreciation expense were being
recognized) and the investment (as if the book value of the asset were being reduced) by the
negative income effect of the “extra depreciation” the higher fair value would cause. This would
equal 40% × $12 million ÷ 10 years = $480,000 each year for ten years.
Answers to Questions (continued) The investment account was decreased by $40,000

(40% × $100,000). Cash increased by the same amount.
Question 8-25 There is no effect on the income statement.
These instruments “derive” their values or contractually required cash flows
Question 8-26from an “underlying,” for example, some other security or index.
The two purposes for which derivative contracts are used are:
Question 8-27
1. to protect or mitigate risk (hedging instrument) or
2. held for trading (speculative activity).
Depending on the purpose, the accounting treatment for derivative contracts differs. If
derivative contracts are used for hedging purposes, special accounting rules called “hedge
accounting” applies. Essentially, the changes in fair value of the hedging instrument and hedged
item must be recognized and measured in a manner that creates an offsetting effect (the hedging
effect). On the other hand, if derivative contracts are held for trading, it must be measured at
FVTPL.
By default, a derivative is a held for trading security unless it is properly designated as a
hedging instrument.
Stage 1 impairment loss is when investment has low credit risk or where there
Question 8-28is no significant deterioration in credit quality of investment since inception. In
stage 1 situations, expected credit loss for the following twelve months should be
provided for as loss allowance. Expected credit loss is calculated using the probability of default in
the subsequent twelve months multiplied by the expected life time losses.
Stage 2 impairment loss occurs when there is significant increase in credit risk
Question 8-29since inception but investment has not encountered a credit default event (e.g.,
bankruptcy or default in payments). In stage 2, the investor has to provide a loss
allowance that is equal to the life time expected credit loss.
The fundamental difference between stage 3 and stage 2 expected credit loss is the calculation
of interest revenue. In stage 3, interest is calculated based on the amortized cost balance (gross
carrying amount less loss allowance) whereas for stage 2, interest is calculated based on the gross
carrying amount.
8-6
Life time expected credit loss is the present value of the weighted average cash
Question 8-30shortfall. Cash shortfall is the difference between the contractual cash flows on
contractually due dates and the expected cash flows on those dates. The difference
is probability-weighted to arrive at the weighted average cash shortfall. As the difference arises in
the future, the weighted average cash shortfall is discounted by the appropriate interest rate to arrive
at the present value of the weighted average cash shortfall.
Expected credit loss is the present value of probability-weighed credit loss.
Question 8-31The attributes necessary are the effective interest rate (discount rate), contractual
cash flows at contractual dates, and estimates of expected cash flows on those
dates and the probabilities of those cash shortfalls occurring.
The main difference is that for “purchased or originated credit-impaired”
Question 8-32financial assets, the investor has to provide the lifetime expected credit loss at the
very start. The loss is also known as as a “day 1” loss allowance. Moreover, since
the financial assets is usually purchased at a sharp discount, the credit-adjusted effective interest
rate is used instead of the typical effective interest rate. In stage 1 type loans, the expected credit
loss is very small, being the probability of default in the next twelve months multiplied by the
lifetime credit losses.
Answers to Questions (concluded) The main difference is that accounting for loss
allowance on trade receivables, lease receivables or
Question 8-33 contract assets do not require the application of the three-
stage model. Instead, the investor is required to recognize
lifetime expected credit loss for these receivables that do not have a significant financing
component. Even if they have a significant financing component, the investor is permitted to
recognize lifetime expected credit loss as an accounting policy choice.
The underlying reason is practical expediency: it is difficult and onerous for sellers to track each
receivable for movement across the three stages.
Since this fund won’t be used within the upcoming operating cycle, it is a
Question 8-34noncurrent asset. It should be reported as part of “Investments and funds.”
Part of each premium payment the company makes is not used by the
Question 8-35insurance company to pay for life insurance coverage, but rather is “invested” on
behalf of the insured company in a fixed-income investment. As a result, the
periodic insurance premium should not be expensed in its entirety; an appropriate portion should be
recorded instead as a noncurrent asset—cash surrender value.
When a creditor’s investment in a receivable becomes impaired, due to a
Question 8-36troubled debt restructuring or for any other reason, the receivable is remeasured
based on the discounted present value of currently expected cash flows at the
loan’s original effective rate (regardless of the extent to which expected cash receipts have been
reduced). The extent of the impairment is the difference between the carrying amount of the
receivable (the present value of the receivable’s cash flows prior to the restructuring) and the
present value of the revised cash flows discounted at the loan’s original effective rate. This
difference is recorded as a loss at the time the receivable is reduced.
8-7
Brief Exercises (a)
Brief Exercise 8-1

Investment in bonds (principal amount).................. 720,000
Discount on bond investment (difference)......... 120,000
Cash (price of bonds).......................................... 600,000
(b)
Cash (1.5% × $720,000).......................................... 10,800
Discount on bond investment (difference)............ 1,200
Interest revenue (2% × $600,000)....................... 12,000
Unlike for FVOCI securities, unrealized gains and losses

for FVTPL securities are included in net income. S&L
Brief Exercise 8-2reports its $2,000 loss in 2022 earnings. When the fair value
rises by $7,000 in 2023, that amount is reported in 2023
earnings ($5000 as a realized gain, and $2000 as the reversal of the unrealized loss
that was recognized in 2022). S&L’s journal entries for these transactions would be:
2022
December 27
Investment in Amber Co shares .......................................... 875,000
Cash................................................................................. 875,000
December 31
Net unrealized gains and losses—I/S................................... 2,000
Investment in Amber Co shares ($875,000 − 873,000)........ 2,000
Brief Exercise 8-2 (concluded) 2023

January 3
Cash (selling price)................................................................. 880,000
Gain on investments (to balance)....................................... 7,000
Investment in Amber Co shares (account balance).............. 873,000
Brief Exercise 8-3 Unlike for FVTPL securities, unrealized gains and losses
for FVOCI securities are not included in net income. S&L
reports its $2,000 loss in 2022 as other comprehensive income in the statement of
comprehensive income. When the fair value rises to $880,000 in 2023, the amount
8-8
reported in 2023 earnings is the $5,000 gain realized by the sale of the securities.
S&L’s journal entries for these transactions would be:
2022
December 27
Cash................................................................................. 875,000
December 31
Net unrealized gains and losses—OCI................................ 2,000
Investment in Amber Co shares ($875,000 − 873,000)........ 2,000
2023
January 3
Realized gain on investments—OCI................................ 7,000
Investment in Amber Co shares (cost).............................. 873,000
Gains on disposal of FVOCI equity investments are not reclassified to the income
statement and remain in OCI. However, IFRS 9 permits them to be transferred to
another equity account bypassing the income statement.
Brief Exercise 8-4

FVOCI securities are reported at fair value, and resulting unrealized gains and
losses are not included in the determination of net income for the period. Rather, they
are reported as “other comprehensive income” in the statement of comprehensive
income. The accumulated balance of net unrealized gains and losses is reported as a
separate component of shareholders’ equity, as part of other comprehensive income.
The adjusting entry needed to increase the fair value adjustment from $110,000 to
$170,000 is:
Investment in Crystal Co shares ($670,000 − 610,000) 60,000
Net unrealized gains and losses—OCI............ 60,000
Brief Exercise 8-5 These are equity securities and are reported at their
fair value, $4,000,000. They are reported as either FVTPL or
FVOCI financial assets. The shares have been held for over a year. It is unlikely that
8-9
they are held-for-trading securities. Of course, the equity method isn’t appropriate
either because 40,000 shares of a large public company certainly don’t constitute
“significant influence.” Under IFRS 9, the default measurement basis is FVTPL for
equity investments unless Adams Industries opt to measure them at FVOCI.
Brief Exercise 8-6 Because S&L elected to classify the equity investments at
FVOCI under the irrevocable option permitted by IFRS 9, it
would measure this investment at fair value thorough other comprehensive income.
Therefore, S&L reports its $2,000 loss in 2022 other comprehensive income. When
the fair value rises by $7,000 in 2023, that amount is reported in 2023 other
comprehensive income. S&L’s journal entries for these transactions would be:
2022
December 27
Cash................................................................................. 875,000
December 31
Net unrealized gains and losses—OCI................................ 2,000
Investment in Amber Co shares ($875,000 − 873,000)... 2,000
2023
January 3
Gain on investments (to balance)—OCI............................. 7,000
Investment in Amber Co shares (account balance).............. 873,000
Gains on disposal of FVOCI equity investments are not reclassified to the income
statement and remain in OCI. However, IFRS 9 permits them to be transferred to
another equity account bypassing the income statement.
Brief Exercise 8-7 An investor should account for dividends from an equity
method investee as a reduction in its investment account in
the consolidated financial statements. Since investment revenue is recognized as the
investee earns it, it would be inappropriate to again recognize revenue when earnings
are distributed as dividends. Instead, the dividend distribution is considered to be a
reduction of the investee’s net assets, reflecting the fact that the investor’s ownership
interest in those net assets declined proportionately. Turner’s cash increased by $2
8-10
million (40% × $5 million). Its investment account declined by the same amount.
There is no effect on the income statement.
Brief Exercise 8-8 An investor should account for dividends from an

investment not accounted for by the equity method as
investment revenue. Turner’s cash increased by $500,000 (10% × $5 million). It also
reports $500,000 as investment revenue in the income statement when it measures the
investment at FVTPL or FVOCI.
Under the equity method, an investor should account for dividends from an equity
method investee as a reduction in its investment account in the consolidated financial
statements. As a result, Turner’s cash increased by $500,000 (10% × $5 million) and
investment account decreased by $500,000.
Given Turner’s choice of not electing under the

Brief Exercise 8-9irrevocable option to measure investment at fair value
through other comprehensive income, it would account for
this investment as a FVTPL security.
2022
January 2
Investment in ICA Company ..............................................10,000,000
Cash................................................................................. 10,000,000
December 30
Cash (40% × $500,000) .......................................................... 200,000
Investment revenue ......................................................... 200,000
December 31
Fair value adjustment ($11.5M − 10M)................................... 1,500,000
Net unrealized gains and losses—I/S
(or “Investment revenue”)................................................ 1,500,000
8-11
With the equity method, we attempt to approximate the

Brief Exercise 8-10effects of accounting for the purchase of the investee as a
consolidation. Consolidated financial statements report
acquired net assets at their fair values. Both investment revenue and the investment
would be reduced by the negative income effect of the “extra depreciation” the higher
fair value would cause. This would equal 30% × $50 million ÷ 15 years = $1 million
each year for fifteen years.
Although the drop in the market price of shares results
in an impairment loss for the equity investments, the loss is
Brief Exercise 8-11taken to other comprehensive income. Under the
irrevocable option, fair value changes on equity
investments are taken to other comprehensive income. Gains or losses on disposal
and impairment are not reclassified to income statement. This accounting treatment is
different for fair value changes on debt investments. IFRS 9 simplifies the accounting
for equity investments measured at FVOCI by requiring all changes to be taken to
OCI in all situations, including impairment:
Unrealized loss—OCI ($4.50 × $100,000 shares)... 450,000

Investment in Branch Pharmaceuticals ........... 450,000
Brief Exercise 8-12

Under IFRS 9, impairment loss on a debt or receivable is recognized and
measured in accordance with the expected credit loss model. Expected credit loss is
the present value of probability-weighted difference between contractual cash flows
at contractual payment dates and the expected cash flows at those dates. IFRS 9
adopts a three-stage model that requires the investor or lender to evaluate expected
credit loss over different time horizons, depending on the credit quality of the
instrument.
Since the probability of default has not change since initial recognition, the credit
quality is considered “low.” As such, FIN has to provide a loss provision that is equal
to twelve-month expected credit losses.
For FIN, the cash flows are as follows,
Contractual cash flows per annum = $600,000 × 7% = 42,000

Weighted average cash shortfall = Cash shortfall × Probability of default
8-12
2020 2021 2022 2023 2024

Probability of default within twelve
months 0.5%
42, 42, 42, 42, 642,
Contractual cash flows 000 000 000 000 000
Expected cash flows 42,000 42,000 42,000 0 0
Cash shortfall 0 0 0 42,000 642,000
Weighted average cash shortfall

0 0 0 210 3,210
(ignored discounting)
Loss allowance as at December 31, 2020 = 0.5% × ($42,000 + $642,000) = $210

+ 3,210 = 3,420
Brief Exercise 8-13

The increase in probability of default to 25 percent is considered as “significant”.
However, S Co has not defaulted on any interest payment; the impairment loss is
stage 2 in the expected credit loss model. In stage 2, the investor or lender has to
provide a loss allowance that is equal to the lifetime expected credit loss. However,
interest revenue is calculated in the usual way by multiplying the effective interest
rate to the gross carrying amount (before deducting the impairment loss).
2022 2023 2024

Probability of default in lifetime 25%
42, 42, 642,
Contractual cash flows 000 000 000
Expected cash flows 42,000 0 0
Cash shortfall 0 42,000 642,000
Weighted average cash shortfall 0 10,500 160,500

Present value of weighted average
0 9,171 131,016
shortfall
Loss allowance as at December 31, 2021 = $9,171 + 131,016 = 140,187

Interest revenue = $600,000 × 7% = 42,000
Brief Exercise 8-14

The increase in the probability of default to 90 percent is considered as
“significant.” Since S Co has also defaulted on the interest payment, a credit loss
event has occurred and the loan falls in stage 3 of the expected credit loss model. In
stage 3, the lifetime expected credit losses must be recognized in the loss allowance.
8-13
A fundamental difference between stage 2 and stage 3 is that interest on stage 3

loans is calculated on their amortized cost balance (i.e., gross carrying amount less
loss allowance) whereas interest on stage 2 loans is calculated on their gross
carrying amount (before deducting the loss allowance).
2023 2024
42 642
Contractual cash flows ,000 ,000
Expected cash flows 0 0
Cash shortfall 42,000 642,000
Weighted average cash shortfall 37,800 577,800

Present value of weighted
35,327 504,673
average shortfall
Loss allowance as at December 31, 2023 = $35,327 + 504,673 = $540,000
Exercises
Interest revenue = ($600,000 − 540,000) × 7% = $4,200
Exercise 8-1Requirement 1 ($ in millions)

Investment in bonds (principal amount).................. 240
Discount on bond investment (difference)......... 40
Cash (price of bonds).......................................... 200
Requirement 2
Cash (3% × $240 million)....................................... 7.2
Discount on bond investment (difference)............ 0.8
Interest revenue (4% × $200)............................. 8.0
Requirement 3
Tanner-UNF reports its investment in the December 31, 2022, statement of
financial position at its amortized cost—that is, its book value:
Investment in bonds............................................ $240.0
Less: Discount on bond investment ($40 − 0.8 million) 39.2
Amortized cost................................................ $200.8
8-14
If the investor holds the investments in a business model to collect

contractual cash flows, increases and decreases in the fair value between the
time a quoted debt security is acquired and the day it matures to a prearranged
maturity value are relatively unimportant. For this reason, the measurement
basis is amortized cost rather than fair value in the statement of financial
position.
Requirement 4 ($ in millions)
Cash (proceeds from sale)....................................... 190.0
Discount on bond investment (balance, determined above) 39.2
Loss on sale of investments (to balance)............... 10.8
Investment in bonds (principal amount).............. 240.0
Exercise 8-2November 1
($ in millions)
Cash................................................................. 2.4
Investment revenue...................................... 2.4
December 1
Investment in Facsimile Enterprises bonds..... 30
Cash............................................................. 30
December 31
Investment in Treasury bills ........................... 8.9
Cash............................................................. 8.9
December 31
Investment revenue receivable—Convenience
bonds ($48 million × 10% × 2/12)....................... 0.8
Investment revenue receivable—Facsimile
Enterprises bonds ($30 million × 12% × 1/12).... 0.3
Investment revenue ................................... 1.1
Note: Securities held in a business model to collect contractual cash flow are carried at
amortized cost and are not adjusted to fair value.
Investment in G Motors ordinary shares 40,000

Exercise 8-3 .........Brokerage fee expense 1,200
Cash ([800 shares × $50] + $1,200)................... 41,200
8-15
Cash ([800 shares × $53] − $1,300)....................... 41,100

Gain on sale of investments......................... 1,100
Investment in G Motors ordinary shares .... 40,000
Exercise 8-4 Requirement 1
Net unrealized gains and losses—OCI 25,000

Investment in ANC Company 30,000
Investment in Drake Company 80,000
Investment in Blair Ltd. 75,000
Investment in Aaron Industries 60,000
Requirement 2
None. Accumulated net gains and losses for FVOCI securities are reported as
other comprehensive income, a separate component of shareholders’ equity,
and changes in the balance are reported as other comprehensive income or
loss in the statement of profit or loss and other comprehensive income rather
than in net income. This statement can be reported either (a) as a single
statement of profit or loss and other comprehensive income or (b) as two
statements comprising of income statement and statement of profit or loss and
other comprehensive income. In either presentation, the changes in fair value
of FVOCI securities are reported separately from net income.
Exercise 8-5Requirement 1
Debt investments are those whose contractual cash flows are solely principal and
interest on principal only. The IBT shares do not meet this condition; hence, it is
not possible to measure the IBT shares at amortized cost. Since the IBT shares are
held as long-term investments, they would not be classified as “held for trading”
securities.
Equity instruments are reported at fair value, and unrealized gains or losses are
included in the determination of income unless the investor choose to elect the
irrevocable option to recognize equity instrument at FVOCI. Hence, the IBT
8-16
shares are measured at FVTPL, unless Union Company opts to measure the
shares at FVOCI.
Requirement 2
December 31, 2022

Net unrealized gains and losses (10,000 shares × [$58 − 60]) .......... 20,000
Investment in IBT shares..................................................... 20,000
Exercise 8-5 (concluded) Requirement 3
December 31, 2023
($ in 000s) Unrealized
FVTPL Securities Carrying Value Fair Value Gain (Loss)
IBT shares—Dec. 31, 2023 $580 $610 $30
Investment account 10,000 shares × [$61 − 58])............................... 30,000

Net unrealized gains and losses—I/S....................................... 30,000
2022
8-17
March 2
($ in millions)
Investment in Platinum Gauges shares ....................................... 31
Cash......................................................................................... 31
April 12
Investment in Zenith bonds......................................................... 20
Cash......................................................................................... 20
July 18
Cash............................................................................................. 2
Investment revenue.................................................................. 2
October 15
Cash............................................................................................. 1
October 16
Cash............................................................................................. 21
Investment in Zenith bonds..................................................... 20
Gain on sale of investments..................................................... 1
November 1
Investment in LTD preference shares ......................................... 40
Cash......................................................................................... 40
Exercise 8-6 (continued) December 31

Accumulated
($ in millions) Unrealized
FVOCI Securities Carrying Amount Fair Value Gain (Loss)
Platinum Gauges shares $31 $32* $1
LTD preference shares 40 37** (3)
Totals $71 $69 $(2)
*$32 × 1 million shares

**$74 × 500,000 shares
8-18
Adjusting entry:
Investment in Platinum Gauges shares ....................................... 1
Net unrealized gains and losses—OCI ($71 − 69)......................... 2
Investment in LTD preference shares...................................... 3
2023
January 23
($ in millions)
Cash ([1 million shares × 1/2] × $32)................................................. 16.0
Investment in Platinum Gauges
shares ($32 million cost × 1/2).................................................. 16.0
OCI balances on equity investments are not reclassified to net income on

disposal.
March 1
Cash ($76 × 500,000 shares)............................................................. 38
Loss on sale of investments (OCI)................................................ 1
Investment in LTD preference (carrying amount)....................... 37
OCI balances on equity investments are not reclassified to net income on

disposal.
8-19
Requirement 2
Exercise 8-6 (concluded)
2022 Income Statement
($ in millions)
Investment revenue (from July 18; October 15)................................ $3
Gain on sale of debt investments (from October 16)....................... 1
Other comprehensive income:

Net unrealized gains and losses on investments................... $2
Note: Unlike for FVTPL securities, unrealized gains and losses are not
included in income for FVOCI securities. Rather, they are included in other
comprehensive income and accumulated in a separate component of
shareholders’ equity.
Purchase ($ in millions)
Investment in Jackson Industry shares........................................ 90
Cash ........................................................................................ 90
Net income
No entry for fair value changes
Dividends
Cash (5% × $60 million).................................................................. 3
Adjusting entry
Investment in Jackson Industry shares ($98 − 90 million).............. 8
Net unrealized gains and losses—OCI.................................... 8
8-20
Requirement 2
Investment revenue.......................... $3 million
Note: An unrealized gain is not included in net income for FVOCI securities.
Rather, it is included in other comprehensive income and accumulated in
shareholders’ equity in other comprehensive income.
2022
December 17
Investment in Grocers’ Supply preference shares ............... 350,000
Cash................................................................................. 350,000
December 28
Cash..................................................................................... 2,000
Investment revenue.......................................................... 2,000
December 31
Investment in Grocers’ Supply preference shares................ 50,000
([$4 × 100,000 shares] − $350,000)......................................... 50,000
2023
January 5
Loss on investments (to balance)............................................ 5,000
Investment in Grocers’ Supply preference
shares (account balance)................................................. 400,000
8-21

Statement of Financial Position:
FVTPL securities.................................................... $400,000
Income Statement:
Investment revenue (dividends)........................................... $2,000
Net unrealized gains and losses (from adjusting entry) $50,000
Note: Unlike for FVOCI securities, unrealized gains and losses for FVTPL
securities are included in income.
Exercise 8-91. Investments reported as current assets.

Security A $910,000
Security B 100,000
Security C 780,000
Security E 490,000
Total $2,280,000
2. Investments reported as noncurrent assets.
Security D $915,000
Security F 615,000
$1,530,000
3. Unrealized gain (or loss) component of income before taxes.

FVTPL Securities:
Cost Fair value Unrealized
gain (loss)
Security A $900,000 $910,000 $10,000
B 105,000 100,000 (5,000)
Totals $1,005,000 $1,010,000 $5,000
4. Unrealized gain (or loss) component of OCI in shareholders’ equity.

FVOCI Securities:
8-22
Cost Fair value Unrealized

gain (loss)
Security C $700,000 $780,000 $80,000
D 900,000 915,000 15,000
Totals $1,600,000 $1,695,000 $95,000
Accumulated
FVOCI Securities Carrying amount Fair Value Gain (Loss)
IBT shares—Dec. 31, 2022 $1,200 $1,175 $(25)
Net unrealized gains and losses—OCI................................... 25,000

Investment in IBT shares ($1,175,000 − 1,200,000)............. 25,000
Exercise 8-10 (continued) Requirement 2

Accumulated
FVOCI Securities Carrying amount Fair Value Gain (Loss)
IBT shares—Dec. 31, 2022 $1,200 $1,275 $75
Investment in IBT shares ($1,275,000 − 1,200,000) ................. 75,000

Net unrealized gains and losses—OCI............................ 75,000

Accumulated
FVOCI Securities Carrying Amount Fair Value Gain (Loss)
IBT shares—Dec. 31, 2022 $1,200 $1,375 $175
Investment in IBT shares ($1,375,000 − 1,200,000) .................. 175,000

Net unrealized gains and losses—OCI............................ 175,000
8-23
Requirement 1
Exercise 8-11
The sale of the A company shares increased Harlon’s pretax earnings by $1 million in
2023. The purchase of the C Company shares had an effect on Harlon’s 2023
earnings by reducing net income by $1 million (because the shares are classified as
FVTPL securities, any unrealized gains or losses occurring after purchase during
2023 would affect 2023 earnings). Here are the entries used to record those two
transactions:
December 31, 2022 ($ in millions)

Net unrealized gains and losses—I/S ($20 − 14) 6
Investment in A Company shares 6
June 1, 2023 ($ in millions)

Cash 15
Gain on sale of investments—I/S (difference) 1
Investment in A Company shares (carrying amount) 14
September 12, 2023

Investment in C Company shares 15
Cash 15
December 31, 2023 ($ in millions)

Net unrealized gains and losses—I/S ($15 − 14) 1
Investment in C Company shares 1
Harlon’s FVTPL securities portfolio should be reported in its 2023 statement of

financial position at its fair value of $101 million:
December 31, 2023
($ in millions) Cost, Dec. 31 Fair Value, Dec. 31

FVTPL Securities 2022 2023
A Company shares $20 $14 na
8-24
B Company bonds 35 35 $37

C Company shares 15 na 14
D Industries shares 45 46 50
Totals $115 $95 $101
In 2023, Harlon would have had a net gain of $6 ($101 − 95) in the income
statement.
Cash 15
Investment in B Company bonds 2
Investment in D Industries shares 4
Net gains on investments—I/S (difference) 6
Investment in A Company shares ....... 14
Investment in C Company shares........ 1
The investment would be accounted for as an FVOCI investment:
Purchase
Investment in AMC ordinary shares.................................... 480,000
Cash ............................................................................... 480,000
Net income
No entry
Dividends
Cash (20% × 400,000 shares ×$0.25)......................................... 20,000
Investment revenue......................................................... 20,000
Adjusting entry
Investment in AMC ordinary shares ($505,000 − 480,000)..... 25,000
Net unrealized gains and losses—OCI........................... 25,000
Requirement 2
The investment would be accounted for using the equity method in the separate
financial statements of Painters Equipment Company. Equity accounting
entries from the purchase through the end of the year are as follows:
8-25
Purchase
Investment in AMC shares................................................... 480,000
Cash ............................................................................... 480,000
Net income
Investment in AMC shares (20% × $250,000) ....................... 50,000
Investment revenue......................................................... 50,000
Dividends
Cash (20% × 400,000 shares × $0.25)........................................ 20,000
Investment in AMC shares............................................. 20,000
Adjusting entry
Exercise 8-13
Investment in Nursery Supplies shares.................................... 56
Cash .................................................................................... 56
Net income
Investment in Nursery Supplies shares (30% × $40 million) ...... 12
Investment revenue.............................................................. 12
Dividends
Cash (30% × 8 million shares × $1.25)........................................... 3
Investment in Nursery Supplies shares................................ 3
Adjusting entry
Exercise 8-14Requirement 1: Error discovered before the books are adjusted

or closed in 2022.
8-26
The journal entry the company made is:
Cash............................................................. 100,000
Investments.............................................. 100,000
The journal entry the company should have made is:
Cash............................................................. 100,000
Investments.............................................. 80,000
Gain on sale of investments ($100,000 − 80,000) 20,000
Therefore, to get from what was done to what should have been done, the
following entry is needed:
Investments ($100,000 − 80,000).................... 20,000

Gain on sale of investments..................... 20,000
Requirement 2: Error not discovered until early 2023.
Investments ($100,000 − 80,000).................... 20,000

Retained earnings.................................... 20,000
Exercise 8-15
Investment in Carne Cosmetics shares................................ 68
Cash ................................................................................ 68
Net income
Investment in Carne Cosmetics shares (25% × $40 million) . . 10
Investment revenue.......................................................... 10
Dividends
Cash (4 million shares × $1)..................................................... 4
Investment in Carne Cosmetics shares............................ 4
Depreciation Adjustment
Investment revenue ($8 million [calculation below‡] ÷ 8 years). 1
Investment in Carne Cosmetics shares............................ 1
8-27
‡Calculations:
Investee Net Assets Difference
Net Assets Purchased Attributed to:
  
Cost $68
 Goodwill:$12
Fair value: $224* × 25% = $56
 Undervaluation
Book value: $192 × 25% = $48 of assets: $8
*[$192 + 32] = $224
Adjusting entry
No entry to adjust for changes in fair value as this investment is accounted for
under the equity method.
8-28
Investment in Lake Construction shares.............................. 300
Cash ................................................................................ 300
Net income
Investment in Lake Construction shares (20% × $150 million) 30
Investment revenue.......................................................... 30
Dividends
Cash (20% × $30 million)........................................................ 6
Investment in Lake Construction shares.......................... 6
Adjustment for depreciation
Investment revenue ($10 million [calculation below‡] ÷ 10 years) 1
Investment in Lake Construction shares.......................... 1
‡Calculation:
  
Cost $300
 Goodwill: $120
Fair value: $900 × 20% = $180
 Undervaluation
Book value: $800 ×20% = $160 of buildings ($10) and land ($10): $20
Requirement 2
a. Investment in Lake Construction shares
__________________________________________
($ in millions)
Cost 300
Share of income 30
6 Dividends
1 Depreciation adjustment
_________________
Balance 323
b. As investment revenue in the income statement.

$30 million (share of income) − $1 million (depreciation adjustment) =
8-29
$29 million
c. Among investing activities in the statement of cash flows.
$300 million
[Cash dividends received ($6 million) also are reported—as part of
operating activities. If Cameron reports cash flows using the indirect
method, the operations section of its statement of cash flows would include
an adjustment of ($23 million) to get from the net income figure that
includes $29 million of revenue to a cash flow number that should only
include $6 million of cash flow.]
Electing the fair value option for amortized cost securities simply requires
reclassifying those securities as FVTPL securities. Therefore, this investment
would be classified as a FVTPL security on Tanner-UNF’s statement of financial
position.
Requirement 3
Cash (3% × $240 million)....................................... 7.2
Interest revenue (4% × $200).................................. 8.0
Requirement 4
The carrying value of the bonds is $240 − ($40 − $0.8) = $200.8. Therefore, to
adjust to fair value of $210, Tanner-UNF would need the following journal
entry:
Investment in bonds ........................................... 9.2

Net unrealized gains and losses—I/S ($210 − 200.8) 9.2
8-30
Requirement 5
Tanner-UNF reports its investment in the December 31, 2022, statement of

financial position at fair value of $210 million.
Cash (proceeds from sale)....................................... 190.0

Loss on investments* (to balance)......................... 20.0
Discount on bond investment (account balance).... 39.2
Investment in bonds (account balance)............... 249.2
*This includes the unrealized loss of $9.2 million and the loss on sale of $10.8
million. IFRS 9 does not require separate disclosures of realized and unrealized gains
or losses.
Exercise 8-18
Requirement 1
Since Sanborn did not elect the option to measure the equity securities at
FVOCI, this investment would be classified as a FVTPL security on Sanborn’s
statement of financial position.
Requirement 2
Investment in Jackson Industry shares........................................ 90
Cash ........................................................................................ 90
Net income
No entry
Dividends
Cash (5% × $60 million).................................................................. 3
Adjusting entry
Investment in Jackson Industry shares ($98 − 90 million).............. 8
Net unrealized gains and losses—I/S...................................... 8
8-31
Requirement 3
Investment revenue (dividends)........................................... $3,000

Net unrealized gains and losses (from adjusting entry) 8,000
Total effect on 2022 net income before taxes
11,000
Requirement 1
Exercise 8-19
Since the company did not elect the irrevocable option to measure the security at
FVOCI, changes in the fair value of the investment are recognized in the income
statement.
Requirement 2
Investment in Nursery Supplies shares.................................... 56
Cash .................................................................................... 56
Net income
No entry.
Dividends
Cash (30% × 8 million shares × $1.25)........................................... 3
Investment revenue.............................................................. 3
Adjusting entry......................................................................................
Net unrealized gains and losses—I/S ($56 − 52 million).............. 4
Investment in Nursery Supplies shares................................ 4
Under IFRS 9, impairment loss on a debt or receivable is

Exercise 8-20recognized and measured using the expected credit loss model.
Expected credit loss is the present value of the probability-
weighted difference between contractual cash flows and expected
cash flows. IFRS 9 adopts a three-stage model that requires the
investor or lender to evaluate the state of expected credit loss at a point in time.
As the probability of default has not changed since initial recognition, the credit
quality is considered “low” (stage 1). As such, FIN has to provide a loss provision
8-32
that is equal to the expected credit losses calculated as the probability of default in the
next twelve months multiplied by the expected lifetime losses.
For FIN, the loss allowance is as follows:
Contractual cash flows per annum = $600,000 × 7% = 42,000

Weighted average cash shortfall = Cash shortfall × Probability of default
Loss allowance as at Dec. 31, 2020 = $504 + $504 + $7,704 = 8,712
2020 2021 2022 2023 2024

Probability of default within twelve
months 1.2%
42,00 4
Contractual cash flows 0 42,000 42,000 2,000 642,000
42,00
Expected cash flows 0 42,000 0 0 0
42,00
Cash shortfall 0 0 42,000 0 642,000
Weighted average cash shortfall

(ignored discounting) 504 504 7,704
8-33
Exercise 8-21
The increase in probability of default to 25 percent is considered as “significant.”

However, Z Co has not defaulted on any interest payment (i.e., no credit loss event
has occurred) and the loan is a stage 2 financial asset in the expected credit loss
model. In stage 2, the investor or lender has to provide a loss allowance that is equal
to the lifetime expected credit loss. However, interest revenue is measured by
applying the effective interest rate to the gross carrying amount (before deducting
the loss allowance).
2022 2023 2024

4 42 642
Contractual cash flows 2,000 ,000 ,000
Expected cash flows 0 0 0
Cash shortfall 42,000 42,000 642,000
Weighted average cash shortfall 12,600 12,600 192,600

11,591 10,664 149,955
average shortfall
Loss allowance as at Dec. 31, 2021 = $11,591 + 10,664 + 149,955 = $172,210

Gross carrying amount = $574,032 (from amortization table)
Interest revenue = $49,309 (from amortization table)
Amortization table (assuming no default)

Gross
carrying
Date Cash interest Effective interest Amortization amount
January 3, 2020 560,000
December 31, 2020 42,000 48,724 6,724 566,724
December 31, 2021 42,000 49,309 7,309 574,032
December 31, 2022 42,000 49,945 7,945 581,977
December 31, 2023 42,000 50,636 8,636 590,613
December 31, 2024 42,000 51,387 9,387 600,000
8-34
Exercise 8-22
The increase in probability of default to 85 percent is considered as “significant.”

Since Z Co has also defaulted on the interest payment, a credit default event has
occurred and the loan is a stage 3 financial asset in the expected credit loss model.
In stage 3, the lifetime expected credit losses must be recognized as the loss
allowance.
A fundamental difference between stage 2 and stage 3 is that interest on stage 3
loans is calculated on their amortized cost balance (i.e., gross carrying amount less
loss allowance), whereas interest on stage 2 loans is calculated on their gross
carrying amount (before deducting the loss allowance).
2023 2024
42 642
Contractual cash flows ,000 ,000
Expected cash flows 0 0
Cash shortfall 42,000 642,000
Weighted average cash shortfall 35,700 545,700

32,842 461,838
average shortfall
Loss allowance as at Jan. 3, 2023 = $32,842 + 461,838 = 494,680
Gross carrying amount as at Jan. 3, 2023 = $581,977 (from amortization table)
Interest revenue = ($581,977 – 494,680) × 8.7% = 87,297
Amortization table (default on December 31, 2022)

Gross carrying
Date Cash interest Effective interest Amortization amount
January 3, 2020 560,000
December 31, 2020 42,000 48,724 6,724 566,724
December 31, 2021 42,000 49,309 7,309 574,032
December 31, 2022 42,000 49,945 7,945 581,977
December 31, 2023 6,300 7,595 1,295 581,977
December 31, 2024 6,300 7,708 1,408 581,977
8-35
Exercise 8-23
When distressed or troubled loans are purchased, the investor has to provide the
lifetime expected credit loss at the very start.
January 3, 2020
Expected credit loss = ($1,000,000 − 10,000) × 20% = 198,000 (ignored discounting)
Initial recognition of investment and expected credit loss
Investment in Good Books......................................................1,000,000
Impairment loss—I/S............................................................... 198,000
Loss allowance ................................................................... 198,000
Cash .................................................................................... 1,000,000
December 31, 2020

Expected credit loss = ($1,000,000 − 10,000) × 25% = 247,500 (ignored discounting)
Increase in lifetime credit loss
Impairment loss—I/S ($247,500 − 198,000)........................... 49,500
Loss allowance ................................................................... 49,500
Interest revenue
Interest receivable ($1,000,000 × 5%)..................................... 50,000
Interest revenue ................................................................... 50,000
Exercise 8-24
Provision for uncollectible trade receivables is calculated using the
probability-weighted provision matrix as follows
30 days or 31–60 61–90 91–180 181 days to >1

Period outstanding less days days days 1 year year Total
Provision rates 0.04% 0.60% 1.35% 5.00% 50% 100%
Dec. 31, 2020

$1,000,00 $300,00 $6,00
Carrying amount 0 0 $80,000 $55,000 $20,000 0 $1,461,000
Probability- $400 $1,800 $1,080 $2,750 $10,000 $6,00 $22,030
8-36
weighted provision 0
Dec. 31, 2021

$1,600,00 $670,00 $100,00 $7,60
Carrying amount 0 0 0 $79,000 $16,000 0 $2,472,600
Probability- $7,60
weighted provision $640 $4,020 $1,350 $3,950 $8,000 0 $25,560
Recognition of loss provision
December 31, 2020
Impairment loss—I/S .............................................................. 22,030
Provision for trade receivables ........................................... 22,030
December 31, 2021

Increase in loss provision
Impairment loss—I/S ($25,560 − 22,030)............................... 3,530
Provision for trade receivables ........................................... 3,530
Insurance expense (difference)............................................... 64,000

Cash surrender value of life insurance ($27,000 − 21,000)..... 6,000
Cash (2022 premium).......................................................... 70,000
Requirement 2
Cash (death benefit)......................................................... 4,000,000

Cash surrender value of life insurance (account balance) 27,000
Gain on life insurance settlement (to balance)............ 3,973,000
Insurance expense (difference)....................................... 22,900
Cash surrender value of life insurance ($4,600 − 2,500). 2,100
Cash (premium).......................................................... 25,000
Requirement 2
8-37
Cash (death benefit)......................................................... 250,000

Cash surrender value of life insurance (account balance) 16,000
Gain on life insurance settlement (to balance)............ 234,000
ANALYSIS
Exercise 8-27
Previous Value:
Accrued 2021 interest (10% × $12,000,000) $1,200,000
Principal 12,000,000
Carrying amount of the receivable $13,200,000
New Value:
Interest $1 million × 1.73554* = $1,735,540
Principal $11 million × 0.82645** =9,090,950
Present value of the receivable (10,826,490)
Loss: $2,373,510
*Present value of an ordinary annuity of $1: n = 2, i = 10%
**Present value of $1: n = 2, i = 10%
JOURNAL ENTRIES
January 1, 2022
Loss on troubled debt restructuring (to balance)............ 2,373,510
Accrued interest receivable (account balance)............. 1,200,000
Note receivable ($12,000,000 − 10,826,490)................. 1,173,510
December 31, 2022

Cash (required by new agreement)..................................... 1,000,000
Note receivable (to balance)........................................... 82,649
Interest revenue (10% × $10,826,490).......................... 1,082,649
December 31, 2023

Interest revenue (10% × [$10,826,490 + 82,649]).......... 1,090,861*

Note receivable (balance)........................................... 11,000,000
*Rounded to amortize the note to $11,000,000 (per schedule below)
8-38
Amortization Schedule—Not required

Cash Effective Increase in Outstanding

Interest Interest Balance Balance
by agreement 10% × Outstanding Balance Discount Reduction
10,826,490
1 1,000,000 .10 (10,826,490) = 1,082,649 82,649 10,909,139
2 1,000,000 .10 (10,909,139) = 1,090,861* 90,861 11,000,000
2,000,000 2,173,510 173,510
*Rounded
ANALYSIS
Exercise 8-28
Previous Value:
Accrued 2021 interest (10% × $240,000) $24,000
Principal 240,000
Carrying amount of the receivable $264,000
New Value:
$11,555 + 11,555 + 11,555 + 240,000 = $274,665
$274,665 × 0.82645* = (226,997)
Loss: $37,003
*Present value of $1: n = 2, i = 10%
JOURNAL ENTRIES
8-39
January 1, 2022
Loss on troubled debt restructuring (to balance)............ 37,003
Accrued interest receivable (10% × $240,000)............ 24,000
Note receivable ($240,000 − 226,997).......................... 13,003
December 31, 2022

Interest revenue (10% × $226,997).............................. 22,700
December 31, 2023
Interest revenue (10% × [$226,997 + 22,700]).............. 24,968*
Cash (required by new agreement)..................................... 274,665
Note receivable (balance)........................................... 274,665
*Rounded to amortize the note to $274,665 (per schedule below)
Exercise 8-28 (concluded) Amortization Schedule—Not required

226,997
1 0 .10 (226,997) = 22,700 22,700 249,697
2 0 .10 (249,697) = 24,968* 24,968 274,665
47,668 47,668
*Rounded
Problems
Problem 8-1
Requirement 2
Cash (4% × $80 million)......................................... 3.20
Interest revenue (5% × $66).................................... 3.30
8-40
Requirement 3
Cash (4% × $80 million)......................................... 3.20
Interest revenue (5% × [$66 + 0.1])........................ 3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2022, statement of
financial position at its amortized cost—that is, its book value:
Investment in bonds............................................................ $80.00
Less: Discount on bond investment ($14 − 0.1 −0.11 million) 13.79
Amortized cost................................................................ $66.21
Increases and decreases in the fair value between the time a debt security is
acquired and the day it matures to a prearranged maturity value are relatively
unimportant if sale before maturity isn’t an alternative. For this reason, if an
investor has the “positive intent and ability” to hold the securities to maturity,
investments in debt securities are classified as “held to collect contractual cash
flows” and reported at amortized cost rather than fair value in the statement of
financial position.
Problem 8-1 (concluded)
Requirement 5
Fuzzy Monkey’s 2022 statement of cash flows would be affected as follows:
Operating cash flows: Cash inflow from interest of $3.2 + $3.2 =

$6.4. (Note: if Fuzzy Monkey prepares an indirect method
statement of cash flows, it would have interest revenue of $3.30
+ $3.31 = $6.61 included in net income, so would have to
include an adjustment of $6.4 − $6.61 = ($0.21) to get from net
income to cash from operations.)
Investing cash flows: Cash outflow from purchasing investments
of $66.
Problem 8-2Requirement 1 ($ in millions)
8-41
Requirement 2
Cash (4% × $80 million)......................................... 3.20
Requirement 3
Cash (4% × $80 million)......................................... 3.20
Requirement 4
financial position at its fair value, $70 million in this case. For investments in
FVTPL securities, changes in fair values, and thus market returns, provide an
indication of management’s success in deciding when to acquire the
investment, when to sell it, whether to invest in fixed-rate or variable-rate
securities, and whether to invest in long-term or short-term securities.
To do this, we first need to determine the investment’s amortized cost (or book
value) at the end of the year:
Less: Discount on bond investment ($14 − 0.10 − 0.11 million) 13.79
Amortized cost................................................................ $66.21
Then, to record it at fair value, we increase the investment by $70 − 66.21 =
$3.79 million:
Investment in bonds............................................ 3.79
Net unrealized gains and losses—I/S ($70 − 66.21)
3.79
Because these are FVTPL securities, the unrealized gain of $3.79 would be
recognized in Fuzzy Monkey’s 2022 income statement.
Requirement 5
8-42

+ $3.31 = $6.61 and an unrealized gain of $3.79 included in net
income, totaling $10.4, so would have to include an adjustment
of $6.4 − $10.4 = ($4.0) to get from net income to cash from
operations.)
of $66.
Problem 8-3Requirement 1 ($ in millions)

Requirement 2
Cash (4% × $80 million)......................................... 3.20
Requirement 3
Cash (4% × $80 million)......................................... 3.20
Requirement 4
financial position at its fair value, $70 million in this case. For investments in
FVOCI securities, changes in t values, and thus market returns, provide an
indication of management’s success in deciding when to acquire the
investment, when to sell it, whether to invest in fixed-rate or variable-rate
securities, and whether to invest in long-term or short-term securities.
To do this, we first need to determine the investment’s amortized cost (or book
value) at the end of the year:
Less: Discount on bond investment ($14 − 0.1 − 0.11 million) 13.79
Amortized cost................................................................ $66.21
8-43
Then, to record it at fair value, we increase the investment by $70 − 66.21 =

$3.79 million:
Net unrealized gains and losses—OCI ($70 − 66.21) 3.79
Because these are FVOCI securities, the unrealized gain of $3.79 would be
recognized in Fuzzy Monkey’s 2022 other comprehensive income and serve to
increase the other comprehensive income shown in shareholders’ equity.
Requirement 5

+ $3.31 = $6.61 included in net income, so would have to
include an adjustment of $6.4 − $6.61 = ($0.21) to get from net
income to cash from operations.)
of $66.
Problem 8-4Note: Because Fuzzy Monkey elected the fair value option, these
investments will be reclassified as FVTPL securities and accounted for under that
approach. Therefore, the answers to Requirements 1–5 are the same as those to
Problem 8-2.
Requirement 2
Cash (4% × $80 million)......................................... 3.20
Discount on bond investment (difference)............ .10
8-44
Requirement 3
Cash (4% × $80 million)......................................... 3.20
Discount on bond investment (difference)............ .11
Requirement 4
financial position at its fair value, $70 million in this case. For investments
accounted for under the fair value option, changes in fair values, and thus
market returns, provide an indication of management’s success in deciding
when to acquire the investment, when to sell it, whether to invest in fixed-rate
or variable-rate securities, and whether to invest in long-term or short-term
securities.
To determine the journal entry that Fuzzy Monkey must make, we first need to
determine the investment’s amortized cost (or book value) at the end of the
year:
Less: Discount on bond investment ($14 − .10 − .11 million) 13.79
Amortized cost................................................................ $66.21
Problem 8-4 (concluded) Then, to record it at fair value, we increase the
investment by $70 − 66.21 = $3.79 million:
Net unrealized gains and losses—I/S ($70 − 66.21) 3.79
Because these are accounted for under the fair value option, the unrealized gain
of $3.79 would be recognized in Fuzzy Monkey’s 2022 income statement.
Requirement 5

statement of cash flows, it would have included in net income
interest revenue of $3.30 + $3.31 = $6.61 and an unrealized gain
of $3.79, totaling $10.4, so would have to include an adjustment
of $6.4 − $10.4 = ($4.0) to get from net income to the correct
operating cash flow.)
8-45

of $66.
Requirement 6
The answers to requirements 1–5 would not differ if the investment
qualified for treatment as an amortized cost investment (i.e., held in a
business model to collect contractual cash flows), because Fuzzy
Monkey’s choice of the fair value option applies when there is an
“accounting mismatch” and if opted, still requires classification of the
investment as if the investment were a FVTPL security.
Problem 8-5Requirement 1
Ornamental insulation has equity and debt investments. The investments are not
bought for short-term gains; hence, they are not classified as held for trading
securities.
However, by default, all equity securities are measured at FVTPL, unless the
investor elects to measure them as FVOCI. Since no indication is made for this
election, investments in equity securities are measured as FVTPL financial assets.
The debt investments are held in a portfolio whose business model is to collect
contractual cash flows and to sell. There is no indication that there is an “accounting
mismatch” permitting a choice to measure them as FVTPL financial assets. Hence,
the debt investments are measured as FVOCI financial assets.
Requirement 2
2022
February 21
Investment in Distribution Transformers shares ......... 400,000
Cash.......................................................................... 400,000
March 18
Cash.............................................................................. 8,000
Investment revenue.................................................. 8,000
8-46
September 1
Investment in American Instruments bonds ................ 900,000
Cash.......................................................................... 900,000
October 20
Cash.............................................................................. 425,000
Investment in Distribution Transformers ............... 400,000
Gain on investments—I/S........................................ 25,000
November 1
Investment in M&D Company shares ......................... 1,400,000
Cash.......................................................................... 1,400,000
Problem 8-5 (continued)
December 31
Adjusting entries:
Investment revenue receivable..................................... 30,000

Interest revenue ($900,000 × 10% × 4/12).................... 30,000
Unrealized
Securities Carrying amount Fair Value Gain (Loss)
M&D company shares $1,400,000 $1,460,000 $60,000
American instruments bonds 900,000 850,000 (50,000)
Totals—Dec. 31, 2022 $2,300,000 $2,310,000 $10,000
Investment in M&D shares .......................................... 60,000

Unrealized loss—OCI * 50,000
Investment in American instrument bonds............... 50,000
Unrealized gains—I/S**.......................................... 60,000
*Investment in bonds are carried at FVOCI (refer Requirement 1).

**Investment in shares are carried at FVTPL (refer Requirement 1).
8-47

Requirement 3
Income statement:
Investment revenue $8,000
Interest revenue* 30,000
Gain on sale of investments 25,000
Fair value gain on investments
60,000
Note: Unlike for FVTPL securities, unrealized gains and losses are not included in income
for FVOCI securities.
Statement of Profit or Loss and Other Comprehensive Income**:

Unrealized fair value losses on investments $50,000
Statement of financial position:

Current Assets
Interest revenue receivable $30,000
Non-Current Assets
FVTPL securities
$1,460,000
FVOCI securities $850,000
Shareholders’ Equity
Other comprehensive income
Net unrealized loss ($50,000)
*Can be combined with investment revenue but if so, should be disclosed in the footnotes.
**Can be reported either (a) one statement or (b) two statements comprising of the income
statement and the statement of comprehensive income.
8-48
Problem 8-5 (continued) Requirement 4
2023
January 20
Cash.............................................................................. 1,485,000
Gain on investments—I/S (to balance)...................... 25,000
Investment in M&D company shares (balance)......... 1,460,000
March 1
Cash.............................................................................. 45,000
Interest revenue receivable....................................... 30,000
Interest revenue........................................................ 15,000
August 12
Investment in Vast Communications shares ............... 650,000
Cash.......................................................................... 650,000
September 1
Cash.............................................................................. 45,000
Interest revenue........................................................ 45,000
December 31
Adjusting entries:
Investment revenue receivable..................................... 30,000
Interest revenue ($900,000 × 10% × 4/12).................... 30,000
Unrealized
Securities Carrying amount Fair Value Gain (Loss)
Vast Communication shares $650,000 $670,000 $20,000
American Instruments bonds 850,000 830,000 (20,000)
Totals—Dec. 31, 2023 $1,500,000 $1,500,000 $0
Investment in Vast Communication shares.................. 20,000

Unrealized loss—OCI* ……………………………….. 20,000
Investment in American Instrument bonds............ 20,000
Unrealized gains—I/S**……………………… 20,000
*Investment in bonds are carried at FVOCI (refer Requirement 1).

** Investment in shares are carried at FVTPL (refer Requirement 1).
8-49

Requirement 5
Income statement:
Interest revenue ($15,000 + 45,000 + 30,000) $90,000
Gain on investments ($25,000 + 20,000) 45,000
Note: Unlike for FVTPL securities, unrealized gains and losses are not
included in income for FVOCI securities.
Statement of Profit or Loss and Other Comprehensive Income*:

Unrealized loss on investments ($20,000)
Statement of financial position:

Current Assets
Interest revenue receivable $30,000
Noncurrent Assets
FVTPL securities $670,000

FVOCI securities $830,000
Shareholders’ Equity
Net unrealized loss ($50,000 (2022) + 20,000) ($70,000)
* Can be reported either (a) one statement or (b) two statements comprising
the income statement and the statement of comprehensive income.
2022
December 12 ($ in millions)
Investment in FF&G company bonds .......................................... 12
Cash.......................................................................................... 12
8-50
December 13
Investment in Ferry ordinary shares ............................................ 22
Cash.......................................................................................... 22
December 15
Cash.............................................................................................. 12.1
Investment in FF&G company bonds ...................................... 12.0
Gain on investments ($12.1 − 12)............................................... 0.1
December 22
Investment in Treasury bills ........................................................ 56
Investment in Treasury bonds ...................................................... 65
Cash.......................................................................................... 121
December 23
Cash.............................................................................................. 10
Loss on investments ($10 − 11)...................................................... 1
Investment in Ferry ordinary shares ($22 × 1/2)......................... 11
December 26
Cash (selling price).......................................................................... 57
Gain on investments ($57 − 56).................................................. 1
Investment in Treasury bills (account balance)............................ 56
December 27
Cash (selling price).......................................................................... 63
Loss on investments ($63 − 65)...................................................... 2
Investment in Treasury bonds (account balance).......................... 65
December 28
Cash.............................................................................................. 0.2
Investment revenue................................................................... 0.2
December 31
($ in millions)
Adjusting entry:
($10 million − [$22 million × 1/2]).................................................. 1.0
Investment in Ferry ordinary shares ......................................... 1.0
8-51
Closing entry:
Income summary (to balance)......................................................... 0.7
Investment revenue ($5 + 0.2 million)............................................. 5.2
Gain on investments ($8 + 0.1 + 1 million)...................................... 9.1
Loss on investments ($11 + 1 + 2 million).................................... 14.0
Net unrealized gains and losses—I/S (adjusting entry)................ 1.0
Note: Unlike for FVOCI securities, unrealized gains and losses are included
in income for FVTPL securities.
Requirement 2
($ in millions)
Statement of financial position (short-term investment):
FVTPL securities................................ 10
Income statement:
Investment revenue (closing entry) 5.2
Gain on investments (closing entry) 9.1
Loss on investments (closing entry) (14.0)
Net unrealized gains and losses on investments (closing entry) (1.0)
8-52
Requirement 3
2023
January 2
($ in millions)
Cash (selling price).......................................................................... 10.2
Gain on investments (to balance) ............................................... 0.2
Investment in Ferry ordinary shares (account balance)................ 10.0
January 5
Investment in Warehouse Designs bonds .................................... 34
Cash.......................................................................................... 34
Problem 8-72022 ($
in millions)
October 18
Investment in Millwork Ventures preference shares ................... 58
Cash.......................................................................................... 58
October 31
Cash.............................................................................................. 1.5
Interest revenue......................................................................... 1.5
November 1
Investment in Holistic Entertainment bonds................................. 18
Cash.......................................................................................... 18
November 1
Cash.............................................................................................. 28
Loss on sale of investments ($28 − 30)........................................... 2
Investment in Kansas Abstractors bonds ................................. 30
December 1
Investment in Household Plastics bonds...................................... 60
Cash.......................................................................................... 60
8-53
December 20
Investment in Treasury bonds ...................................................... 5.6
Cash.......................................................................................... 5.6
December 21
Investment in NXS shares ............................................................ 44
Cash.......................................................................................... 44
December 23
Cash.............................................................................................. 5.7
Investment in Treasury bonds .................................................. 5.6
Gain on investments ($5.7 − 5.6)................................................ 0.1
($ in millions)
December 29
Cash.............................................................................................. 3
Investment revenue................................................................ 3
December 31
Accrued interest:
Interest revenue receivable—Holistic
Entertainment ($18 million × 10% × 2/12)....................................... 0.3
Interest revenue receivable—Household
Plastics ($60 million × 12% × 1/12)................................................. 0.6
Interest revenue ..................................................................... 0.9
Revaluations:
Net unrealized gains and losses—OCI
([2 million shares of Millwork Ventures × $27.50] − $58 million)........ 3
Investment in Millwork Ventures preference shares ............. 3
Investment in NXS shares ............................................................ 2

([4 million shares of NXS × $11.50] − $44 million)...................... 2
8-54
Note: Securities under amortized cost are not adjusted to fair value.
Closing entry:
Net unrealized gains and losses—I/S (NXS)................................. 2.0
Interest revenue ($3.0 + 1.5 + 0.9)................................................... 5.4
Gain on investments (U.S. Treasury bonds)...................................... .1
Loss on investments (Kansas Abstractors)................................. 2.0
Income summary (to balance)................................................... 5.5
Note: Unlike for FVOCI securities, unrealized gains and losses are
included in income for FVTPL securities.
2023
January 7
Cash.............................................................................................. 43
Loss on investments—OCI *(to balance)......................................... 3
Investment in NXS shares (account balance)............................... 46
*Accumulated OCI is not reclassified to the income statement as the NXS shares
are equity instruments.
Beale should report its FVOCI securities in its December 31, 2023, statement of
financial position at their fair value, $54 million.
Requirement 2
The journal entry needed to enable the investment to be reported at fair value is:
($ in millions)
Investment in shares and bonds ($54 − 51*) 3
Net unrealized gains and losses—OCI 3
Fair value of securities as at December 31, 2022 $78 million

Less fair value of disposed Schwab Pharmaceuticals ($27 million)
Fair value of unsold securities $51 million*
8-55
Requirement 3
As of December 31, 2022, the cost of the Schwab Pharmaceuticals investment was
$25 million and its fair value was $27 million. Therefore, in the year-end 2022
adjustment process, Beale must have made whatever adjustment was necessary to
produce a debit balance of $2 in the investment account for Schwab
Pharmaceuticals and a credit balance of that amount in other comprehensive
income. Because the Schwab Pharmaceuticals investment is equity investments,
the related OCI on the sold portion is not reclassified to net income. Beale’s
statement of comprehensive income can be provided as (a) one statement or (b)
two statements comprising the income statement and the statement of
comprehensive income.
Statement of Comprehensive Income
($ in millions)
Net income.............................................. $xxx

Unrealized gains (losses) on investments $3
Comprehensive income $xxx

Comprehensive income includes both net income and other comprehensive
income. $3 million of unrealized gains must have occurred during 2023. There is no
reclassification for the OCI relating to the sold FVOCI securities as these securities
are equity in nature.
Problem 8-9
Requirement 1
Investment in Lavery Labeling shares.......................................... 324
Cash ......................................................................................... 324
Net income
Investment in Lavery Labeling shares (30% × $160 million) .......... 48
Investment revenue................................................................... 48
8-56
Dividends
Cash (10 million shares × $2)............................................................ 20
Investment in Lavery Labeling shares...................................... 20
Depreciation adjustment
Investment revenue ([$80 million × 30%] ÷ 6 years) ‡........................ 4
Investment in Lavery Labeling shares................................................... 4
‡Calculations:

  
Cost $324
 Goodwill: $60
Fair value: $880* × 30% =$264
 Undervaluation
Book value: $800 × 30% = $240 of depr. assets: $24
*[$800 + 80] = $880
Adjusting entry
No entry to recognize changes in the fair value of the Lavery investment, as
Runyan is accounting for its investment under the equity method.
Requirement 2
Cash.......................................................................................... 324
Net income
No entry
Dividends
Adjusting entry
Net unrealized gains and losses—OCI
([10 million shares × $31] − $324 million)................................................ 14
8-57
Cash ......................................................................................... 324
Net income
No entry
Dividends
Adjusting entry
([10 million shares × $31] − $324 million)................................................. 14
Requirement 2
Because Runyan is accounting for the Lavery investment under the fair value
option, the unrealized loss would be included in 2022 net income. Therefore, total
effect on net income would be $20 million—14 million, or $6 million.
Requirement 1
Problem 8-11
Investment in Vancouver T&M shares......................................... 400.0
Cash ......................................................................................... 400.0
Net income
Investment in Vancouver T&M shares (40% × $140 million) ......... 56.0
Investment revenue................................................................... 56.0
Dividends
Cash (40% × $30 million)................................................................. 12.0
Investment in Vancouver T&M shares..................................... 12.0
8-58
Inventory adjustment
Investment revenue ($5 million × 40%: all sold in 2012).................... 2.0
Investment in Vancouver T&M shares..................................... 2.0
Depreciation adjustment
Investment revenue ([$20 million × 40%] ÷ 16 years)‡...................... .5
Investment in Vancouver T&M shares..................................... .5
‡Calculations:
  
Cost $400
 Goodwill: $80 [plug]
Fair value: $800* × 40% = $320
Inventory (5) × 40%  Undervaluation
of inventory: $2
Plant facilities (20) × 40%  Undervaluation
of plant: $8
Book value: $775 × 40% = $310
* $775 + 5 + 20
Requirement 2
Investment Revenue
($ in millions)
56.0 Share of income
Inventory 2.0
Depreciation .5
_________________
Balance 53.5
Requirement 3
8-59
Investment in Vancouver T&M shares

($ in millions)
Cost 400.0
Share of income 56.0
12.0 Dividends
2.0 Inventory
.5 Depreciation
_________________
Balance 441.5
Requirement 4
$400 million cash outflow from investing activities
$12 million cash inflow (dividends) among operating activities
(Note: if Northwest uses the indirect method to report its operating cash flows,
it would need an adjustment of ($41.5) to get from the $53.5 included as
investment revenue in net income to the $12 of cash actually received in
dividends and needing to be shown in cash from operations.)
Problem 8-12
Requirement 1
Miller’s management should decide whether it has the ability to exercise significant
influence over operating and financial policies of the Marlon Company. Ability to
exercise significant influence is presumed for investments of 20 percent or more of
voting shares and presumed not to exist for investments of less than 20 percent, other
things being equal. Evidence to the contrary should be considered, including
participation on the board of directors, technological dependency, material
intercompany transactions, or interchange of managerial personnel.
Requirement 2
a. Income statement: ($ in millions)

Investment revenue ($12 million × 1/6) $2.0
Patent amortization adjustment ($4 million* ÷ 10) (.4)
*([$24 million] × 1/6])
$1.6
8-60
b. Statement of financial position:

Investment in Marlon Company
($19 million + 2 million − 1 million − 0.4 million) $19.6*
*Investment in Marlon Company
($ in millions)
Cost 19.0
Share of income 2.0
1.0 Dividends ($6 million × 1/6)
.4 Amortization adjustment
_________________
Balance 19.6
c. Statement of cash flows:
$19 million cash outflow from investing activities

$1 million cash inflow (dividends) among operating activities
(Note: if Marlon uses the indirect method to report its operating cash flows, it
would need an adjustment of ($0.6) to get from the $1.6 included as
investment revenue in net income to the $1 of cash actually received in
dividends and needing to be shown in cash from operations.)
8-61
Problem 8-13
Item Reporting Category
__A_ 1. 35 percent of the nonvoting preference stock A. FVTPL investments

of International Aircraft Company B. Amortized cost securities
__B_ 2. Treasury bills held in a business model
to collect contractual cash flow C. FVOCI securities
__C_ 3. Two-year note receivable from an
unbiased affiliate held in a business
model to collect contractual cash flow
and to sell D. Equity method
__B_ 4. Accounts receivable
__A_ 5. Perpetual bonds with coupon interest of
6 percent paid in perpetuity when company
has sufficient cash reserve E. None of the above
__A_ 6. Ordinary shares held in trading account
for immediate resale.
__A_ 7. Bonds acquired to profit from short-term differences in price.
__D_ 8. 35 percent of the voting ordinary shares of Computer Storage Devices
Company.
__D_ 9. 90 percent of the voting ordinary shares of Affiliated Peripherals Ltd.
__C_10. Corporate bonds of Primary Smelting Company to be sold only if interest
rates fall ½ percent.
__A_11. 25 percent of the voting ordinary shares of Smith Foundries company: 51
percent family-owned by Smith family; fair value determinable. No
significant influence.
__D_12. 17 percent of the voting ordinary shares of Shipping Barrels company:
Investor’s CEO on the board of directors of Shipping Barrels company.
Explanatory notes:
Item 1: Nonvoting preference shares do not give significant influence or control
to the investor; By default, equity investments are carried at FVTPL.
Item 4: Accounts receivable meets the contractual cash flow test, although
financing component would be minimal.
Item 5: Although described as bonds, the perpetual bonds do not have an
obligation to pay coupons in all circumstances (waived when cash reserves
fall). It would not qualify for the contractual cash flow test.
8-62
Items 8, 9, and 12: Assumption of either significant influence or control.

Item 11: No significant influence indicated.
Equity investments that are not subject to significant influence, control, or joint
control are classified as FVTPL as the FVOCI option is not applied in this
question.
($ in millions)
Land.............................................................................................. 16
Impairment loss............................................................................. 6
Note receivable......................................................................... 20
Accrued interest receivable....................................................... 2
Requirement 2
ANALYSIS
Previous Value:
Accrued 2021 interest (10% × $20,000,000) $2,000,000
New Value:
Interest $1 million × 3.16987 * = $3,169,870
Principal $15 million × 0.68301 ** = 10,245,150
Present value of the receivable (13,415,020)
Loss: $8,584,980
*Present value of an ordinary annuity of $1: n = 4, i = 10%
**Present value of $1: n = 4, i = 10%
JOURNAL ENTRIES
January 1, 2022
Impairment loss (to balance)................................................ 8,584,980
Accrued interest receivable (10% × $20,000,000)............. 2,000,000
Note receivable ($20,000,000 − $13,415,020).................... 6,584,980
December 31, 2022

Cash (required by new agreement).......................................... 1,000,000
Note receivable (to balance)................................................ 341,502
Interest revenue (10% × $13,415,020)............................... 1,341,502
8-63
December 31, 2023

December 31, 2024
December 31, 2025

Interest revenue (10% × $14,545,391)............................... 1,454,609*

Note receivable (balance)................................................ 15,000,000
Amortization Schedule—Not required

13,415,020
1 1,000,000 .10(13,415,020) = 1,341,502 341,502
2 1,000,000 .10(13,756,522) = 1,375,652 375,652
3 1,000,000 .10(14,132,174) = 1,413,217 413,217
4 1,000,000 .10(14,545,391) = 1,454,609* 454,609
4,000,000 5,584,980 1,584,980
*Rounded

Requirement 3
ANALYSIS
8-64
Previous Value:
Accrued interest (10% × $20,000,000) $2,000,000
New Value:
$27,775,000 × 0.68301 * = (18,970,603)
Loss: $3,029,397
*Present value of $1: n = 4, i = 10%
JOURNAL ENTRIES
January 1, 2022 ..
Impairment loss (to balance)........................................................ 3,029,397
Accrued interest receivable (10% × $20,000,000)............. 2,000,000
Note receivable ($20,000,000 − 18,970,603)...................... 1,029,397
December 31, 2022 ..

Note receivable (to balance)................................................ 1,897,060

Interest revenue (10% × [$18,970,603 + 1,897,060])........... 2,086,766

Interest revenue (10% × balance [see schedule])................. 2,295,443

Interest revenue (10% × balance [see schedule])................. 2,525,128*

Note receivable (balance)................................................ 27,775,000
8-65
Problem 8-14 (concluded) Amortization Schedule—Not required

18,970,603
1 0 .10 (18,970,603) = 1,897,060 1,897,060
2 0 .10 (20,867,663) = 2,086,766 2,086,766
3 0 .10 (22,954,429) = 2,295,443 2,295,443
4 0 .10 (25,249,872) = 2,525,128* 2,525,128
8,804,397 8,804,397
*Rounded
Problem 8-15
Requirement 1
Bond Fair Value at 1/1/22:

Interest $150,000 × (6%/2) × 14.21240 * = $63,956
Principal $150,000 × 0.50257 ** = 75,386
Present value of the receivable 139,342
*Present value of an ordinary annuity of $1: n = 20, i = 3.5% (=7%/2)

**Present value of $1: n = 20, i = 3.5% (=7%/2)
January 1, 2022
Requirement 2
January 1, 2022
June 30, 2022

Cash (6%/2 × $150,000).......................................... 4,500
8-66
Discount on bond investment (difference)............ 377

Interest revenue (7%/2 × [$150,000 − 10,658])...... 4,877
December 31, 2022

Cash (6%/2 × $150,000).......................................... 4,500
Interest revenue (7%/2 × [$150,000 − {$10,658 − 377}]) 4,890
Note: For amortized cost investments, there are no adjustments to fair value.
Requirement 3
January 1, 2022
June 30, 2022

Cash (6%/2 × $150,000).......................................... 4,500
Interest revenue (7%/2 × [$150,000 − 10,658])...... 4,877
Bond Fair Value at June 30, 2022:

Interest $150,000 × (6%/2) × 13.13394 * = $59,103
Principal $150,000 × 0.47464 ** = 71,196
Present value of the receivable 130,299
*Present value of an ordinary annuity of $1: n = 19, i = 4% (=8%/2)

**Present value of $1: n = 19, i = 4% (=8%/2)
January 1 initial cost $139,342

Increase from discount amortization 377
June 30 amortized initial cost $139,719
Comparing the amortized initial cost with the fair value of the bonds on that date
provides the amount needed to adjust the investment to its fair value.

June 30 fair value 130,299
8-67
Fair value adjustment needed $9,420
Net unrealized gains and losses—I/S ........................................... 9,420

Investment in bonds............................................................. 9,420

December 31, 2022
Cash (6%/2 × $150,000).......................................... 4,500
Interest revenue (7%/2 × [$150,000 − {$10,658 − 377}]) 4,890
Bond Fair Value at December 31, 2022:

Interest $150,000 × (6%/2) × 12.15999 * = $54,720
Principal $150,000 × 0.45280 ** = 67,920
Present value of the receivable $122,640
*Present value of an ordinary annuity of $1: n = 18, i = 4.5% (=9%/2)

**Present value of $1: n = 18, i = 4.5% (=9%/2)

Increase from discount amortization 390
Dec. 31 amortized initial cost $140,109
Comparing the amortized initial cost with the fair value of the bonds on that date
provides the amount needed to adjust the investment to its fair value.
Dec. 31 amortized initial cost $140,109

Dec. 31 fair value 122,640
Fair value adjustment needed: debit/(credit) $17,469
Less: Fair value adjustment at June 30 debit/(credit) (9,420)
Change in fair value adjustment needed $8,049
Net unrealized gains and losses—I/S ........................................... 8,049

Investment in bonds............................................................. 8,049
Problem 8-16
8-68
Requirement 1
Amortization table
Effective
Cash interest interest Unamortized Carrying
Date 5.00% 3.3461% Amortization premium Principal amount
8,000,00
1 Jan. 2021 600,000 0 8,600,000
8,000,00
31 Dec. 2021 400,000 287,766 112,234 487,766 0 8,487,766
8,000,00
31 Dec. 2022 400,000 284,011 115,989 371,778 0 8,371,778
8,000,00
31 Dec. 2023 400,000 280,130 119,870 251,907 0 8,251,907
8,000,00
31 Dec. 2024 400,000 276,119 123,881 128,026 0 8,128,026
8,000,00
31 Dec. 2025 400,000 271,974 128,026 0 0 8,000,000
2,000,000 1,400,000 600,000
January 1, 2021
Bonds.................................................................. 8,000,000
Unamortized premium......................................... 600,000
Cash................................................................. 8,600,000
December 31, 2021

Cash..................................................................... 400,000
Unamortized premium..................................... 112,234
Interest income................................................ 287,766
Requirement 2
December 31, 2022

Cash..................................................................... 400,000
Interest income................................................ 284,011
Requirement 3
December 31, 2022

Cash..................................................................... 8,420,000
8-69
Bonds............................................................... 8,000,000
Gain on sale of bonds...................................... 48,222
Problem 8-17
Requirement 1
Amortization table
Cash Effective
interest interest Unamortized Carrying
1 Jan 2021 600,000 8,000,000 8,600,000

31 Dec 2021 400,000 287,766 112,234 487,766 8,000,000 8,487,766
31 Dec 2022 400,000 284,011 115,989 371,778 8,000,000 8,371,778
31 Dec 2023 400,000 280,130 119,870 251,907 8,000,000 8,251,907
31 Dec 2024 400,000 276,119 123,881 128,026 8,000,000 8,128,026
31 Dec 2025 400,000 271,974 128,026 0 8,000,000 8,000,000
2,000,000 1,400,000 600,000
January 1, 2021
Bonds.................................................................. 8,600,000
Cash................................................................. 8,600,000
December 31, 2021

Cash..................................................................... 400,000
Bonds............................................................... 112,234
Interest income................................................ 287,766
December 31, 2021

Bonds.................................................................. 44,234
Requirement 2
December 31, 2022

Cash..................................................................... 400,000
Bonds............................................................... 115,989
Interest income................................................ 284,011
December 31, 2022

Bonds.................................................................. 3,989
8-70

Requirement 3
December 31, 2022

Cash..................................................................... 8,420,000
Bonds............................................................... 8,420,000
December 31, 2022

Deferred gain (OCI) ($44,234 + 3989)............... 48,223
Realized gain—I/S.......................................... 48,223
Problem 8-18
Requirement 1
Amortization table
Cash Effective
1 Jan 2021 600,000 8,000,000 8,600,000

31 Dec 2021 400,000 287,766 112,234 487,766 8,000,000 8,487,766
31 Dec 2022 400,000 284,011 115,989 371,778 8,000,000 8,371,778
31 Dec 2023 400,000 280,130 119,870 251,907 8,000,000 8,251,907
31 Dec 2024 400,000 276,119 123,881 128,026 8,000,000 8,128,026
31 Dec 2025 400,000 271,974 128,026 0 8,000,000 8,000,000
2,000,000 1,400,000 600,000
January 1, 2021
Bonds.................................................................. 8,600,000
Cash................................................................. 8,600,000
December 31, 2021

Cash..................................................................... 400,000
Bonds............................................................... 112,234
Interest income................................................ 287,766
December 31, 2021

Bonds.................................................................. 44,234
Net unrealized gains and losses—I/S.............. 44,234
8-71
Requirement 2
December 31, 2022

Cash..................................................................... 400,000
Bonds............................................................... 115,989
Interest income................................................ 284,011
December 31, 2022

Bonds.................................................................. 3,989

Requirement 3
December 31, 2022

Cash..................................................................... 8,420,000
Bonds............................................................... 8,420,000
Problem 8-19
Requirement 1
Amortization Table
Cash Effective
Date 5.00% 6.9214% Amortization discount Principal amount
1 Jan. 2021 (600,000) 7,600,000 7,000,000
31 Dec. 2021 380,000 484,498 (104,498) (495,502) 7,600,000 7,104,498
31 Dec. 2022 380,000 491,731 (111,731) (383,771) 7,600,000 7,216,229
31 Dec. 2023 380,000 499,464 (119,464) (264,307) 7,600,000 7,335,693
31 Dec. 2024 380,000 507,733 (127,733) (136,574) 7,600,000 7,463,426
31 Dec. 2025 380,000 516,574 (136,574) 0 7,600,000 7,600,000
1,900,000 2,500,000 (600,000)
January 1, 2021
Bonds.................................................................. 7,600,000
8-72
Unamortized discount...................................... 600,000

Cash................................................................. 7,000,000
December 31, 2021

Cash..................................................................... 380,000
Unamortized discount......................................... 104,498
Interest income................................................ 484,498
Requirement 2
December 31, 2022

Cash..................................................................... 380,000
Interest income................................................ 491,731
Requirement 3
December 31, 2022

Cash..................................................................... 7,890,000
Bonds............................................................... 7,600,000
Gain on sale of bonds...................................... 673,771
Problem 8-19 (same problem number, extension of previous
problem)
Requirement 1
Amortization Table
Cash Effective
1 Jan. 2021 (600,000) 7,600,000 7,000,000
31 Dec. 2021 380,000 484,498 (104,498) (495,502) 7,600,000 7,104,498
31 Dec. 2022 380,000 491,731 (111,731) (383,771) 7,600,000 7,216,229
31 Dec. 2023 380,000 499,464 (119,464) (264,307) 7,600,000 7,335,693

31 Dec. 2024 380,000 507,733 7,600,000 7,463,426
8-73
(127,733) (136,574)
31 Dec. 2025 380,000 516,574 (136,574) 0 7,600,000 7,600,000
1,900,000 2,500,000 (600,000)
January 1, 2021
Bonds.................................................................. 7,000,000
Cash................................................................. 7,000,000
December 31, 2021

Cash..................................................................... 380,000
Bonds.................................................................. 104,498
Interest income................................................ 484,498
December 31, 2021

Bonds.................................................................. 352,502
Requirement 2
December 31, 2022

Cash..................................................................... 380,000
Bonds.................................................................. 111,731
Interest income................................................ 491,731
December 31, 2022

Bonds.................................................................. 321,269
Requirement 3
December 31, 2022

Cash..................................................................... 7,890,000
Bonds............................................................... 7,890,000
December 31, 2022

Deferred gain (OCI) ($352,502 + 321,269)........ 673,771
8-74
Realized gain—I/S.......................................... 673,771

Problem 8-20
Requirement 1
Amortization Table
Cash Effective
1 Jan. 2021 (600,000) 7,600,000 7,000,000
31 Dec. 2021 380,000 484,498 (104,498) (495,502) 7,600,000 7,104,498
31 Dec. 2022 380,000 491,731 (111,731) (383,771) 7,600,000 7,216,229
31 Dec. 2023 380,000 499,464 (119,464) (264,307) 7,600,000 7,335,693
31 Dec. 2024 380,000 507,733 (127,733) (136,574) 7,600,000 7,463,426
31 Dec. 2025 380,000 516,574 (136,574) 0 7,600,000 7,600,000
1,900,000 2,500,000 (600,000)
January 1, 2021
Bonds.................................................................. 7,000,000
Cash................................................................. 7,000,000
December 31, 2021

Cash..................................................................... 380,000
Bonds.................................................................. 104,498
Interest income................................................ 484,498
December 31, 2021

Bonds.................................................................. 352,502
Requirement 2
8-75
December 31, 2022

Cash..................................................................... 380,000
Bonds.................................................................. 111,731
Interest income................................................ 491,731
December 31, 2022

Bonds.................................................................. 321,269
Requirement 3
December 31, 2022

Cash..................................................................... 7,890,000
Bonds............................................................... 7,890,000
Problem 8-21
Requirement 1
Amortization Table
Cash Effective Gross Amortized
interest interest Amortizatio Unamortized carrying Loss cost
Date 4.00% 2.3907% n premium Principal amount allowance balance Fair value
Jan. 1,
2021 300,000 4,000,000 4,300,000 0 4,300,000
Dec.
31,
2021 160,000 102,801 57,199 242,801 4,000,000 4,242,801 0 4,242,801 4,320,000
Dec.
31,
2022 160,000 101,434 58,566 184,235 4,000,000 4,184,235 984,235 3,200,000 3,200,000
Dec.
31,
2023 160,000 100,033 59,967 124,268 4,000,000 4,124,268 1,434,268 2,690,000 2,690,000
Dec.
31,
2024 160,000 98,600 61,400 62,868 4,000,000 4,062,868 781,321 3,281,547 3,281,547
Dec.
31,
2025 160,000 97,132 62,868 0 4,000,000 4,000,000 800,000 3,200,000 3,200,000
800,000 500,000 300,000
Requirement 2
January 1, 2021
Bonds.................................................................. 4,000,000
8-76
Unamortized premium......................................... 300,000

Cash................................................................. 4,300,000
December 31, 2021

Cash..................................................................... 160,000
Interest income................................................ 102,801
Requirement 3
December 31, 2022
Cash..................................................................... 160,000
Interest income................................................ 101,434
December 31, 2022

Impairment loss................................................... 984,235
Loss allowance................................................ 984,235
Problem 8-22
Requirement 1
Amortization Table
Cash Effective Gross Amortized
interest interest Unamortized carrying Loss cost
Date 4.00% 2.3907% Amortization premium Principal amount allowance balance Fair value
Jan. 1,
2021 300,000 4,000,000 4,300,000 0 4,300,000
Dec.
31,
2021 160,000 102,801 57,199 242,801 4,000,000 4,242,801 0 4,242,801 4,320,000
Dec.
31,
2022 160,000 101,434 58,566 184,235 4,000,000 4,184,235 984,235 3,200,000 3,200,000
Dec.
31,
2023 160,000 100,033 59,967 124,268 4,000,000 4,124,268 1,434,268 2,690,000 2,690,000
Dec.
31,
2024 160,000 98,600 61,400 62,868 4,000,000 4,062,868 781,321 3,281,547 3,281,547
Dec.
31,
2025 160,000 97,132 62,868 0 4,000,000 4,000,000 800,000 3,200,000 3,200,000
800,000 500,000 300,000
Requirement 2
January 1, 2021
Bonds.................................................................. 4,300,000
Cash................................................................. 4,300,000
8-77
December 31, 2021

Cash..................................................................... 160,000
Bonds............................................................... 57,199
Interest income................................................ 102,801
December 31, 2021

Bonds ($4,320,000 − (4,300,000 − 57,199))....... 77,199
Requirement 3
December 31, 2022

Cash..................................................................... 160,000
Bonds............................................................... 58,566
Interest income................................................ 101,434
December 31, 2021

Net unrealized gains and losses—OCI................ 1,061,434
Bonds ($3,200,000 − (4,200,000 − 58,566))... 1,061,434
December 31, 2022

Impairment loss................................................... 984,235
Loss allowance................................................ 984,235
Cases
Real World Case 8-1
Requirement 1
From the footnote disclosure, IFRS 9 has two major impact on HSBC, namely, (1) the
classification and measurement basis used for financial assets and (2) the provision of
loss allowance on financial assets. Among the two, the latter seem to have the most
8-78
significant impact due to its radical change from the previous accounting standard
IAS 39.
The measurement of impairment loss under IFRS 9 is more forward looking in the
new expected credit loss model. The assessment of credit risk and estimation of ECL
incorporates all available information relevant such as past events, current conditions,
and reasonable and supportable forecasts of economic conditions at reporting date.
Moreover, the new model requires HSBC to classify its financial assets into three
stages to which the accounting for each stage differs. For financial assets in stage 1, a
twelve-month ECL is to be provided and for stage 2 and stage 3, lifetime ECL is to be
provided. As a result, there is likely to be an increase in the total level of impairment
allowance since all financial assets will be assess for at least twelve-month ECL.
For the classification and measurement of financial assets, IFRS 9 determines the
measurement method through the contractual cash flow characteristics and how the
financial assets are managed within HSBC. Although there might be some differences
with IAS 39, the overall impact is reclassification and is not significant for the
portfolio of financial assets.
Requirement 2
HSBC needs to prepare for the implementation of IFRS 9. A reasonably long period
is probably required, given the massive impact of the standard on the bank’s
accounting statements. Typically, the following are steps required to ensure smooth
implementation of IFRS 9.
Planning: A steering committee, comprising key persons from different units in the
organization is often required to determine the impact, plan of action and resources
required to coordinate the effort.
Policy determination: The organization needs to establish policies to determine the

conditions for the adoption of the options permitted by IFRS 9, for example, the fair
value option for accounting mismatch and the irrevocable option permitted by IFRS
9. Internal guidelines to determine subjective terms such as “significant” may need to
be spelt out.
Documentation of key processes and data: Each unit in an organization needs to have
processes in place to collect key data that would enable the identification of factors
that are important to IFRS 9. For example, the identification of the business models
and the evidence to identify the stages in the expected credit loss model.
8-79
IT systems: The automation of the systems to collect data and to implement the
requirements of IFRS 9 is necessary and requires many robust tests, pilot runs, and
parallel runs to ensure that it would be operational by 2018.
Communication and education: IFRS 9 affects not only the accounting unit but the
entire organization and its stakeholders. The impact of IFRS 9 on product
development, marketing, and promotion is significant. There is a need to explain the
impact of IFRS 9 to stakeholders.
Transitional provisions: IFRS 9 provides transitional requirements. The organization

has to be prepared to apply these requirements. The organization also has to consider
if it wants to early adopt the standard.
Post-implementation review: Subsequent to implementation, the impact of IFRS 9 on

the organization’s financial statements must be reviewed. Consequential impact on
performance, share prices, dividend policies, managerial bonuses, and other key
metrics have to be evaluated.
8-80
Research Case 8-2

Requirement 1
Students can select any public company that is IFRS compliant.

Requirement 2
Students should apply their business judgement here. The fair value option is a
choice. However, this choice is fairly permanent (when a company has an
accounting mismatch, they would apply the option). Hence, companies would be
concerned about the impact of the choice. Using fair values has the following
impact:
1. increases (decreases) assets when fair value increases (falls);
2. increase (decreases) net profit or equity when fair value increases (falls); and
3. increases volatility but recognizes gains (losses) earlier.
Students may do “mock ups” of past financial statements—showing the impact on

key metrics when the fair value option is applied. They may do a ratio analysis to
compare the difference between amortized cost and the fair value approach.
The pros and cons of adopting or not adopting the fair value option should be
considered.
Requirement 3
Similar considerations as in requirement 2 apply here. Using the FVOCI option has
the following impact:
1. Avoids volatility on the profit and loss statement;
2. No impact on net income throughout holding period and on sale of the

investments—will this be a problem for the company since the performance
metric is not revealing the unrealized or unrealized gains?;
8-81
3. No impact on net income on impairment of the equity investment—this may

be seen as favorable to the investor. Besides not showing the loss in net
income, the investor does not need to evaluate the expected credit loss on the
investment.
The pros and cons of adopting or not adopting the fair value option should be
considered with supporting numbers, if these are available.
Research Case 8-3

This research exercise involves students accessing (a) Basis of conclusions
relating to IFRS 9 and (b) Comment letters from the global community relating to
the expected credit loss model. While the Basis of Conclusions is proprietary
(most university libraries should have a paid database that allows access), the
comment letters can be accessed on www.ifrs.org. If students do not have access
to the Basis of Conclusions, the case can be adjusted to require students to access
only the comment letters.
Students evaluate both the standard-setters’ perspective and the stakeholders’

perspective. While the standard-setters explain the rationale and probably the
conceptual motivations for the requirements of IFRS 9, the stakeholders will be
concerned more about the practical implications of IFRS 9.
In evaluating the pros and cons of each side of the argument, students are
encouraged to take note of the stakeholder that provides the feedback. Is the
respondent a preparer, user, regulator, or other parties? Is there a vested interest?
Are there economic advantages or setbacks for the respondent?
Typically comment letters are given with a dissenting view rather than a point of
agreement. This exercise is useful to demonstrate the consultative and political
nature of the standard setting process.
8-82
Case 8-4
Air France-KLM Case

Requirement 1
a. Per note 24 (“Other financial assets”), the balance of investments accounted
for at FVPL is $877 (including “Cash secured” portion) as of December 31,
2015, equal to $406 current marketable securities, $60 noncurrent marketable
securities, and $411 current cash secured. $817 of that amount is included in
the $967 amount of “Other short-term financial assets” that appears in the
balance sheet and $60 of that amount is included in the $1,224 amount of
“Other financial assets” that appears in the balance sheet.
b. Per note 24 (“Other financial assets”), $817 of the balance is classified as

current, and $60 is classified as noncurrent.
c. Per note 36.4 (“Valuation methods for financial assets and liabilities at their
fair value”), $37 of the $877 balance is estimated using level 1 inputs, and the
other $840 is estimated using level 2 inputs. Level 2 inputs to fair value
estimates are less reliable than level 1 inputs, but still use market-based inputs
to calculate fair value. Still, this fair-value estimate isn’t as reliable as it would
be if based on level 1 of the fair value hierarchy.
Requirement 2
a. Per note 24 (“Other financial assets”), the balance of investments accounted
for as available for sale is $432 as of December 31, 2015, including $29
available shares and $403 of shares secured. All $432 is included in the
$1,224 amount of “Other financial assets” that appears in the balance sheet.
b. Per note 24 and the balance sheet, all of that balance is classified as
noncurrent.
c. Per note 36.4 (“Valuation methods for financial assets and liabilities at their
fair value”), $429 of the $432 is estimated using level 1 inputs, and the other
$3 is estimated using level 2 inputs. Level 1 inputs to fair value estimates are
the most reliable of the three levels of inputs, so these fair value estimates
should be very reliable.
8-83
Air France-KLM Case (concluded)
Requirement 3
a. Per note 4.3, “In accordance with IAS 28 “Investments in Associates and Joint
Ventures,” companies in which the Group has the ability to exercise
significant influence on financial and operating policy decisions are also
accounted for using the equity method. The ability to exercise significant
influence is presumed to exist when the Group holds more than 20 percent of
the voting rights.
b. Per note 4.3, “In accordance with IFRS 11 “Join arrangements”, the Group
applies the equity method to partnership over which it exercises control jointly
with one or more partners (joint venture).
c. Per note 22 (“Equity affiliates”) and the balance sheet, the carrying value of
AF’s equity-method investments on its December 31, 2015, balance sheet is
$118.
d. Per note 22 and the income statement, AF’s equity-method investments
reduced its net income from continuing operations by $30 during 2015.
Case 8-5
Requirement 1
Satisfied by going to http://www.iasplus.com/standard/ias28.htm.
Requirement 2
Renault’s decision appears appropriate, as the company has significant influence,
but not control. Significant influence is indicated by a greater-than-20 percent
equity stake and seats on the Nissan board. Lack of control is indicated by Renault
not owning a majority of voting rights or board seats and not having full rights to
use assets or the obligations with respect to liabilities.
Requirement 3
It is not surprising that Renault makes adjustments that take into account the fair
value of Nissan’s assets and liabilities at the time Renault invested in Nissan. For
example, if the fair value of Nissan’s fixed assets was greater than the book value
8-84
of those assets on the date of Renault’s purchase, Renault would need to recognize
additional depreciation over the life of those assets when applying the equity
method. This is consistent with IFRS and also with US GAAP.
Requirement 4
Renault’s harmonization adjustments are required by IFRS, which requires that “if
the associate uses accounting policies that differ from those of the investor, the
associate's financial statements should be adjusted to reflect the investor's
accounting policies for the purpose of applying the equity method.” [IAS 28.27].
US GAAP has no such requirement.
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Chapter 8: Investments

Questions for Review of Key Topics

In application of IFRS 9, the three measurement bases are:

An equity instrument that is not held for trading qualifies to be measured at

The primary differences between debt instruments and equity instruments

Unrealized gains or losses on FVTPL securities are reported in the income

The equity method, like consolidation, views the

Answers to Questions (continued) The investment account was decreased by $40,000

Brief Exercises (a)

Brief Exercise 8-1

Unlike for FVOCI securities, unrealized gains and losses

Brief Exercise 8-2 (concluded) 2023

Brief Exercise 8-4

Brief Exercise 8-8 An investor should account for dividends from an

Given Turner’s choice of not electing under the

With the equity method, we attempt to approximate the

Unrealized loss—OCI ($4.50 × $100,000 shares)... 450,000

Brief Exercise 8-12

For FIN, the cash flows are as follows,

Contractual cash flows per annum = $600,000 × 7% = 42,000

2020 2021 2022 2023 2024

Cash shortfall 0 0 0 42,000 642,000

Weighted average cash shortfall

Loss allowance as at December 31, 2020 = 0.5% × ($42,000 + $642,000) = $210

Brief Exercise 8-13

2022 2023 2024

Cash shortfall 0 42,000 642,000

Weighted average cash shortfall 0 10,500 160,500

Loss allowance as at December 31, 2021 = $9,171 + 131,016 = 140,187

Brief Exercise 8-14

A fundamental difference between stage 2 and stage 3 is that interest on stage 3

Weighted average cash shortfall 37,800 577,800

Exercise 8-1Requirement 1 ($ in millions)

If the investor holds the investments in a business model to collect

Investment in G Motors ordinary shares 40,000

Cash ([800 shares × $53] − $1,300)....................... 41,100

Exercise 8-4 Requirement 1

Net unrealized gains and losses—OCI 25,000

December 31, 2022

Exercise 8-5 (concluded) Requirement 3

December 31, 2023

Investment account 10,000 shares × [$61 − 58])............................... 30,000

Exercise 8-6 (continued) December 31

*$32 × 1 million shares

OCI balances on equity investments are not reclassified to net income on

OCI balances on equity investments are not reclassified to net income on

Other comprehensive income:

Investment revenue.......................... $3 million

Exercise 8-8 (concluded) Requirement 2

Exercise 8-91. Investments reported as current assets.

3. Unrealized gain (or loss) component of income before taxes.

4. Unrealized gain (or loss) component of OCI in shareholders’ equity.

Cost Fair value Unrealized

Net unrealized gains and losses—OCI................................... 25,000

Exercise 8-10 (continued) Requirement 2

Investment in IBT shares ($1,275,000 − 1,200,000) ................. 75,000

Exercise 8-10 (concluded) Requirement 3

Investment in IBT shares ($1,375,000 − 1,200,000) .................. 175,000

December 31, 2022 ($ in millions)

June 1, 2023 ($ in millions)

September 12, 2023

December 31, 2023 ($ in millions)