Question

In: Accounting

According to ISAB, Debt investments are accounted either by the amortize cost or by fair value...

According to ISAB, Debt investments are accounted either by the amortize cost or by fair value method. To identify the method used there is certain model. Please explain the model and its criteria.

Solutions

Expert Solution

Fair value method for measurement of financial instruments is where the financial instruments are carried at fair value. Fair value is determined using the principles outlined in IFRS 13-Fair Value measurement

Under Amortised costs method, financial instruments are carried at amortised cost. Under amortised cost method, the financial instrument is initially recognised at fair value. For subsequent measurement, interest at market rate is added to the instrument and an collections are reduced.

General principle is to measure all instruments at fair value. Amortised cost measurement is allowed only subject to the following two conditions:

1. SPPI Test (Structured Payments of principal and interest): The instrument should meet the SPPI test, i.e. the contract terms of the financial instrument should clearly outline the cash flows receivable from the investment (timing) and the quantum of cash flows. Further, cash flows should only be on account of pirncipal and interest. Interest is considered to be the compensation for time value of money and credit risk. If the instrument contains any feature, like return linked to any stock market interest or gold rate, or a convertible option, such contractual terms will not satisfy SPPI and therefore, these instruments will be carried at fair value

2. Business Model: Business model of the entity for the SPPI instrument should be to hold the instruments with the objective of collecting cash flows arising from the instrument. The entity should not be holding the instruments for trading. If the instruments are hheld for trading, they need to be carried at fair value. Depending on the frequency of trading, entity has to apply judgement whether the fair valuation movement is required to be carried through profit and loss account or through other comprehensive income.

For any further discussion, please comment.


Related Solutions

Al Essa Manufacturing holds a large portfolio of debt and equity investments. The fair value of...
Al Essa Manufacturing holds a large portfolio of debt and equity investments. The fair value of the portfolio is greater than its original cost, even though some investments have decreased in value. Rakan Al Shaalan, the financial vice president, and Fhad Al Shamrani, the controller, are near year-end in the process of classifying for the first time this investment portfolio in accordance with IFRS. Al Shaalan wants to classify those investments that have increased in value during the period as...
The investments of Harlon Enterprises included the following cost and fair value amounts ($ in millions):...
The investments of Harlon Enterprises included the following cost and fair value amounts ($ in millions): Fair Value, Dec. 31 Equity Investments Cost 2021 2022 A Corporation shares $ 56 $ 32 N/A B Corporation shares 71 71 $ 73 C Corporation shares 33 N/A 32 D Industries shares 63 64 68 Totals $ 223 $ 167 $ 173 Harlon accounts for its equity investment portfolio at fair value through net income. Harlon sold its holdings of A Corporation shares...
According to GAAP, companies can elect the fair value option when accounting for many investments. Describe...
According to GAAP, companies can elect the fair value option when accounting for many investments. Describe how accounting for a held-to-maturity investment, an available-for-sale investment, and an equity-method investment is affected by a company electing the fair value option.
Explain why either amortized cost or fair value accounting could be preferable for each of the...
Explain why either amortized cost or fair value accounting could be preferable for each of the following items. 1) Productive assets held for use 2) Assets held for sale 3) Equity investments 4) Long‐term debt 5) Pension assets and liabilities
The accounting for fair value hedges records the derivative at its amortized cost. carrying value. fair...
The accounting for fair value hedges records the derivative at its amortized cost. carrying value. fair value. historical cost. None of the above. 5- How does electing the Fair Value Option under US GAAP change the reporting for investments classified as Trading Securities? Balance Sheet effect / Income Statement effect No change/ No change Change to fair value / Change to recognized unrealized gain & loss in OCI Change to fair value / Change to recognized unrealized gain & loss...
Please compare the fair value and equity methods of accounting for investments in stocks subsequent to...
Please compare the fair value and equity methods of accounting for investments in stocks subsequent to acquisition.
Company ABC. shows on its statement of financial position its investments accounted for as FV-OCI investments....
Company ABC. shows on its statement of financial position its investments accounted for as FV-OCI investments. At its year end of May 31, 2018, the balance in the FV-OCI Investments account was $90,000 and at its year end of May 31, 2019, the balance was $100,000. Novak’s statement of comprehensive income for the year ended May 31, 2019, shows an unrealized loss from fair value adjustment on FV-OCI investments of $10,000. There were no sales of FV-OCI investments during the...
Pronghorn Inc. shows on its statement of financial position its investments accounted for as FV-OCI investments....
Pronghorn Inc. shows on its statement of financial position its investments accounted for as FV-OCI investments. At its year end of May 31, 2018, the balance in the FV-OCI Investments account was $93,500 and at its year end of May 31, 2019, the balance was $123,500. Pronghorn’s statement of comprehensive income for the year ended May 31, 2019, shows an unrealized loss from fair value adjustment on FV-OCI investments of $23,300. There were no sales of FV-OCI investments during the...
In financial accounting and rules of financial reporting 1. What are investments and fair value? What...
In financial accounting and rules of financial reporting 1. What are investments and fair value? What information in disclosed? 2. Why is reporting of them required? 3. What does this information tell you about a company?
Calculating the Fair Value of Debt The Longo Corporation issued $60 million maturity value in notes,...
Calculating the Fair Value of Debt The Longo Corporation issued $60 million maturity value in notes, carrying a coupon rate of six percent, with interest paid semiannually. At the time of the note issue, equivalent risk-rated debt instruments carried yield rates of eight percent. The notes matured in five years. Calculate the proceeds that Longo Corporation will receive from the sale of the notes. Round your answer to the nearest dollar. $Answer How will the notes be disclosed on Longo’s...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT