Question

1. As at 31 March 2018, DuckTales Ltd has another financial instrument which is shares in another company. These shares were purchased for the purposes of making a gain on the investment. Explain to Scrooge McDuck, the CEO of Ducktakes Ltd, how the financial instrument should be accounted for at the end of each financial year. In your answer you should outline how new values for the financial instrument could and should be determined and how any change would affect the financial statements.   

Answer 1

Solution:

As per IAS 109 , Investment in Equity Shares are recorded at cost plus transaction Cost. But at every reporting date it is revalued at Fair Value ( i.e. marked to market) either through Statement of Profit and Loss Account or Other comprehensive Income (which is part II of profit and loss account). In most of the case it is revalued through Profit and Loss Account except one i.e. when it is held for Long Term Strategic Reasons.

Now the question is how to find out the Fair Value of share at every reporting date, so in case of share either it is listed on stock exchange or unlisted. If it is exchange traded (i.e. listed)  it can be found easily by seeing price on stock exchange. That price will be the fair value. If unlisted then we have to see the market price of similar kind of share in same industry.

If at reporting date our fair value is more than book value then we will do following journal entry

Investent in Shares A/c...............Dr

To Statement of profit and loss account/ Other comprehensive Reserve

so, it will increase our investment to fair value and increase our income in financial statement. In case it is marked to market through other comprehensive reserve , it will not go to profit and loss account rather it will go to Other component of equity in Statement of changes in equity.

Reverse will happen if fair value is less then book value.