Chapter 17 Investment

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At the end of an accounting period, companies determine the market price i. If the market price is different from the book value, unrealized gains or losses should be recognized to reflect the fair value of the securities. The accounting treatment of trading and available-for-sale securities is different in this case:. The company holds all 30 shares.

To adjust the value of the investment, Busy Company should make the following journal entry i. In this case, the company would debit the Unrealized loss on trading securities account and credit the Trading securities account. Because the investment in XYZ shares is considered trading securities, the company intends to sell these shares in the near term. As the result, the unrealized gain loss affects current accounting period and is reported in the income statement.

Only the changes in the fair value of trading securities are reported on the income statement in the current period i. The balance sheet value of the trading securities is also adjusted and is carried forward into the future accounting period so realized or unrealized gains losses can be recognized in the future.

For instance, companies might use a contra-asset Market adjustment account to record unrealized gains losses on trading securities. In our example, Busy Company would debit Market adjustment-trading securities instead of Trading securities trading investments are categorized on the balance sheet as ________. The Trading securities account, in such a case, would be reported at the trading investments are categorized on the balance sheet as ________ cost.

Busy Company sold 5 shares in December and held 15 shares at the end of the accounting period. On December 31, 20X2 the company should record the unrealized loss i. Unrealized holding gains and losses on available-for-sale securities in the current period are reported as other comprehensive income rather than income trading investments are categorized on the balance sheet as ________ continuing operations.

The company would need to take off the books available-for-sale securities DEF Company and unrealized price decrease on available-for-sale securities. Also, the company would recognize cash received on the sale of the securities i. Realized gain loss on the sale of available-for-sale securities is the plug-in value. In our example, Busy Company would make the following journal entry on March 1, 20X As we can see from the table above, the realized loss on available-for-sale securities is the plug-in value: The company had to take-off the unrealized loss previously recognized in order not to count the loss twice i.

Accounting for short-term investments. Change in market price of the marketable securities At the end of an accounting period, companies determine the market price i. The accounting treatment of trading and available-for-sale securities is different in this case: Short-term investments definition 2. Classification of investments in securities 3. Accounting for trading and available-for-sale securities 3. Purchase of trading and available-for-sale securities 3.

Receipt of cash dividends 3. Sale of trading and available-for-sale securities 3. Change in market price of the marketable securities. Download free accounting study notes by signing up for our free newsletter example:. Ask a Question Suggest a Topic. Do you have an interesting question or topic? Suggest it to be answered on Simplestudies. Browser does not support frames!

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Group Plc Part 2: These policies have been applied in preparing: It has been assumed that the European Commission will endorse the recent amendment to IAS 19 Employee Benefits - actuarial gains and losses, group plans and disclosures which allows actuarial gains or losses to be taken directly to reserves as permitted under UK GAAP by FRS 17, "Retirement benefits". These standards are also collectively referred to as IFRS. At this stage in its development, matters such as the interpretation and application of IFRS are continuing to evolve.

These uncertainties could result in the need to change the basis of accounting or presentation of certain financial information from that applied in the preparation of this document. As a general rule, the Group is required to establish its IFRS accounting policies for the year ended 31 March and apply these retrospectively to determine its opening IFRS balance sheet at the transition date of 1 April and the comparative information for the year ended 31 March The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement.

Interests in joint ventures are accounted for using the equity method of accounting as permitted by IAS 31 " Interests in joint ventures" and following the procedures for this method set out in IAS 28 "Investments in associates". The equity method requires the Group's share of the joint venture's profit or loss for the period to be presented separately in the income statement and the Group's share of the joint venture's net assets to be presented separately in the balance sheet.

Joint ventures with net liabilities are carried at zero value in the balance sheet and any distributions received are included in the consolidated profit for the year. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with joint ventures are eliminated to the extent of the Group's interest in the joint venture concerned.

Unrealised losses are eliminated in the same way, but only to the extent that there is no evidence of impairment. In accordance with IFRS 3 "Business combinations ", the goodwill is not amortised but is reviewed for impairment at each reporting date. The Group's policy on impairment is set out in j below. In accordance with its treasury policy, the Group does not hold or issue derivatives for trading purposes.

Derivatives are recognised initially at cost. Subsequent to initial recognition, derivatives are stated at fair value. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss unless the derivatives qualify for hedge accounting, in which case recognition depends on the nature of the item being hedged. Where a derivative is designated as a hedge of the variability of a highly probable forecasted transaction, ie an interest payment, the element of the gain or loss on the derivative that is an effective hedge is recognised directly in equity.

When the hedge of a forecasted transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss, ie when interest income or expense is recognised. The ineffective part of any gain or loss is recognised in the income statement immediately.

In addition, properties held under operating leases are accounted for as investment properties when the rest of the definition of an investment property is met. In such cases, the operating leases concerned are accounted for as if they were finance leases. Investment properties are measured initially at cost, including related transaction costs. After initial recognition at cost, investment properties are carried at their fair values based on a professional valuation made as of each reporting date.

Properties are treated as acquired at the point when the Group assumes the significant risks and returns of ownership and as disposed when these are transferred to the buyer.

Investment property is measured on initial recognition at cost, including related transaction costs. Additions to investment properties consist of costs of a capital nature and, in the case of investment properties under development, capitalised interest.

Certain internal staff and associated costs directly attributable to the management of major schemes during the construction phase are also capitalised. The difference between the fair value of an investment property at the reporting date and its carrying amount prior to re-measurement is included in the income statement as a valuation gain or loss.

When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property remains an investment property and is accounted for as such. When the Group begins to redevelop an existing investment property with a view to sale, the property is transferred to trading properties and held as a current asset.

The property is re-measured to fair value as at the date of the transfer with any gain or loss being taken to profit or loss. The re-measured amount becomes the deemed cost at which the property is then carried in trading properties. Property that is being constructed or developed for future use as an investment property, but which has not previously been classified as such, is classified as investment property under development within property, plant and equipment.

This is recognised initially at cost but is subsequently re-measured to fair value at each reporting date. Any gain or loss on re-measurement is taken direct to equity unless the loss in the period exceeds the net cumulative gain previously recognised in equity. In the latter case, the amount by which the loss in the period exceeds the net cumulative gain previously recognised is taken to profit or loss.

On completion, the property is transferred to investment property with any final difference on re-measurement accounted for in accordance with the foregoing policy. Gross borrowing costs associated with direct expenditure on properties under development or undergoing major refurbishment are capitalised. The interest capitalised is calculated using the Group's weighted average cost of borrowings after adjusting for borrowings associated with specific developments.

Where borrowings are associated with specific developments, the amount capitalised is the gross interest incurred on those borrowings less any investment income arising on their temporary investment. Interest is capitalised as from the commencement of the development work until the date of practical completion. The capitalisation of finance costs is suspended if there are prolonged periods when development activity is interrupted.

Interest is also capitalised on the purchase cost of a site or property acquired specifically for redevelopment in the short term but only where activities necessary to prepare the asset for redevelopment are in progress. Operating properties are stated at cost less accumulated depreciation. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the properties concerned. The estimated useful lives are as follows: Freehold land - Not depreciated Freehold buildings - Up to 50 years Leasehold properties - Shorter of the unexpired lease term and 50 years Other property, plant and expenditure This category comprises computers, motor vehicles, furniture, fixtures and fittings, and improvements to Group offices.

These assets are stated at cost less accumulated depreciation and are depreciated on a straight-line basis over their estimated useful lives of between two and five years. The residual values and useful lives of all property, plant and equipment are reviewed, and adjusted if appropriate, at least at each financial year-end. Payments, including prepayments, made under operating leases net of any incentives received from the lessor are charged to the income statement on a straight-line basis over the period of the lease.

Finance leases are capitalised at the lease's commencement at the lower of the fair value of the property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in current and non-current borrowings.

The finance charges are charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The investment properties acquired under finance leases are carried at their fair value. A group company is the lessor i Operating lease - properties leased out to tenants under operating leases are included in investment properties in the balance sheet. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income.

Lease income is recognised over the term of the lease using the net investment method before tax, which reflects a constant periodic rate of return. Where only the buildings element of a property lease is classified as a finance lease, the land element is shown within operating leases.

An appropriate estimate of the profit attributable to work completed is recognised once the outcome of the contract can be estimated reliably. The gross amount due from customers for contract work is shown as a receivable.

The gross amount due comprises costs incurred plus recognised profits less the sum of recognised losses and progress billings. Where the sum of recognised losses and progress billings exceeds costs incurred plus recognised profits, the amount is shown as a liability. A provision for impairment of trade receivables is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned.

Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. If any such indication exists, the asset's recoverable amount is estimated see below. An impairment loss is recognised in profit or loss whenever the carrying amount of an asset exceeds its recoverable amount.

For the purposes of assessing impairment, assets are grouped together at the lowest levels for which there are separately identifiable cash flows. The recoverable amount of an asset is the greater of its net selling price and its value in use. The value in use is determined as the net present value of the future cash flows expected to be derived from the asset, discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount after the reversal does not exceed the amount that would have been determined, net of applicable depreciation, if no impairment loss had been recognised. External costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

Subsequent to initial recognition, borrowings are stated at amortised cost with any difference between the amount initially recognised and redemption value being recognised in the income statement over the period of the borrowings, using the effective interest method.

Where existing borrowings are exchanged for new borrowings and the terms of the existing and new borrowings are not substantially different as defined by IAS 39 , the new borrowings are recognised initially at the carrying amount of the existing borrowings.

The difference between the amount initially recognised and the redemption value of the new borrowings is recognised in the income statement over the period of the new borrowings, using the effective interest method. In respect of defined benefit pension schemes, obligations are measured at discounted present value while scheme assets are measured at their fair value.

The operating and financing costs of such plans are recognised separately in the income statement; service costs are spread systematically over the working lives of the employees concerned and financing costs are recognised in the periods in which they arise. Actuarial gains and losses arising from either experience differing from previous actuarial assumptions or changes to those assumptions are recognised immediately in the statement of recognised income and expense.

Contributions to defined contribution schemes are expensed as incurred. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. Provision is made for dilapidations that will crystallise in the future where, on the basis of the present condition of the property, an obligation exists at the reporting date and can be reliably measured. The estimate is revised over the remaining period of the lease to reflect changes in the condition of the building or other changes in circumstances.

The estimate of the obligation takes account of relevant external advice. Rental income includes the net income from managed operations such as car parks, food courts, serviced offices and flats.

Service charges and other recoveries include income in relation to services charges and directly recoverable expenditure together with any chargeable management fees. Property services income represents unitary charges and the recovery of other direct property or contract expenditure reimbursable by customers. Where revenue is obtained from the rendering of services, it is recognised by reference to the stage of completion of the relevant transactions at the reporting date.

Rental income from investment property leased out under operating lease is recognised in the income statement on a straight-line basis over the term of the lease.