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INVESTMENT AND INVESTMENT PROPERTIES

INVESTMENT AND INVESTMENT PROPERTIES. IAS 25 ACCOUNTING FOR INVESTMENT FRS 128 INVESTMENT IN ASSOCIATES. Introduction. IAS 25: deals with accounting for: Investment properties Current investment and Long-term investment

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INVESTMENT AND INVESTMENT PROPERTIES

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  1. INVESTMENT AND INVESTMENT PROPERTIES IAS 25 ACCOUNTING FOR INVESTMENT FRS 128 INVESTMENT IN ASSOCIATES

  2. Introduction • IAS 25: deals with accounting for: • Investment properties • Current investment and • Long-term investment • In general, investment is an assets that expected to have inflows of economic benefits • Held not for trading or to be used in the business operation • The main purpose is for the anticipated accretion of wealth

  3. Reasons to hold investments • Control and influence: • Invest in subsidiaries or associates • Strengthen trading relationship • Surplus of fund (temporary investment) • Capital appreciation (investment properties)

  4. Forms of investments • Financial rights: bond and shares • Evidenced by certificates • Tangible: land, buildings, marketable commodities

  5. Issues/focus • General reporting requirement • Classification of investment • Measurement and recognition of cost of investment • Determining carrying amount and treatment of changes in value • Reclassification of investment • Disposal of investments • Disclosure and presentation

  6. (A) REPORTING REQUIREMENT Company Act 1965-9th Schedule • Balance Sheet • Total of investments by category • Method used by each category • Market value for quoted investment • Income Statement • Gross income from subsidiaries • Gross income from: • Investment in shares/debentures quoted in M’sia • Investment in shares/debentures quoted outside M’sia • Other sources (unquoted) • Other interest Income

  7. Reporting requirement Security Commission, 1995 • Require companies in general to comply with: • Co. Act 1965-9th Schedule • FRS 127, 128 and 140 • Insurance Co. to comply with • FRS 202-General insurance Business • FRS 203-Life Insurance Business

  8. Reporting requirement FRS 101-Presentation of Financial Statements • Prescribe minimum line items that should be presented on the face of Balance Sheet • Examples of line item presented on the face of BS • Investment properties • Investment in subsidiary companies; and • Other investment

  9. (B) CLASSIFICATION (CURRENT VS. LONG-TERM) • Depends on: • Nature of the investment • Enterprise’s intention • Ability to liquidate and realise within a short period of time without suffering a significant loss • Classification must be accordance with the guides provided in FRS 101 • Current IF it is: • Held primary for trading purposes/short-term (expected to be realise within 12 months, or • Cash or cash equivalent asset which is not restricted in its use.

  10. (C) MEASUREMENT OF COST • Measured and recorded at cost (historical cost principle) • Applies to all investment (current or long-term or subsequent measurement) • Cost should comprise of purchase price PLUS any incidental cost • consideration price include: • Securities – fair value of the securities issued • Exchange for another assets – fair value of the assets given up or fair value of the investment acquired (if more clearly evident)

  11. entries Dt. Investment xxx Cr. Cash xxx Assets xxx Securities xxx Example 1 ABC bhd. acquired a 30% equity interest in share capital of XYZ Bhd. The agreed purchase consideration include an issue of 5mill XYZ Bhd’s shares of RM1 valued at RM3 each and the balance in cash of RM5m. Other acquisition charges totalled RM18000. What is the cost of the investment?

  12. Changes in the cost of Investment(Interest-bearing investment) • Example: investment in loan stock and bond • Reduce by; • inflows of interest and dividend from the investment (pre-acquisition vs. post-acquisition interest and dividend) • Amortisation of premium (if purchase at premium) • Increase by: • Amortisation of discount (if purchase at discount • The reduce cost is regarded as recovery cost

  13. pre-acquisition vs. post –acquisition of interest and dividend • Interest; • Pre-acquisition: interest received for the period before acquisition of investment • Post-acquisition : interest received for the period after acquisition of investment • Dividend from: • pre-acquisition profit vs. post –acquisition profit • pre-acquisition: treated as recovery cost (reduce investment cost) • post –acquisition: as an income (crediting IS)

  14. Journal entry: Dt. Cash (interest/dividend received) xxx Cr. Investment cost (pre-acq.) xxx Cr. Interest/dividend income xxx

  15. Example 2 • On 1 July 20x7, GHI Bhd. purchased 10,000,000 units of ABC’s 12% unsecured loan stocks in the open market at a price of RM1.06/unit. Brokerage fees incurred was 1% of the total purchase price. Interest on the loan stocks is payable annually on 31 Dec. each year. • Determine the cost of investment and show the journal entry to record the receipt of the interest.

  16. Purchase at premium or discount • Initial recorded costs are adjusted for the amortisation of premium/discount • The adjusted carrying amount is regarded as cost of the investment in BS • Amortisation should be over the period from acquisition to maturity

  17. 1. Initial cost recorded Dt Investment xxx Cr. Cash xxx 2. End of year: record amortisation a. Premium; Dt. Amortisation of premium (IS) xxx Cr. Investment xxx b. Discount; Dt. Investment xxx Cr. Amortisation of discount (IS) xxx 3. At maturity date/redemption Dt. Cash xxx Cr. Investment xxx Journal entries:

  18. Example 3 • On 1 Jan. 20x1, PQR Bhd. purchased two listed corporate bonds from the open market: • 10,000,000 unit of Pink Bhd’s, 6% coupon bond of RM1 par value at a price of RM0.80/unit. Interest on bond is paid annually and the bond are due for redemption at par on 31 Dec 20x5 • 10,000,000 unit of Red Bhd’s, 13% coupon bond of RM1 par value at a price of RM1.15/unit. Interest on bond is paid annually and the bond are due for redemption at par on 31 Dec 20x5 • Determine the cost of each investment, show journal entry at the end of each year until redemption date

  19. (D)DETERMINING CARRYING AMOUNT AND TREATMENT OF CHANGES IN VALUE • 4 basis • Lower of cost and market value • Market value • Cost basis • Revaluation basis • Selection of the basis depend on the classification of the investment (current or long-term) • Can be managed by; • Aggregate portfolio-huge number of investment • Category of investment • Individual – for few investment

  20. Current investment • Valued at • Market value basis; or • LCM • The carrying amount is determined either: • On an aggregate portfolio basis • by category of investment, or • On an individual investment basis • MIA and MICPA recommend LCM basis

  21. Long-term investment • Valued at • Cost basis; or • Revalued amount; or • LCM (for marketable securities) determined on an aggregate portfolio basis • MIA and MICPA recommend the cost basis

  22. LCM BASIS • Suitable for current investment • Provides prudent- recognised losses immediately, but unrealised gain are not • Accordance with the historical cost principle • Under LCM, investment are recorded at costs and written down to market value

  23. Treatment under LCM basis • For current Investment • all losses are charged to IS; and a) If managed by category/portfolio • Create a provision account • Individual investment remains at cost • Journal entry: Dt. Loss or reduction in value a/c (IS) xx Cr. Provision for reduction in value (BS) xx b) If manage by individual • Reduce the cost of investment • Journal entry: Dt. Loss or reduction in value a/c (IS) xx Cr. Investment (BS) xx

  24. Treatment under LCM basis • For long-term investment • Managed by aggregate portfolio basis • Losses/reduction in value are not charge in IS • It should be accounted for through equity by debiting other reserves (revaluation reserves of other investment or assets) • Journal entry: Dt. Reserves xx Cr. Investment portfolio (BS) xx

  25. Treatment for reversal • why reverse? When market value as at BS date in subsequent period is greater then the cost • Need to reverse the value back to cost • Current investment; • Credit to income Dt. Investment xx Cr. Reversal for previous reduction (IS) xx • Long-term Investment • Include in equity (cr. back to reserve a/c) Dt. Investment portfolio a/c xx Cr. reserve a/c xx (Reversal for previous reduction)

  26. Illustration 4 (page 264) • Illustration 5 (page 265)

  27. MARKET VALUE BASIS • Only applicable for current investment • Re-value every end of period • Any changes (decrease/increase) in carrying amount must be consistently included in income or Revaluation Reserve • Not recommended for Malaysian practices

  28. COST BASIS • Suitable for long-term investment • Carried at cost of acquisition • Revalue: if; • Permanent decline- charged to income immediately • Temporary decline – no adjustment

  29. Factors for permanent and temporary decline: Permanent decline: • Judge by market price • Investee’s net assets and results • Expected cash flow from investment • Risk, and type and extent of interest in investee Temporary decline: • Decline in market price by general downward market trend

  30. Treatment and disclosure Disclosure • Treated as part of the ordinary expenses • Disclose separately if material Journal entry: Dt. Permanent decline (IS) xx Cr. Investment a/c xx

  31. Illustration 6 (page 268)

  32. REVALUATION BASIS • Only for long-term investment • Represents a modification to historical cost principle • Upward revaluation is restricted to the net tangible asset value of the investee • Prevent the use of market prices, as they would: • Result in parent company’s reserves > group’s reserves

  33. Revaluation Reserve Rule • Surplus • Should be credited to revaluation reserve (RR) • Subsequent deficit • is charge against the RR to the extent of the balance available • Shortfall: charge to income statement • Journal entry: 1) Dt. Investment a/c xx Cr. Revaluation reserve xx 2) Dt Revaluation reserve xx Dt deficit in revaluation (under IS) xx Cr. Investment a/c xx

  34. Revaluation Reserve Rule • Deficit • Charge to Income Statement • Subsequent surplus • Credited to income (limit: equal to previous deficit) • Balance credited to RR • Journal entry: 1) Dt. Deficit in revaluation (IS) xx Cr. Investment a/c xx 2) Dt Investment a/c xx Cr Surplus in revaluation (under IS) xx Cr. Revaluation reserve xx

  35. Illustration 7 (page 270)

  36. (E) RE-CLASSIFICATION • Long-term to current • Transferred at the lower of cost and carrying amount, if the current investment are being carried at LCM. (any revaluation reserve should be reversed on the transfer) • Transferred at the carrying amount, if current investment are being carried at market value (any revaluation reserve should be transferred to income) • Current to long-term • Should be transferred at whatever carrying amount on the date of re-classification

  37. Illustration 8 (page 273)

  38. (F) DISPOSAL OF INVESTMENT • Gain or loss should be calculated • Net proceeds vs. carrying amount = gain/loss • Gain/loss should be credited / charged to income • Disclosure; • Treated as part of the ordinary expenses • Disclose separately if material • Previously revalued: remaining RR transferred to R/E

  39. Journal entry • Gain: Dt. Cash xx Cr. Investment xx Cr. Gain (IS) xx • Loss: Dt. Cash xx Dt. Loss (IS) xx Cr. Investment xx • Transfer of RR Dt. Revaluation Reserve xx Cr. Retained Earnings xx

  40. Illustration 9 (page 274)

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