Lecture 1a- SEM2-Investments in Equity Securities.pdf

8/14/2019 Lecture 1a- SEM2-Investments in Equity Securities.pdf

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LECTURE 1

ACCOUNTING FOR

INVESTMENTS INEQUITY SECURITIES

By

Dr Mazni Abdullah, CA (M), PhD (Stirling), MBA (Malaya), B Acc (Malaya)

Session 2012/2013


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Which Financial Reporting Standards

should be used?

Financial Reporting Standards effective 1/1/2010

FRS Title Effective Date

FRS132 Financial Instruments:Presentation

1 Jan 2010

FRS139 Financial Instruments:

Recognition &

Measurement

1 Jan 2010

FRS7 Financial Instruments:

Disclosure

1 Jan 2010


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should be used?



MFRS 132 Financial Instruments:Presentation

1 Jan 2012

MFRS 139 Financial Instruments:

Recognition & Measurement

1 Jan 2012

MFRS 7 Financial Instruments:Disclosure

1 Jan 2012


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should be used?



MFRS 132 Financial Instruments:Presentation

1 Jan 2012



1 Jan 2012

MFRS 7 Financial Instruments:Disclosure

1 Jan 2012

MFRS 9 Financial Instruments 1 Jan 2013


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MFRS 132 Financial Instruments

Presentation

Prescribes the presentation of financial instruments

from the perspective of issuer

Related to the classification of financial instruments

into financial assets, financial liabilities and equityinstruments.

The standard applies to all types of financial

instruments except given under Para 4 (a-f) (eg.

Employers right, insurance contract)


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Presentation

Definitions are given under Para 11.

A financial instrument is any contract that gives rise

to afinancial asset of one entityand afinancial

liability / equity instrument of another entity. Financial assets?

Financial liabilities?

Equity instruments?

Offsetting a financial asset and a financial liability

(Para 42)


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Presentation

Substance over form principle

Para 16 prescribes the conditions that should be met in order

to classify a financial instrument as an equity instrument

from the issuers perspective. A critical feature of a financial liability is the contractual

obligation of the issuer to deliver cash / another financial

asset to the holder or to exchange another financial

instrument under potentially unfavourable conditions to the

issuer. If this feature is not met, the financial instrument is

classified as an equity instrument.


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Presentation

Substance over form principle

Ordinary shares Favourable / UF Liability / Equity?

7% Preference shares Favourable/ UF Liability / Equity?


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Categories of Financial Assets

1. Financial instruments at FV through profit or loss (FIFVPL);2. Held to maturity investments (HTM);

3. Loans and receivables;

4. Available for sale investments (AFS).

The main differences among these four categories are in:

a) Subsequent measurement

b) Gain or loss arising from changes in fair values of the

financial assets or financial liabilities.


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FIFVPL

* FIFVPL comprises (i) held for trading securities and

(ii) designated securities.

Held for trading financial asset is acquired with theintention to trade for short-term profit margins; or a

derivative instrument. Eg. quoted equity

investments, quoted bonds.


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Held to maturity

Non-derivative financial assets with fixed/determinable payments and fixed maturity that an

entity has the positive intent and ability to hold to

maturity other than FIFVPL, AFS and loans and

receivables. E.g. investment in government bonds Tainting Rule?

Once tainted, the HTM investments shall be

reclassified as AFS investments.

An entity shall assess its intention & ability to hold its

HTM investments at the end of each subsequent

reporting period.


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Loans and Receivables & AFS

Loans and receivables

Non-derivative financial assets with fixed /

determinable payments that are not quoted in an

active market, other than AFS, FIFVPL or held fortrading investments. E.g. inter-company loans and

advances.

AFS

Other financial assets that are not classified into any

of the categories above.


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Categories of Financial Liabilities

1) Financial liabilities at FV through profit or loss ( held

for trading & designated liabilities)

2) Financial liabilities measured at amortised cost; and

3) Others (e.g. below market rates)

Not much emphasis on classification because most

financial liabilities are measured at amortised costbasis. E.g. term loans, borrowings, payables.


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1) Recognition

entity shall recognise a financial asset or a financial

liability in its statement position when, and onlywhen, the entity becomes a party to the contractual

provisions of the instruments.


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RecognitionTrade Receivables

/ Trade Payables

ASSETS LIABILITIES

WHEN THE ENTITY

ENTERS INTO THE SALES

/ PURCHASE CONTRACT


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RecognitionFORWARD

CONTRACT

ASSETS LIABILITIES

ON THE

COMMITMENT DATE


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Recognition

Derivative Instruments

Before MFRS 139: they were not recognised (off

balance sheet) until the maturity date.

MFRS 139: an entity shall recognise all derivativesinstruments on the balance sheet from day one.

Contractual rights / obligations under derivatives

are recognised as assets / liabilities.


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Derecognition

When an entity should derecognise a financialinstrument in the statement of financial position?

An entity should derecognise a financial asset when:

The contractual rights to the cash flows from the financial asset expire,

or The entity transfers substantially all the risks and rewards of

ownership of the financial asset to another party. The entity has to

perform the tests in para 20 (MFRS139) to determine whether the

transfer leads to derecognition.


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Initial Measurement MFRS 139, Para 43: when a financial asset or

financial liability is recognised initially, an entity shallmeasure it at its FV, plus, in the case of a financial

asset/ financial liability not at FV through profit and

loss, transaction costs that are directly attributable

to the acquisition or issue of the financial asset/

financial liability.

The transaction costs for investment designated as

FIFVPL or Held for trading shall be expensed whenincurred.

FV? MFRS 13, Fair Value Measurement


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Initial MeasurementExample:

MM Bhd acquired 1,000,000 ordinary shares of Jerami Bhd ata price of RM5 per share. Brokerage fees amount to

RM50,000. How much the investment amount that should be

recorder by MM Bhd if the investment is classified as (1) AFS;

(2) FIFVPL.

AFS (000) FIFVPL (000)

Price paid

(1,000,000 x 5) 5,000 5,000

Transaction costs 50 -

Investment

amount recorded 5,050 5,000


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Subsequent Measurement of

Financial Assets Financial assets should be measured at their FV

except:

Loans and receivables (at amortised cost using the

effective interest method)

HTM investments (at amortised cost using the effective

interest method)

Investments in equity instruments that do not have a

quoted market price in an active market.

Amortised cost definition in MFRS139


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Financial Assets

Category Method Recognition

HTM Amortised cost Income Statement

Loans & Receivables Amortised cost Income Statement

FIFVPL Fair value Income StatementAFS Fair value Statement of changes in

equity through OCI


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Financial Liabilities

All financial liabilities should be measured at

amortised cost except for financial liabilities

designated as FIFVPL.


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Illustration A (from Ng Eng Juan, 2012)

ABC Bhd acquires the following shares on 15 Nov 20x1, which

it intends to sell in early 20x2 to take advantage of the

expected changes in the share prices.

(a) 100,000 ordinary shares of LMN Bhd at RM2.00 per share plus

transaction costs of RM3,000; and

(b) 200,000 ordinary shares of XYZ Bhd at RM3.00 per share plus

transaction costs of RM5,000. At its accounting year end on 31 Dec 20x1, the shares are

quoted on BURSA at the following prices:

(a) LMNs shares at RM1.70 per share; and

(b) XYZs shares at RM4.00 per share

Required: Record the above transactions in the ABCs book.


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Solution A

The shares are classified as Held for Trading.

15/11/x1

Dr Investment in trading securities 800,000

Dr Expense 8,000

Cr Cash 808,000

31/12/x1Dr Investment in trading securities 170,000*

Cr Fair value gain 170,000

Cost FV Gain/(loss)LMN Bhd 200,000 170,000 (30,000)

XYZ Bhd 600,000 800,000 200,000

Total 800,000 970,000 170,000*


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Illustration B (from Ng Eng Juan, 2012)

Refer to illustration A, but now assume that the shares were

acquired for long term investments.

At its accounting year end on 31 Dec 20x2, the shares are

quoted on BURSA at the following prices:

(a) LMNs shares at RM1.50 per share; and

(b) XYZs shares at RM3.20 per share

Required: Record the above transactions in the ABCs book.


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Solution B

The shares are classified as Available for Sale (AFS).

15/11/x1

Dr Investment in AFS securities 808,000

Cr Cash 808,000

31/12/x1

Dr Investment in AFS securities 162,000*Cr Fair value reserve 162,000

Cost FV Gain/(loss)LMN Bhd 203,000 170,000 (33,000)

XYZ Bhd 605,000 800,000 195,000

Total 808,000 970,000 162,000*


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Solution B

31/12/x2

Dr Fair value reserve 180,000*

Cr Investment in AFS securities 180,000

Cost FV Gain/(loss)

LMN Bhd 203,000 150,000 (53,000)

XYZ Bhd 605,000 640,000 35,000

Total 808,000 790,000 (18,000)

FV adjustment c/f 162,000

Adjustment for the year 180,000*


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Illustration C (from Ng Eng Juan, 2012)

On 1 Jan 20x1, ABC Bhd pays RM104,330 to acquire a bondwhich has a nominal value of RM100,000, a coupon rate of

6% interest payable on 31 Dec each year and matures on 31

Dec 20x5. ABC has intended and has the ability to hold the

bond until maturity date, and therefore classifies the bond as

Held to maturity investment. (It may be determined from afinancial calculator that the effective interest rate is 5%).


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Solution

Year Interest

income (5%)

Interest

received (6%)

Decrease in

Carrying

Amount

Carrying

Amount

104,330

31/12/x1 5,216 6,000 784 103,546

31/12/x2 5,177 6,000 823 102,723

31/12/x3 5,136 6,000 864 101,859

31/12/x4 5,093 6,000 907 100,952

31/12/x5 5,048 6,000 952 100,000


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Solution

1/1/x1

Dr Investment in bond 104,330

Cr Cash 104,330

31/12/x1

Dr Cash 6000

Cr Investment in bond 784Cr Interest income 5,216

31/12/x5

Dr Cash 6,000

Cr Investment in bond 952

Cr Interest income 5048

Dr Cash 100,000

Cr Investment in bond 100,000


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Regular way purchase or sale of a

financial asset

a contract for the purchase / sale of financial asset where the

term requires delivery of the asset within the timeframe

established generally by regulation or convention in the

market place concerned.

Example: a term of T + 3 days is used for securities

purchased or sold on the Bursa Malaysia.

MFRS 139, para 38 : should be recognised using either trade

date accounting or settlement date accounting.

The method chosen shall be applied consistently


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financial asset

Trade date the date an entity commits to purchase or to sell

an asset.

Settlement date the date that an asset is delivered to or by

an entity.

Trade date accounting :

a) the asset to be received / liability to be paid is recognised on

the trade date

b) The asset that is sold / receivable for payment is

derecognised on the trade date.


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financial asset

Settlement date accounting :

a) Recognise the asset on the day it is received by the entity

b) Derecognise the asset on the day it is delivered by the entity

Under settlement date accounting, any change in FV of the

asset during the period between the trade date & the

settlement date is treated according to the category of

financial assets:

1) Assets carried at cost or amortised costs Not recognise

2) Assets carried at FIFVPL Recognise in profit or loss.

3) AFS Recognise in other comprehensive income


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financial asset

Example 1:

On 28 Dec 20x1, MM Bhd purchased 10,000 equity shares of

TMC Bhd at RM5 per share, and classified the investment as

FIFVPL. On a T+3 day basis, the settlement date is 3 January

20x2. Financial year end for MM Bhd is 31 Dec 20x1. As at 31Dec 20x1, the closing market price of the ordinary shares is

RM6 and the price remains the same until 3 January 20x2.

Required:

Record the above transaction using (1) settlement date

accounting and (2) trade date accounting.


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financial asset

(1) Settlement date accounting:

On trade date: No entry

At 31 Dec 20x1:Dr Receivable (60,000 50,000)10,000

Cr Gain in profit or loss 10,000

On settlement date:

Dr Equity Investment ( at FV) 60,000

Cr Cash 50,000

Cr Receivable 10,000


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financial asset

(2) Trade date accounting:

On trade date:

Dr Equity investment, at FV 50,000

Cr Liability to broker 50,000At 31 Dec 20x1:

Dr Equity investment 10,000

Cr Gain in profit or loss 10,000

On settlement date:Dr Liability to broker 50,000

Cr Cash 50,000


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Impairment

MFRS 139, Para 46: All financial assets, except those

measured at FV through profit or loss, are subject to

impairment test.

An entity should assess at each BS date whether there is any

objective evidence that a financial asset or a group of asset is

impaired; for e.g. issuer experiencing significant financialdifficulties, active market disappears.

Impairment the carrying amount (CA) of financial assets

> its recoverable amount (RA).

What is the RA for the financial assets?


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Impairment

Type of Financial Assets Recoverable Amount

Financial assets carried at amortised

costs

PV of expected future cash flows

discounted at the financial

instruments original effective interest

rateUnquoted security (not at FV) PV of expected future cash flows

discounted at the current market rate

of interest for a similar financial asset

Equity instruments carried at FV Current FV


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MFRS 7-Disclosures Understanding of financial risks is crucial especially in the area

of hedge accounting. Financial Risks volatility / variability of the FV or future cash

flows of financial instruments.

Types of financial risks:

a) Market risk due to changes in market pricesi. Currency risk due to changes in foreign exchange rates

ii. Interest rate risk due to changes in market interest rates

iii. Other price risk due to changes in market prices

b) Credit risk fail to discharge an obligation to the other partyc) Liquidity risk difficulty in meeting obligations by the entity


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MFRS 7-Disclosures Hedge accounting - use financial instruments (normally

derivatives) to offset effects of the FV or future cash flows of ahedged items. In other words, to match the gain/loss of a

hedged items with the corresponding loss/gain of its hedging

instruments.

Hedged items items that expose to financial risks. E.g.:

i. Quoted equity instruments expose to price risk

ii. Foreign currency loans expose to currency risk

iii. Investment in a foreign operations expose to currency risk


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Please summarise what youve

learned or understand from this

lecture.

5 minutes !

Lecture 1a- SEM2-Investments in Equity Securities.pdf

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