Hello,
From what the book says, investments in financial assets will be recorded on the investor’s balance sheets at fair market value (using AFS securities as an example).
Is this correct? Wouldn’t the accounting on the income statement and OCI (for interest, dividends, realized and unrealized G/L) also get recorded in the equity portion of the balance sheet?
Thanks,
Yes.
How so?
You buy a stock for $10:
At your next balance sheet date the stock is worth $12
How come the dividends or interest receieved do not get incorporated into the balance sheet (under S/E equity) in either the held for trading or the avaliable for sales accounting?
They do: Interest Income or Dividend Income (income statement).
Say company A invests into Company B and consolidates its B/S using equity mode for accounting.
Investment into company B at end of the period is worth 17 million, while company B also paid out dividends worth about 3 million.
The text say that you should consolidate onto the firm’s balance sheet at 17 million (which is under assets) but does not mention anything about the 3 million dollar dividends payment to be incorporate onto the balance sheet.
I am reading this from Schweser, do you know if this is accurate?
The 3 million reduces the investment.
If Company A paid 17 million, their share of Company B’s net income was, say, 4 million, and they received 3 million in dividends, then their Investment in Company B would be:
17 million + 4 million − 3 million = 18 million
In the Kaplan example, a company classifying its investment into a company (1 million share investment) as Avaliable for Sale.
In a specific year, the company pays dividends of $3 per share and reported net income at 750 million. Fair market value of the investment is 17 million at year end.
The book says we only record the 17 million market value on the investment on the balance sheet. Based on what you said right above this does not seem to be correct
Or is it because the 3 million in diviends already gets recorded on the investor’s income statement, and thus we do not need to worry about it when asking for balance sheet consoldiation?
You do realize that the equity method that we were discussing earlier and the investment in securities that you’re discussing now are completely different (and incompatible) accounting methods, yes?
No, it’s not that.
There are two notional “walls” when accounting for investments in equity instruments. These are “significant influence” and “control”.
If you have an investment in a company in which you don’t even have significant influence, then you account it as an IFRS 9 investment in a financial asset. Depending on classification, gains and losses due to change in fv go through pl or oci. Income from dividends go through pl. As any pl operation, this also affects equity (retained earnings). If you have significant influence (i.e. you have more influence than the former case, but not enough to control the decisions, dividend distributions etc), then you apply the equity method. If you have control, then you need to consolidate.
In any problem, you really need to be aware what the relationship with the investee is, to be able to recognize which accounting method to use.