Investments — Debt & Equity Instruments
How an entity accounts for an investment depends on what kind of asset it is (debt vs. equity), what the investor intends (collect contractual cash flows? trade? hold long-term?), and how much influence/control the investor has over the investee. ACC 926 Module 9.
ADMN 201 covers what stocks and bonds are (in SecuritiesMarkets and InvestmentVehicles). ACC 926 covers how they appear on the investor’s financial statements.
Three Levels of Influence
graph TD Inv[Investor] Inv --> NoI[No significant influence<br/>< 20% equity stake] Inv --> Sig[Significant Influence<br/>20–50% — Associate] Inv --> Ctrl[Control<br/>> 50% — Subsidiary] NoI --> M1[Three measurement models:<br/>Amortized Cost · FV-NI · FV-OCI] Sig --> M2[Equity Method] Ctrl --> M3[Consolidation]
(diagram saved)
| Influence | Equity stake (rule of thumb) | Accounting treatment |
|---|---|---|
| None / passive | < 20% | Cost / Amortized Cost / FV-NI / FV-OCI |
| Significant | 20–50% (associate) | Equity Method |
| Control | > 50% (subsidiary) | Consolidation |
% is presumptive — actual influence/control test trumps the percentage.
Three Measurement Models for Non-Strategic Investments
1. Amortized Cost (a.k.a. Cost Model)
Used when business model is to collect contractual cash flows AND cash flows are solely principal + interest (SPPI).
- Initial measurement: cost (incl. transaction costs).
- Subsequent: amortized cost using effective interest method.
- Interest revenue recognized via effective interest.
- Impairment under expected credit loss model (IFRS 9).
2. Fair Value through Net Income (FV-NI)
Used when held for trading, OR designated, OR equity instruments not designated to FV-OCI.
- Initial: fair value (transaction costs expensed).
- Subsequent: fair value at each reporting date.
- Unrealized gains/losses → Net Income.
- Dividend/interest income → Net Income.
3. Fair Value through Other Comprehensive Income (FV-OCI) — IFRS only
Two flavours:
Debt — FV-OCI (recyclable): Business model is collect cash flows AND sell.
- Unrealized gains/losses → OCI.
- On derecognition → recycle accumulated OCI to net income.
Equity — FV-OCI (non-recyclable): Irrevocable election at recognition for non-trading equity.
- Unrealized gains/losses → OCI.
- On derecognition → never recycled to net income (transferred within equity).
- Dividends recognized in net income.
ASPE has no FV-OCI category. Under ASPE, choices are typically Cost (debt held to maturity) or FV-NI.
Comparison Table
| Model | Initial measurement | Subsequent measurement | Gains/losses to | Interest/dividends | IFRS | ASPE |
|---|---|---|---|---|---|---|
| Amortized cost | Cost incl. transaction costs | Amortized cost (effective interest) | NI (impairment only) | NI | ✓ | ✓ |
| FV-NI | FV (transaction costs expensed) | FV | NI | NI | ✓ | ✓ |
| FV-OCI debt | FV + transaction costs | FV | OCI (recycle on derecognition) | NI | ✓ | ✗ |
| FV-OCI equity | FV + transaction costs | FV | OCI (never recycle) | NI | ✓ | ✗ |
Strategic Investments
Significant Influence (Associate) — Equity Method
- Initial: cost.
- Subsequent: investment carrying amount adjusted for the investor’s share of the investee’s net income (increase) and dividends received (decrease).
- “One-line consolidation.”
Investment ↑ for share of NI
Investment ↓ for dividends received
Dividends from an associate are not revenue — they reduce the investment.
Control (Subsidiary) — Consolidation
- Combine investee’s assets, liabilities, revenues, expenses line-by-line into the investor’s statements.
- Recognize non-controlling interest for the portion not owned.
- Eliminate intercompany transactions.
ASPE permits a private company to choose cost method or equity method instead of consolidation under certain conditions; IFRS requires consolidation.
Impairment Models
| Model | Trigger | Loss measure |
|---|---|---|
| Incurred Loss (older) | Loss event has occurred | Difference between CA and recoverable amount |
| Expected Loss (IFRS 9) | Forward-looking — recognize expected credit losses from origination | 12-month ECL or lifetime ECL depending on credit deterioration |
| Fair Value Loss | Used for FV models | Mark to FV; loss already in NI/OCI |
IFRS 9’s expected credit loss (ECL) model is the current IFRS standard for debt instruments at amortized cost or FV-OCI.
Cross-Course Connections
- SecuritiesMarkets — ADMN 201’s primary/secondary markets, stocks, bonds
- InvestmentVehicles — ADMN 201’s investor categories of securities
- Investments-SecuritiesMarkets — connection page from ADMN 201 markets framing to ACC 926 investor accounting
- PresentValueMeasurement — fair value hierarchy (IFRS 13) and amortized cost mechanics
- IFRSvsASPE — FV-OCI is IFRS-only; consolidation rules differ
Key Points
- Three influence tiers: none / significant / control = three accounting regimes
- Three measurement models for non-strategic: amortized cost · FV-NI · FV-OCI (last is IFRS-only)
- FV-NI → unrealized G/L through net income
- FV-OCI debt → unrealized G/L through OCI, recycle on derecognition
- FV-OCI equity (irrevocable election) → unrealized G/L through OCI, never recycle
- Equity method for associates: investment ↑ share of NI, ↓ dividends received
- Subsidiaries → consolidation (ASPE may permit cost or equity method)
- IFRS 9 expected credit loss model for amortized-cost and FV-OCI debt