Financial Accounting

IFRS 4th Edition

Weygandt ● Kimmel ● Kieso

Chapter 13

Investments
Chapter Outline
Learning Objectives
LO 1 Explain how to account for debt investments.
LO 2 Explain how to account for share investments.
LO 3 Indicate how debt and share investments are
reported in financial statements.

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 Learning Objective 1
Explain How to Account for Debt
Investments

LO 1 Copyright ©2019 John Wiley & Sons, Inc. 3

Why Companies Invest
Corporations purchase investments in debt or share
securities for one of three reasons
1. Company may have excess cash.
2. To generate earnings from investment income.
3. For strategic reasons.

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Why Companies Invest

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Accounting for Debt Investments
Debt investments are investments in government and
company bonds.
Entries are made to record
1. the acquisition,
2. the interest revenue, and
3. the sale.

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Recording Acquisition of Bonds (1 of 2)
At acquisition, investments are recorded at cost.
Cost includes all expenditures necessary to acquire
these investments, such as the price paid plus
brokerage fees (commissions), if any.

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Recording Acquisition of Bonds (2 of 2)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January
1, 2020, at a cost of €50,000. The entry to record the investment is:

Jan. 1 Debt Investments (50 × €1,000) 50,000

Cash 50,000

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Recording Bond Interest (1 of 3)
Calculate and record interest revenue based upon the
• carrying value of the bond
• times the interest rate
• times the portion of the year the bond is
outstanding.

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Recording Bond Interest (2 of 3)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January
1, 2020, for €50,000. The bonds pay interest of €4,000 annually on
January 1 (€50,000 × 8%). If Kuhl NV’s fiscal year ends on December
31, it accrued the interest of €4,000 earned since January 1.
The entry to accrue interest on Doan SA bonds is:

Dec. 31 Interest Receivable 4,000

Interest Revenue 4,000

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Recording Bond Interest (3 of 3)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January
1, 2020, for €50,000. The bonds pay interest of €4,000 annually on
January 1 (€50,000 × 8%). The entry to record receipt of accrued
interest on January 1 is:

Jan. 1 Cash 4,000

Interest Receivable 4,000

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Recording Sale of Bonds (1 of 2)
• Credit the investment account for the cost of the
bonds.
• Record as a gain or loss
• any difference between the net proceeds from the
sale (sales price less brokerage fees) and
• the cost of the bonds.

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Recording Sale of Bonds (2 of 2)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January
1, 2020, for €50,000. The bonds pay interest of €4,000 annually on
January 1 (€50,000 × 8%). Assume that Kuhl NV receives net
proceeds of €54,000 on the sale of the Doan SA bonds on January
1, 2021, after receiving the interest due. The entry to record the
sale of the bonds is:

Jan. 1 Cash 54,000

Debt Investments 50,000
Gain on Sale of Debt Investments 4,000

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DO IT! 1: Debt Investments (1 of 4)
Waldo AG had the following transactions pertaining to debt
investments.
Jan. 1, 2020 Purchased 30, €1,000 Hillary AG 10% bonds for
€30,000. Interest is payable annually on January 1.
Dec. 31, 2020 Accrued interest on Hillary AG bonds in 2020.
Jan. 1, 2021 Received interest on Hillary AG bonds.
Jan. 1, 2021 Sold 15 Hillary AG bonds for €14,600.
Dec. 31, 2021 Accrued interest on Hillary AG bonds in 2021.
Journalize the transactions.

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DO IT! 1: Debt Investments (2 of 4)
Jan. 1, 2020 Purchased 30, €1,000 Hillary AG 10% bonds for
€30,000. Interest is payable annually on January 1.
Debt Investments 30,000
Cash 30,000

Dec. 31, 2020 Accrued interest on Hillary AG bonds in 2020.

Interest Receivable 3,000
Interest Revenue (€30,000 × 10%) 3,000

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DO IT! 1: Debt Investments (3 of 4)
Jan. 1, 2021 Received interest on Hillary AG bonds.
Cash 3,000
Interest Receivable 3,000

Jan. 1, 2021 Sold 15 Hillary AG bonds for €14,600.

Cash 14,600
Loss on Sale of Debt Investments 400
Debt Investments (€30,000 × 15/30) 15,000

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DO IT! 1: Debt Investments (4 of 4)
Dec. 31, 2021 Accrued interest on Hillary AG bonds in 2021.
Interest Receivable 1,500
Interest Revenue (€15,000 × 10%) 1,500

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 Learning Objective 2
Explain How to Account for Share
Investments

LO 1 Copyright ©2019 John Wiley & Sons, Inc. 18

Accounting for Share Investments
Investor’s Ownership Interest in Investee’s Ordinary Shares

Less than 20% Between 20% and 50% More Than 50%

Insignificant Significant Controlling

influence on influence on influence on
Investee investee investee

Cost method with Consolidated

adjustment for fair Equity method financial
value statements

The accounting for investments in shares depends on the extent of the

investor’s influence over the operating and financial affairs of the issuing
corporation (the Investee).
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Holdings of Less Than 20% (1 of 4)
• Companies use the cost method.
• Investment is recorded at cost and revenue
recognized only when cash dividends are received.
• Cost includes all expenditures necessary to acquire
these investments, such as the price paid plus any
brokerage fees (commissions), if any.

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Recording Acquisition of Share
Investments (2 of 4)
On July 1, 2020, Lee Ltd. acquires 1,000 shares (10% ownership) of
Beal Ltd. Lee pays HK$405 per share. The entry for the purchase
is:

July 1 Share Investments (1,000 × HK$405) 405,000

Cash 405,000

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Recording Dividends (3 of 4)
During the time Lee owns the shares, it makes entries for any cash
dividends received. If Lee receives a HK$20 per share dividend on
December 31, the entry is:

Dec. 31 Cash (1,000 × HK$20) 20,000

Dividend Revenue 20,000

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Recording Sales of Shares (4 of 4)
Assume that Lee Corporation receives net proceeds of HK$395,000
on the sale of its Beal shares on February 10, 2021. Because the
shares cost HK$405,000, Lee incurred a loss of HK$10,000. The
entry to record the sale is:

Feb. 10 Cash (1,000 × HK$395) 395,000

Loss on Sale of Share Investments 10,000
Share Investments 405,000

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Holdings Between 20% and 50% (1 of 5)
• Companies use the equity method.
• Investment is recorded at cost and subsequently adjusts
the investment account each period for the:
• investor’s share of the associate’s net income and
• dividends received by the investor.

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Recording Acquisition of Share
Investments (2 of 5)
Milar plc acquires 30% of the ordinary shares of Beck plc for
₤120,000 on January 1, 2020. The entry to record the transaction
is:

Jan. 1 Share Investments 120,000

Cash 120,000

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Recording Revenue (3 of 5)
Assume that for 2020, Beck reports net income of ₤100,000. The
entry to record the transaction is:

Dec. 31 Share Investments (30% × ₤100,000) 30,000

Revenue from Share Investments 30,000

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Recording Dividends (4 of 5)
Assume that for 2020, Beck pays a ₤40,000 cash dividend. The
entry to record the transaction is:

Dec. 31 Cash (30% × ₤40,000) 12,000

Share Investments 12,000

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Investment and Revenue Accounts (5 of 5)
Milar plc acquires 30% of the ordinary shares of Beck plc for
₤120,000 on January 1, 2017. For 2017, Beck reports net income of
₤100,000 and paid dividends of ₤40,000.
After Milar posts the transactions for the year, its investment and
revenue accounts will show the following.

Share Investments Revenue from Share Investments

Jan 1. 120,000 Dec. 31 12,000 Dec. 31 30,000

Dec. 31 30,000

Dec. 31 Bal. 138,000

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Holdings of More than 50% (1 of 2)
• Parent company - A company that owns more than
50% of the ordinary shares of another entity.
• Subsidiary (affiliated) company - entity whose
shares the parent company owns.
• Parent generally prepares consolidated financial
statements.

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Holdings More than 50% (2 of 2)
Consolidated statements indicate the magnitude and scope of
operations of the companies under common control.

The Disney
Unilever (NLD) Adidas (DEU)
Company (USA)
•Hellmann’s •Reebok •Capital Cities/ABC, Inc.
•Disneyland, Disney
•Lipton •Rockport World
•Bertolli •TaylorMade •Mighty Ducks
•Anaheim Angels
•Knorr •Ashworth •ESPN

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Accounting Across the Organization

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DO IT! 2: Share Investments (1 of 5)
Rho Jean Ltd. acquired 5% of the 400,000 ordinary shares of
Stillwater Ltd. at a total cost of NT$60 per share on May 18, 2020.
On August 30, Stillwater declared and paid a NT$750,000 dividend.
On December 31, Stillwater reported net income of NT$2,440,000
for the year.
Prepare all necessary journal entries for 2017.

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DO IT! 2: Share Investments (2 of 5)
May 18:
Share Investments 1,200,000
(400,000 × 5% × NT$60)
Cash 1,200,000
(To record purchase of 20,000 shares of Stillwater)
Aug. 30:
Cash 37,500
Dividend Revenue 37,500
(NT$750,000 × 5%)
(To record receipt of cash dividend)

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DO IT! 2: Share Investments (3 of 5)
Natal, Ltd. obtained significant influence over North Sails by buying
40% of North Sails’ 60,000 outstanding ordinary shares at a cost of
NT$120 per share on January 1, 2020. On April 15, North Sails
declared and paid a cash dividend of NT$450,000. On December
31, North Sails reported net income of NT$1,200,000 for the year.
Prepare all necessary journal entries for 2020.

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DO IT! 2: Share Investments (4 of 5)
Jan. 1:
Share Investments 2,880,000
(60,000 × 40% × NT$120)
Cash 2,880,000
(To record purchase of 24,000 shares of North Sails)
Apr. 15:
Cash 180,000
Share Investments 180,000
(NT$450,000 × 40%)
(To record receipt of cash dividend)

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DO IT! 2: Share Investments (5 of 5)
Dec. 31:
Share Investments 480,000
(NT$1,200,000 × 40%)
Revenue from Share Investments 480,000
(To record 40% equity in North Sails’ net income)

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 Learning Objective 3
Indicate how debt and share
investments are reported in financial
statements

LO 1 Copyright ©2019 John Wiley & Sons, Inc. 37

Valuing and Reporting Investments
Categories of Securities
Debt investments are classified into two categories:
• Trading securities
• Held-for-collection securities
Share investments are classified into two categories:
• Trading securities
• Non-trading securities

These guidelines apply to all debt securities and to those share

investments in which the holdings are less than 20%.
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Categories of Securities

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Trading Securities
• Companies hold trading securities with the
intention of selling them in a short period (generally
less than a month).
• Trading means frequent buying and selling.
• Companies report trading securities at fair value,
and report changes from cost as part of net income.
• Classified as current asset.

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Trading Securities Illustration
Investments of Pace SA are classified as trading securities on
December 31, 2020.
Trading Securities, December 31, 2020
Investments Cost Fair Value Unrealized Gain (Loss)
Yorkville Company bonds € 50,000 € 48,000 € (2,000)
Kodak Company shares 90,000 99,000 9,000
Total € 140,000 € 147,000 € 7,000

The adjusting entry to record unrealized gain on trading securities

for Pace SA is:
Dec. 31 Fair Value Adjustment—Trading 7,000
2020 Unrealized Gain or Loss—Income 7,000

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Trading Securities Illustration
Investments of Pace SA are classified as trading securities on
December 31, 2021.
Trading Securities, December 31, 2021
Investments Cost Fair Value Unrealized Gain (Loss)
Toby Company bonds € 40,000 € 41,000 € 1,000
Vince Company shares 80,000 74,000 (6,000)
Total € 120,000 € 115,000 € (5,000)

The adjusting entry to record unrealized loss on trading securities

for Pace SA is:
Dec. 31 Unrealized Gain or Loss—Income 12,000
2021 Fair Value Adjustment—Trading 12,000

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Non-Trading Securities
• These securities can be classified as current assets
or as non-current assets, depending on the intent of
management.
• Procedure for determining fair value and the
unrealized gain or loss for these securities is the
same as for trading securities.
• Companies report securities at fair value, and
report changes from cost as a component of other
comprehensive income.

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Non-Trading Securities Illustration
Ingrao AG has two securities that it classifies as non-trading.

Trading Securities, December 31, 2020

Investments Cost Fair Value Unrealized Gain (Loss)
Rachel Soup AG shares € 93,537 € 103,600 € 10,063
Zellar Company shares 200,000 180,400 (19,600)
Total € 293,537 € 284,000 € (9,537)

The adjusting entry to record unrealized loss on non-trading

securities for Pace SA is:
Dec. 31 Unrealized Gain or Loss—Equity 9,537
Fair Value Adjustment—Non-Trading 9,537

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Non-Trading Securities
Inagrao AG
Comprehensive Income Statement
For the Year Ended December 31, 2020

Net Income € 126,200

Other comprehensive income
Unrealized loss on non-trading securities (9,537)
Comprehensive income € 116,663

The closing entry to transfer the Unrealized Gain or Loss—Equity to Accumulated Other
Comprehensive Income is:
Dec. 31 Accumulated Other Comprehensive Income 9,537
(2020) Unrealized Gain or Loss—Equity 9,537

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Non-Trading Securities
Inagrao AG
Statement of Financial Position (partial)
December 31, 2020

Equity
Share capital—ordinary € 1,200,000
Retained Earnings 126,200
Accumulated other comprehensive loss (9,537)
Total Equity € 1,316,663

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Non-Trading Securities Illustration
Fair value of Ingrao’s non-trading securities on December 31, 2021, its second
year of operations.
Non-Trading Securities, December 31, 2021
Investments Cost Fair Value Unrealized Gain (Loss)
Rachel Soup AG shares € 93,537 € 102,774 € 9,237
Zellar Company shares 200,000 192,400 (7,600)
Total € 293,537 € 295,174 € 1,637

It has a €9,537 credit balance from the previous year, so Ingrao must debit its Fair Value
Adjustment—Non-Trading account by €11,174 (€9,537 + €1,637) to achieve a €1,637
debit balance.
Dec. 31 Fair Value Adjustment—Non-Trading 11,174
(2021) Unrealized Gain or Loss—Equity 11,174

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Non-Trading Securities
Inagrao AG
Comprehensive Income Statement
For the Year Ended December 31, 2021

Net Income € 201,400

Other comprehensive income
Unrealized gain on non-trading securities 11,174
Comprehensive income € 212,574

The closing entry to transfer the Unrealized Gain or Loss—Equity to Accumulated Other
Comprehensive Income is:
Dec. 31 Unrealized Gain or Loss—Equity 11,174
(2021) Accumulated Other Comprehensive Income 11,174

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Non-Trading Securities
Inagrao AG
Statement of Financial Position (partial)
December 31, 2020

Equity
Share capital—ordinary € 1,200,000
Retained Earnings 327,600
Accumulated other comprehensive income 1,637
Total Equity € 1,529,237

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Non-Trading Securities (1 of 2)
In the statement of financial position, a debit balance
in Unrealized Gain or Loss—Equity results in a(n):
a. increase to equity.
b. decrease to equity.
c. loss in the income statement.
d. loss in the retained earnings statement.

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Non-Trading Securities (2 of 2)
In the statement of financial position, a debit balance
in Unrealized Gain or Loss—Equity results in a(n):
a. increase to equity.
b. decrease to equity.
c. loss in the income statement.
d. loss in the retained earnings statement.

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DO IT! 3a: Trading and Non-Trading
Securities (1 of 3)
Some of Chengdu Ltd.’s investment securities are classified as
trading securities and some are classified as non-trading. The cost
and fair value of each category at December 31, 2020, are as
follows.
Cost Fair Value Unrealized Gain (Loss)
Trading securities ¥936,000 ¥949,000 ¥13,000
Non-trading securities ¥488,000 ¥514,000 ¥26,000

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DO IT! 3a: Trading and Non-Trading
Securities (2 of 3)
At December 31, 2019, the Fair Value Adjustment—Trading account
had a debit balance of ¥92,000, and the Fair Value Adjustment—
Non-Trading account had a credit balance of ¥57,500. Prepare the
required journal entries for each group of securities for December
31, 2020.
Trading securities:
Unrealized Gain or Loss—Income 79,000
(¥92,000 − ¥13,000)
Fair Value Adjustment—Trading 79,000
(To record unrealized loss on trading securities)
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DO IT! 3a: Trading and Non-Trading
Securities (3 of 3)
At December 31, 2019, the Fair Value Adjustment—Trading account
had a debit balance of ¥92,000, and the Fair Value Adjustment—
Non-Trading account had a credit balance of ¥57,500. Prepare the
required journal entries for each group of securities for December
31, 2020.
Non-trading securities:
Fair Value Adjustment—Non-Trading 83,500
Unrealized Gain or Loss—Equity 83,500
(¥57,500 + ¥26,000)
(To record unrealized gain on trading securities)

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Statement of Financial Position
Presentation
Short-term investments, also called marketable
securities, are securities held by a company that are
1. readily marketable and
2. intended to be converted into cash within the next
year or operating cycle, whichever is longer.
Investments that do not meet both criteria are
classified as long-term investments.

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Non-Trading Securities
Pace SA
Statement of Financial Position (partial)
Current assets
Short-term investments, at fair value € 147,000
Cash 21,000

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Presentation of Realized and
Unrealized Gain or Loss
In the income statement, companies report gains and
losses in the non-operating activities section.

Other Income and Expense

Interest Revenue Unrealized Gain—Income
Dividend Revenue Loss on Sale of Investments
Gain on Sale of Investments Unrealized Loss—Income

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Presentation of Realized and
Unrealized Gain or Loss
In the statement of financial position, companies report in the
equity section accumulated other comprehensive income or loss.
Dawson plc
Statement of Financial Position (partial)
Equity
Share capital—ordinary € 3,000,000
Retained Earnings 1,500,000
Accumulated other comprehensive loss (100,000)
Total Equity € 4,400,000

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 PACE SA
Statement of Financial Position
December 31, 2020
Assets
Intangible assets
Goodwill €270,000
Property, plant, and equipment
Land €200,000
Buildings €800,000
Less: Accumulated depreciation—buildings 200,000 600,000
Equipment 180,000
Less: Accumulated depreciation—equipment 54,000 126,000
Total property, plant, and equipment 926,000

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 PACE SA
Statement of Financial Position
December 31, 2020
Assets
Investments
Investments in held-for-collection debt 20,000
securities, at amortized cost
Investment in shares of less than 20% owned 30,000
companies, at fair value
Investment in share of 20—50% owned 150,000 200,000
company, at equity
Current assets
Prepaid insurance 23,000
Inventory, at FIFO cost 43,000
Accounts receivable 84,000
Less: Allowance for doubtful accounts 4,000 80,000
Short-term investments, at fair value 147,000
Cash 21,000 314,000
Total assets €1,710,000

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 PACE SA
Statement of Financial Position
December 31, 2020
Equity and Liabilities
Equity
Share capital—ordinary, €10 par value, 200,000 shares €800,000
authorized, 80,000 shares issued and outstanding
Share premium—ordinary 100,000
Retained earnings (Note 1) 255,000
Accumulated other comprehensive income 10,000 €1,165,000
Non-current liabilities
Bonds payable, 10%, due 2024 290,000
Current liabilities
Accounts payable 185,000
Income taxes payable 60,000
Interest payable 10,000 255,000
Total equity and liabilities €1,710,000
Note 1. Retained earnings of €100,000 is restricted for plant expansion.

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DO IT! 3b: Financial Statement
Presentation of Investments (1 of )
Identify where each of the following items would be reported in
the financial statements.
1. Interest earned on investments in bonds.
2. Fair value adjustment—non-trading.
3. Unrealized loss on non-trading securities.
4. Gain on sale of share investments.
5. Unrealized gain on trading securities.

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DO IT! 3b: Financial Statement
Presentation of Investments (1 of 2)
Use the following possible categories:
Statement of financial position:
Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Investments Current liabilities
Current assets
Income statement:
Other income and expense
Comprehensive income statement:
Other comprehensive income
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DO IT! 3b: Financial Statement
Presentation of Investments (2 of 2)
Item Financial Statement Category
1. Interest earned on Income statement Other income and expense
investments in bonds
2. Fair value adjustment— Statement of financial Investments
non-trading position
3. Unrealized loss on non- Comprehensive income Other comprehensive
trading securities statement income
4. Gain on sale of share Income statement Other income and expense
investments
5. Unrealized gain on trading Income statement Other income and expense
securities

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 Learning Objective 4
Describe the form and content of
consolidated financial statements as
well as how to prepare them

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Consolidated Statement of Financial
Position
• Companies prepare consolidated statements of
financial position from the individual statements of
their affiliated companies.
• Transactions between the affiliated companies are
identified as intercompany transactions and are
eliminated in consolidation.

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Consolidated Statement of Financial
Position Example
Assume that on January 1, 2017, Powers plc pays
₤150,000 in cash for 100% of Serto plc’s ordinary
shares. Powers records the investment at cost.
The combined totals do not represent a consolidated
statement of financial position, because there has
been a double-counting of assets and equity in the
amount of ₤150,000.

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 Powers plc and Serto plc
Statements of Financial Position
January 1, 2020
Powers Serto Combined Consolidated
Assets plc plc Data Data

Plant and equipment (net) £325,000 £145,000 £470,000 £470,000

Investment in Serto plc 150,000 150,000 -0-
ordinary shares
Current assets 50,000 80,000 130,000 130,000
Total assets £525,000 £225,000 £750,000 £600,000

Equity and Liabilities

Share capital—ordinary £300,000 £100,000 £400,000 £300,000

Retained earnings 175,000 50,000 225,000 175,000

Current liabilities 50,000 75,000 125,000 125,000
Total equity and £525,000 £225,000 £750,000 £600,000
Liabilities

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Cost Equal to Book Value

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Cost Above Book Value
Assume the same data used above, except that
Powers plc pays ₤165,000 in cash for 100% of Serto’s
ordinary shares. The excess of cost over book value is
₤15,000 (₤165,000 - ₤150,000).

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Cost Above Book Value

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Content of A Consolidated Statement
of Financial Position
The prior worksheet shows an excess of cost over book value of
₤15,000. In the consolidated statement of financial position,
Powers first allocates this amount to specific assets, such as
inventory and plant and equipment, if their fair market values on
the acquisition date exceed their book values. Any remainder is
considered to be goodwill. For Serto Company, assume that the fair
market value of plant and equipment is ₤155,000. Thus, Powers
allocates ₤10,000 of the excess of cost over book value to plant and
equipment, and the remainder, ₤5,000, to goodwill.

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Content of A Consolidated Statement
of Financial Position
POWERS plc
Consolidated Statement of Financial Position
January 1, 2020

Assets
Goodwill £ 5,000
Plant and equipment (net) 480,000
Current assets 115,000
Total assets £600,000
Equity and Liabilities
Equity
Share capital—ordinary £300,000
Retained earnings 175,000 £475,000
Current Liabilities 125,000
Total equity and liabilities £600,000

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Consolidated Income Statement
• Statement shows the results of operations of affiliated
companies as though they are one economic unit.
• All intercompany revenue and expense transactions must be
eliminated.
• A worksheet facilitates the preparation of consolidated income
statements in the same manner as it does for the statement of
financial position.

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 Learning Objective 5
Compare the accounting for
investments under IFRS and U.S. GAAP

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A Look at US GAAP and IFRS (1 of 4)
Key Points
Similarities
• The basic accounting entries to record the acquisition of debt securities, the receipt of
interest, and the sale of debt securities are the same under IFRS and GAAP.
• The basic accounting entries to record the acquisition of share investments, the receipt
of dividends, and the sale of share securities are the same under IFRS and GAAP.
• Both IFRS and GAAP require that companies determine how to measure their financial
assets based on two criteria:
• The company’s business model for managing their financial assets; and
• The contractual cash flow characteristics of the financial asset.

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A Look at US GAAP and IFRS (2 of 4)
Key Points
Similarities
• Both IFRS and GAAP use the same criteria to determine whether the equity method of
accounting should be used—that is, significant influence with a general guide of over
20% ownership. IFRS uses the term associate investment rather than equity
investment to describe its investment under the equity method.
• Under IFRS, both the investor and an associate company should follow the same
accounting policies. As a result, in order to prepare financial information, adjustments
are made to the associate’s policies to conform to the investor’s books. GAAP does not
have that requirement.
• Both IFRS and GAAP use held-for-collection (debt investments), trading (both debt and
equity investments), and non-trading equity investment classifications. These
classifications are based on the business model used to manage the investments and
the type of security.

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A Look at US GAAP and IFRS (3 of 4)
Key Points
Differences
• The basis for consolidation under IFRS is control. Under GAAP, a bipolar approach is
used, which is a risk-and-reward model (often referred to as a variable-entity
approach) and a voting-interest approach. However, under both systems, for
consolidation to occur, the investor company must generally own 50% of another
company.
• Under GAAP, companies use Other Revenues and Gains or Other Expenses and Losses
in its income statement presentation. Under IFRS, companies will generally classify
these items as unusual items or financial items.
• GAAP requires that all changes in fair value for all equity securities be reported as part
of income. IFRS requires that changes in fair value in non-trading equity securities be
reported as part of other comprehensive income.

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A Look at US GAAP and IFRS (4 of 4)
Looking into the Future
As indicated earlier, both the FASB and IASB have indicated (conceptually) that they
believe that all financial instruments should be reported at fair value and that changes in
fair value should be reported as part of net income. However, both the FASB and IASB
have decided to permit amortized cost for debt investments held-for-collection. Hopefully,
they will eventually arrive at fair value measurement for all financial instruments.

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