Accounting for Investments in Shares

The accounting method for investments in other companies depends on the level of influence or control the investor has over the investee.

Four Main Methods:

1. Fair Value Through Profit/Loss (FVTPL)
2. Fair Value Through Other Comprehensive Income (FVOCI)
3. Equity Method
4. Consolidation

Determining the Method:

Based on percentage ownership and level of influence:

• 0-20%: Fair Value (usually)
• 20-50%: Equity Method (significant influence)
• 50%+: Consolidation (control)

3. Consolidation Method

For investments with control (usually >50%).

Requirements: Prepare consolidated financial statements.

• Process: Combine parent and subsidiary accounts
• Eliminations: Remove intercompany transactions
• Minority Interest: Non-controlling interest shown separately
• Examples: Parent-subsidiary relationships

Practical Examples:

Example 1: FVTPL (5% investment)

• Buy 5% of XYZ shares for $100,000
  • Dr Investment at FVTPL $100,000, Cr Cash $100,000
• Year-end: Fair value increases to $110,000
  • Dr Investment at FVTPL $10,000, Cr Gain on Investment $10,000 (P&L)
• Receive $3,000 dividend
  • Dr Cash $3,000, Cr Dividend Income $3,000 (P&L)

Example 2: Equity Method (30% investment)

• Buy 30% of ABC for $500,000
  • Dr Investment in Associate $500,000, Cr Cash $500,000
• ABC reports $200,000 net income
  • Share: 30% × $200,000 = $60,000
  • Dr Investment in Associate $60,000, Cr Investment Income $60,000
• ABC pays $50,000 dividend
  • Share: 30% × $50,000 = $15,000
  • Dr Cash $15,000, Cr Investment in Associate $15,000
• Year-end investment balance: $500,000 + $60,000 - $15,000 = $545,000

Example 3: Consolidation (80% investment)

• Buy 80% of DEF for $2,000,000
  • Prepare consolidated statements
  • Combine all assets and liabilities
  • Show 20% minority interest
  • Eliminate intercompany transactions

Key Accounting Standards:

Factors Beyond Percentage:

1. Board representation: Seat on board suggests significant influence
2. Participation in policy making: Involvement in decisions
3. Intercompany transactions: Material transactions between entities
4. Management interchange: Sharing of personnel
5. Technological dependency: One company relies on other's technology

Special Situations:

Joint Ventures:

Joint control (usually 50/50) - use equity method or proportionate consolidation.

Step Acquisitions:

Gradually increase ownership - may need to remeasure previous investment.

Loss-Making Associates:

Investment reduced to zero, then stop recognizing losses unless guaranteed.

Financial Statement Impact:

Important Considerations:

1. Choice between FVTPL and FVOCI for equity investments is irrevocable
2. Must reassess level of influence regularly
3. Fair value estimates require significant judgment
4. Impairment testing required for equity method investments
5. Disclosure requirements extensive under all methods
6. Tax treatment may differ from accounting treatment

Key Points to Remember:

1. Method depends on level of influence, not just percentage
2. Fair value methods: FVTPL (P&L) vs FVOCI (OCI)
3. Equity method: Adjust investment for share of profit/loss
4. Consolidation: Combine financial statements for control
5. Regular reassessment of classification required
6. Disclosure of method and assumptions essential