Chapter 2: Investments in Equity Securities

AOCI is not included in RE but is included as a separate component of SHE.

Cost Method = allowed under ASPE for equity investments that are not quoted in an active market.
o All dividends are recorded as revenue when received or receivable regardless of whether they
represent liquidating dividends.
Equity Method = investor records its proportionate share of the associates income as its own income
and reduces the investment account by its share of the associates dividends declared.
o Income is recognized based on the income reported by the associate, and dividends are reported
as a reduction of the investment account
o Picks up the investors share of the changes in the associates SHE.
Changes to and from the Equity Method
o Changes in reporting methods are accounted for prospectively if they are changed because of a
change in circumstance.
ASPE Differences:
o Investments in Associates can be reported using the cost, equity, or at FV method.
o Non-strategic equity investments should be reported at COST unless the value of the investment
is quoted in an active market or the entity elects to report at FV.
FVTPL, AFS, FVTOCI
o Total Comprehensive Income over the 3 year period in total is the same for all 3 situations.
o Although the different methods report different income each year, in the long run, the total
income is the same under all methods.
o The total income is usually equal to the difference between cash received and cash paid over the
life of the investment.
Rationale for Reporting Unrealized Gains
o Report in Net Income
When trading in investments is part of ST operating strategy of firm
Management should be evaluated on performance.
o Report in OCI
To avoid ST fluctuations in NI
Management should not be evaluated on investments, which are not actively traded.
Reporting Methods
o Equity Method = investment in associate
o Consolidation = Investment in subsidiary
o Cost Method = used for internal purposes. Investments should not be reported at cost fir external
reporting purposes.
ASPE
o Strategic Investments
Consolidation, Cost or Equity Method = investment in subsidiary
Equity or Cost Method = held for significant influence.
Must use same method for all investments in the class
When shares are traded in active market.
- Must report at FV if planned to use cost method
- Unrealized gains reported in net income
o Non Strategic Investments
Report at cost when shares are not actively traded
Report at FV when shares are actively traded
o OCI does not exist under ASPE

Investment in Associate should disclose the following:

o Parent should disclose the following with respect to its investment in Subsidiary:
The name and principal place of business of the associate
The method used to report the investment in the associate
Investment income from Parents investment in Subsidiary should be reported separately on
the income statement and the carrying amount of this investment should be reported
separately on the balance sheet.
The nature of its relationship with Subsidiary and its percentage ownership
summarized financial information for Subsidiary, including the aggregated amounts of assets,
liabilities, revenues, and net income
nature and extent of any significant restrictions on the ability of Subsidiary to transfer funds
to Parent in the form of cash dividends, or to repay loans or advances made by the entity; and
Contingent liabilities incurred relating to its interests in associates.

Chapter 3: Business Combinations

Accounting
ACQUISITION METHOD
Purchases Method
New Entity Method

Acquiring/Parent
CV
CV
FV

Acquired/Subsidiary
FV
Allocation of Purchase Prices
FV

Goodwill = the excess of total consideration given over the FV of identifiable assets and liabilities.
Adjustments on consolidation are not typically recorded in the separate entity records for the parent or
subsidiary.
Consolidated BS produces the same financial position as when parent purchased the net assets directly.
In a reverse takeover the consolidated BS incorporates the CV of net assets f the deemed parent (legal
subsidiary) and the FV of the deemed subsidiary (legal parent).
Push-down Accounting = subsidiary revalues its assets and liabilities, including goodwill, to the
amounts included in the consolidated BS.
A private entity can choose to report an investment in a subsidiary by preparing consolidation FS, by
using the cost or equity methods or at FV in limited situations.
Under IFRS3, issuance costs are not considered part of the acquisition cost as they do not increase the
value of the entity.

Chapter 4: Consolidation of Non-Wholly Owned Subsidiaries.

NCI = part of subsidiary not owned by parent.

Negative goodwill arises when the total consideration given is less than the FV of identifiable net assets.
o Recognized as gain on bargain purchase.
o Use Parent Company Extension, however calculations are for both parent company and entity
theory.
o Only the parent can recognize a gain on bargain purchase ends up in consolidated RE
The entity theory best reflects the true financial position of the company because it incorporates the FV
of all of the subsidiarys assets and liabilities.
When parent issued shares, add the issued shares to the CS total.
When subsidiary has goodwill account, deduct the goodwill account to the CV of net assets when
computing for goodwill.
o In consolidated FS, do not include subsidiarys old goodwill account, add new goodwill
computed instead.
IFRS 3 Allows the entity theory and the parent company extension theory