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Lecture notes Intermediate Financial Accounting - Part 2 $3.23
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  3. Tilburg University (UVT)
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  5. Intermediate Financial Accounting (324038B6)

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Lecture notes Intermediate Financial Accounting - Part 2

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  • Course
  • Intermediate Financial Accounting (324038B6)
  • Institution
  • Tilburg University (UVT)
  • Book
  • Intermediate Accounting IFRS

This document contains all lecture notes from lectures 9 to 12 from the 2021/2022 academic year. In addition, the document contains several examples that also serve as examples for the exam questions. The examples helped me understand and apply the theory.

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Document information

  • January 29, 2023
  • 21
  • 2021/2022
  • Class notes
  • Claudia marangoni
  • College 9 tm 12

Subjects

  • bedrijfseconomie
  • accountancy
  • ifrs
  • pre master
  • financial accounting
  • uvt
  • intermediate financial accounting

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More summaries for

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  • Tilburg University (UVT)
  • Accountancy
  • Intermediate Financial Accounting (324038B6)
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Summary consists mainly of the text of the lectures, without any real addition. The PowerPoint of the lectures will be available free of charge on canvas. So this document adds nothing.

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Intermediate financial accounting – College 9
Financial instruments – Relevant IFRS
IAS 32 & IFRS 9 ‘Financial instruments’
- Financial instruments (focus on financial assets)
- Classification of financial assets
- Other Comprehensive Income (OCI)

- Financial assets: Equity financial instruments
- Financial assets: Debt financial instruments

Financial instruments: definition
IAS 32 defines a financial instrument as any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity.

- Financial markets have created a variety of financial instruments, ranging from
traditional equity and loans to different types of derivates. The above definition
covers them all.
- Note how, for accounting purposes, the perspective matters:
o A share always results in an equity position (for the issuing firm) and an asset
position (for the investor).
o Similarly, a loan always results in a liability (for the borrower) and an asset
(for the lender)

Definitions and some examples:




Financial assets:
- Companies can generate extra returns by investing in financial assets  we
concentrate on 2 types:
o Equity investments (receive capital gains from revaluations)
o Debt investments (receive interests from buying debt)
o Derivates (out of scope)

- Plus, strategic component of investments
o E.g.,: Google Ventures taking positions on Al start-ups.

Financial assets classification
Financial assets (FA) are classified according to 2 criteria:

, - Business model test: Why is the asset held?
o Hold the asset (i.e., collect contractual CF) or sell it?
- Contractual terms test: What are the contractual terms of the assets?
o Solely payments of principal + interests on the amount outstanding or
something else?
Based on the satisfaction of these criteria, the financial assets will be measured at:




Other Comprehensive Income
- Financial assets (A) and liabilities (L) are recognized as A or L, but gains/losses on
these instruments are generally accounted in I/S (realized) or OCI (unrealized)

- In turn, I/S or OCI are part of Shareholders’ Equity:
o Common stock & share premium
o Retained earnings (accumulated net income  I/S)
o Other comprehensive income (OCI)
- OCI includes transactions that bypass the Income Statement but affect assets and
liabilities.
- Comprehensive income = net income + OCI
o One-statement approach (comprehensive income is part of the income
statement)
o Two-statement approach (separate comprehensive I/S)

Nike – Other Comprehensive income
- Transactions that bypass the Income Statement
o Gains/losses on, e.g., cash flows hedges, some financial instruments
o Currency translations (unrealized differences in exchange rates)

Financial assets: Equity financial instruments
Equity financial instruments
- Ownership interest in other companies
- Degree of percentage of acquisition determines
the accounting treatment.




I. Equity holdings <20%
a. IFRS presumes equity FA are held for trading
- Initial recognition: Fair value (FV) = exit price (transaction price)
- Subsequent measurement: All unrealized changes in FV are recognized in the Profit
& Loss account (Fair value through profit & loss  FVTPL).
o Dividends (+NI) and realized gains/losses (+/- NI).

, b. If equity FA are held to maturity (i.e., for long period of time) or are available for sale
(in the middle: no trading but no maturity either).
- Initial recognition: Fair value (FV) = exit price (transaction price)
- Subsequent measurement: All unrealized changes in FV are recognized in the OCI
(FV through OCI  FVTOCI)
o Dividends (+NI) and realized gains/losses (+/- NI).

Example A – FVTPL




Losses March 2011
DR. Unr. loss 10,768
CR. FA at FVTPL 10,768

Gains March 2012
DR. FA at FVTPL 21,216
CR. Unr. Gain 21,216

Example B – FVTOCI
December 2019
DR. FA at FVTOCI 20,750
CR. Cash 20,750

Cash dividend
DR. Cash 450
CR. Dividend revenue 450

II. Equity holdings between 20% - 50%
- Investor does not possess legal control (achieved with >50%), but has significant
influence, as for example:
o Representation at the board/technological dependency
o Intercompany relationship/exchange of management, etc.
- These equity financial assets are accounted for using the equity method
o Initial recognition: Acquisition price (cost of the shares acquired)
o Subsequent measurement: Adjustments (each period) for changes in the
investee’s net assets.
- The investor’s proportionate share of the earnings (or losses) of the investee
periodically increases (decreases) the investment’s carrying amount.
- All dividends received by the investor from the investee also decrease the
investments carrying amount.
- The equity method recognizes that the investee’s earnings increase the investee’s
net assets, and that the investee’s losses and dividends decrease these net assets.

III. Equity holdings > 50%
- Investor is said to have a controlling interest (50% or more)

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