Question

The following investments are held by investors that are public companies:

1. A $5,000,000 5% publicly traded 10-year bond of Tree Ltd. The bonds are held for short-term capital appreciation, as the investor is expecting interest rates to change.
2. A $4,000,000, 5% publicly traded bond that matures in 10 years. The bond is in a portfolio that is managed with the objective of collecting interest and principal.
3. Common shares of Shrub Ltd., amounting to 30% of the outstanding shares. The remaining shares are equally divided among four other investors. Each investor has two representatives on the 10-member board of directors. All strategic decisions must be unanimously agreed to by the board members.
4. Common shares of Plant Ltd., amounting to 30% of the outstanding shares. The remaining shares are equally divided among 18 other investors. The investor has two seats on the 10-member board of directors.
5. A $4,000,000 4% publicly traded 5-year bond of Maple Inc, The bond is in a portfolio that is managed with the objective of collecting interest and principal or sale.
6. Common shares of Elm Inc., amounting to 5% of the outstanding common shares. Elm is publicly traded. Management wishes gains and losses caused by changes in fair value to bypass earnings.
7. Common shares of Beech Ltd., amounting to 16% of the voting shares. The investor has four members on the 10-member board of directors, and has extensive intercompany transactions with Beech.
8. Common shares of Spruce Corp., amounting to 60% of the common shares of Spruce. The seven-member board of directors consists of four members appointed by the investor.

Required:
How should the investor classify each of the above investments? What accounting method should be used for each?

Answer 1

Answer:

a	FVTPL	Valued at fair value, interest in earnings, changes in fair value in earnings
b	AC	Valued at cost, interest in earnings
c	Joint Venture	Equity method
d	Associate (assumes significant influence)	Equity method
e	FVTPL (fair value still can be ascertained)	Valued at fair value, dividends in earnings, changes in fair value in earnings
f	FVTOCI	Valued at fair value, dividends in earnings, changes in fair value in equity
g	Associate (assumes significant influence)	Equity method
h	Subsidiary (assumes control)	Consolidation