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Hi Mike,
How should a gain be accounted for for an equity asset held at FVTOCI?
Should I add the transaction cost to the carrying amount of the equity asset for ALL reporting periods, or, only when it is first recorded?
I see some huge differences between solutions provided by Kaplan and BPP:
Kaplan:
ABC co purchased 10,000 shares on 1 September 2014, making the election to use the alternative treatment under IFRS 9. The shares cost $3.50 each. Transaction costs associated with the purchase were $500.At 31 December 2014, the shares are trading at $4.50 each.
What is the gain to be recognized on these shares for the year ended 31 December 2014?
Solution:
Initial carrying amount= 10,000 x $3.50 + 500 = $35,500Subsequent value = 10,000 x $4.50 = $45,000
Gain on shares = $9,500
BPP Question:
In February 2018 a company purchased 20,000 shares at a price of $4 per share. Transaction costs were $2,000. At the year end of 31 December 2018, these shares were trading at $5.50. The company has made the irrevocable election to classify it as FVTOCI.What amounts should appear in the financial statements of the company for the year ended 31 December 2018?
OCI:
Gain on investment:
(20,000 x 5.50) – (20,000 x 4) = 30,000SOFP:
Investment in equity instruments:
(20,000 x $5.50) + 2,000 = 112,000I think the Kaplan method is the correct one because there was a MCQ question from September 2016 specimen paper which did it exactly the same way as how Kaplan did. But if I were to use BPP’s method for that September 2016 question, I would have got that question wrong..
“Should I add the transaction cost to the carrying amount of the equity asset for ALL reporting periods, or, only when it is first recorded?”
That just would not make any sense at all – the transaction costs are added to arrive at the carrying value and that’s a one-off transaction cost
“OCI:
Gain on investment:
(20,000 x 5.50) – (20,000 x 4) = 30,000SOFP:
Investment in equity instruments:
(20,000 x $5.50) + 2,000 = 112,000”In the OCI working, add the $2,000 to both the (20,000 x $5.50) and the (20,000 x $4) so now you have $112,000 – $82,000 giving you a gain of $30,000 and a value on the SoFP of $112,000
“I see some huge differences between solutions provided by Kaplan and BPP”
Hmmmm
I still don’t quite get it- looking at the BPP question:
Shouldn’t the amount of gain be $28,000 (20,000×5.50) – (82,000) instead?
And the carrying amount would be $110,000 since the transaction cost is a one off expense?
The carrying value is $4 followed by $5.50
Bothe of those carrying values need to be increased by the transaction costs – but that’s not the same as your original query “Should I add the transaction cost to the carrying amount of the equity asset for ALL reporting periods, or, only when it is first recorded”
We bought the shares for $4 each and now they’re being traded at $5.50
What’s the gain? $30,000
Those shares cost us $2,000 to buy and they still cost us $2,000 months later when we prepared the financial statements at the end of the year – that hasn’t changed
If you wanted to buy 20,000 shares as on 31 December, 2018 they would cost you 20,000 x $5.50 + $2,000 = $112,000
As it is, we bought them in February 2018 and they cost us 20,000 x $4 + $2,000 = $82,000
I’m trying to say the same thing in different ways hoping that you will understand one way!
Is that better?
I apologize for failing terribly at trying to understand this. 🙁 The question from Kaplan and this MCQ from the specimen paper September 2016 do not calculate the gains on equity investments this way. But why not?
Specimen paper September 2016:
A long term investment in 10,000 of the equity shares of another company were acquired on 1 October 2012 at a cost of $3.50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 2013 the fair value of these shares is $4.50 each. Where possible, the company makes an irrevocable election for the fair value movements on financial assets to be reported in other comprehensive income.What amount should be included in other comprehensive income for the year ended 30 September 2013?
Answer:
Cost of investment: 10,000 x $3.50 x 1.01 = 35,350Fair value at 30 September 2013: 10,000 x $4.50 = $45,000
Gain = $45,000 – $35,350 = $9,650
However…..applying the BPP’s logic:
If it would cost us 1% of the purchase price next year:
FV= 10,000 x 4.50 x 1.01 = $45,450
Gain = $45,450 – $35,350 = $10,100 (but this isn’t the given answer)“However…..applying the BPP’s logic:
If it would cost us 1% of the purchase price next year:
FV= 10,000 x 4.50 x 1.01 = $45,450”No, that’s not what I was saying
The $350 transaction costs is a fixed sum so the ‘today’ value of the 10,000 shares would be 10,000 x $4.50 + $350 = $45,350 giving a gain of $10,000
I can only imagine that the sentence “On 30 September 2013 the fair value of these shares is $4.50 each” is telling you the value of the 10,000 shareholding … inclusive of the $350 transaction costs
But I don’t like this question – my answer would follow the BPP way (as amended for the $350 not $450 transaction costs) giving a gain of $10,000
Whats going on with that ACCA question- I thought ACCA questions were supposed to be clear and concise! Hopefully this question doesnt come out again otherwise I wouldn’t know what to do 🙁 thanks for the help 🙂
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