IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 25 / Financial In struments: Recognition and Measurement (lAS 39)

6.2.0.3 Because different categories are measured in different ways und er lAS 39 , the measure– ment requirements of lAS 39 are often characterized as a mixed measur ement approach. Co nceptu– ally, an alternative approach wou ld be to measure all financial asse ts and financial liabilities in the same way (e.g., at fair value). A benefi t of such an approac h is that some of the complexity of lAS 39 could be elimi nated, because the need for classifica tion and hedge accounting guida nce wo uld decre ase. Th ere is littl e consensus curre ntly, however, for moving to an alterna tive approac h in the near future. For instance, some belie ve that fair va lues are not suffic iently reliabl e in all cases to incl ude them in the primary financial statements. 6.2.1 Cost 6.2.1.1 Co st is the amount for which an asse t was acquired or a liab ility incurred , including trans– action costs (i.e ., fees or commissions paid). Example If an entity purchases a fi nancial asset fo r a pri ce of $230 and. in addition. incurs $20 of cos ts that are directly attributable to the acquisition, the cost fo r that asset equals $250. 6.2.1.2 Subsequent to initial recogni tion , only one type of financial instrument is measured at cost under lAS 39: investments in unquoted equity instruments that cannot be reliabl y measured at fair value, including derivatives that are linked to and must be settled by such unquoted equity instru– ment s. For instance, an entity may conclude that fair value is not reli abl y measur able for an in– vestment in a nonpublic ent ity ("private equity" inves tment). In that case, the entity is required to measure the investment at cos t. Example Entity A purchases a 10% holding of the ordinary shares in a nonpublic, start-up entity for a total cost of$250 paid in cash. Thus, on initial recognition, it debits finan cial assets $250 and credits cash $250. Dr Financial asset 250 Cr Cash 250 There is no active market f or the shares, and Entity A determines that it is not possible ro reliably estimate the fa ir value of the shares using valuation techniques. In that case, Entity A should con– tinue ro measure the investment at its cost of $250 at each subsequent repo rting dat e for as long as the asset is held, assuming that the asset does not become impaired. 6.2.1.3 Whil e an inve stment measured at cost is held , unrealized hold ing gains or losses are no r– mally not recogni zed in profit or loss. However, any cash di vidend s received are reported as di vi– dend income . Example If Entity A receives a cash di vidend of $10, it make s this journal entry: Dr Cash lO Cr Dividend income lO 6.2.1.4 Wh en an investment held at cos t is sold or otherwise derecogn ized , any difference be- tween its carrying amount and the consideration received is recognized in profit or loss. Example If Entity A sells an investment that is held at cost and that is carried in the balance sheet at $120, fo r cash of $170, it would recognize a realization gain of$50: Dr Cash 170 Cr Financial asset 120 Cr Gainon sale 50

Case Study 7

This case illustrates when an investment would be measured at cost. Facts During 20X6. Entity A acquired these financial instruments: