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Chapter
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Financial In struments: Recognition and Measurement (lAS 39)
253
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: