IAS 25 actually refers to “Accounting for Investments,” and it was withdrawn in 2003. The guidance on accounting for investments can now be found in IFRS 9 Financial Instruments, which provides principles for the classification, measurement, and impairment of financial assets and liabilities.
Under IFRS 9, financial assets are classified into three categories:
- Amortized cost: financial assets that are held for collection of contractual cash flows that are solely principal and interest.
- Fair value through other comprehensive income (FVOCI): financial assets that are held for collection of contractual cash flows and selling the assets before maturity is not planned.
- Fair value through profit or loss (FVTPL): financial assets that do not qualify for either of the above categories.
Here are some examples of accounting for investments under IFRS 9:
Example 1: Company A purchases 10,000 shares of Company B for $100,000 as a long-term investment. Company A intends to hold the shares for the foreseeable future and does not expect to sell them in the near term. How should Company A account for the investment?
Under IFRS 9, Company A should initially measure the investment at fair value, which is $100,000 in this case. Subsequently, Company A should measure the investment at fair value through other comprehensive income (FVOCI), which means that any changes in fair value of the investment will be recognized in other comprehensive income rather than in profit or loss. Company A should also disclose information about the fair value of the investment and the changes in fair value in its financial statements.
Example 2: Company B holds a portfolio of debt securities that it has classified as loans and receivables. One of the borrowers has defaulted on its loan, and Company B believes that it is unlikely to recover the full amount of the loan. How should Company B account for the impairment of the loan?
Under IFRS 9, Company B should recognize an impairment loss on the loan if there is objective evidence of impairment, such as a borrower’s financial difficulties. The impairment loss should be calculated as the difference between the carrying amount of the loan and the present value of the expected future cash flows, discounted at the loan’s original effective interest rate. Company B should also disclose information about the impairment loss and the expected credit losses on its portfolio of loans and receivables in its financial statements.
Example 3: Company C holds an equity investment in Company D, which is publicly traded. Company C plans to sell the investment in the near term to take advantage of an expected increase in the share price. How should Company C account for the investment?
Under IFRS 9, Company C should initially measure the investment at fair value, which is the market price of the shares. Subsequently, Company C should measure the investment at fair value through profit or loss (FVTPL), which means that any changes in fair value of the investment will be recognized in profit or loss rather than in other comprehensive income. Company C should also disclose information about the fair value of the investment and the changes in fair value in its financial statements.