CC BY
23
UDC 657.1.014.134
Kobzeva М.О. ©
PhD student in Accounting and Auditing. Kyiv National Taras Shevchenko University
FINANCIAL INVESTMENTS ESTIMATION IN ACCOUNTING BY INTERNATIONAL
AND NATIONAL STANDARDS
Summary
The paper analyzes and discusses the nature and classification of financial investments. It defines the main estimation methods by international and national standards, and discusses the main principals for identification of cost, fair and depreciation values. Keywords: financial investments, fair value, equity method, influence, control, self-cost.
General formulation of the problem and its relation to important scientific and practical tasks. One of the most important activities of any business is making investments. Financial investments are the foundation for development of any company. The main stage for accounting of financial investments is their estimation. The main estimation principles are listed both in domestic and foreign norms. So, the new International Accounting Standard 13 "The Fair Value", and a number of others, offer some new elaborations on financial investments estimation.
Analysis of the recent studies, which started resolving this problem.
The problem of financial investments estimation to related parties was dealt by both domestic and foreign scholars. Among them there are: Elizabeth A. Gordon, Elaine Henry, Timothy J. Louwers, Brad J, V.V. Babich, F.F. Butynets, S.F. Golov, N.M. Klym, O. Lysenko, L.H. Lovinska, P.T. Sabluk, S. Sachova, H.Umantsiv, etc.
Goal of the article. The goal of this research is to study and identify the main estimation principles of financial investments by the national and international norms. Presentation of the main research material with full justification of scientific results. Investing his assets into other companies, the investor accounts them not among the resources earmarked for internal consumption or use, but as total of assets called "investment". In other words, for the investor company from the moment of investment the assets are no more its buildings, structures, equipment, funds or inventories, but, regardless their form, are listed as shares, equities (interests), loans. The resources invested in another company are investor's financial assets or financial instruments. On the other hand, these resources in the balance sheet of the investee company, accounted as clearly defined assets, are considered the investment property of the Investment Company in their total cost value.
Such kind of companies includes associated entities, subsidiaries and joint ventures.
Many questions arise when using international standards in domestic practice. Those are the requirements by financial statement users to improve the information disclosure mechanism on economic interests, which are reflected in companies' and other organizations' statements; improve the mechanisms for determining profits or losses, cash flows in the financial statements, etc. These encourage the companies to use international standards.
International Accounting Standard 28 "Investments in Associated Companies and Joint Ventures" defines the associated company. This is an economic entity which is not a corporation, such as a partnership, that is controlled by another entity (known as the parent). [1].
According to Ukrainian National Standards of Accounting 19, "The Group of Affiliated Companies", a subsidiary company is a company under control of the parent (holding) company. [2]
© Kobzeva M.O., 2012 r.
As for definition of a joint venture, it is recognized as a company engaged in "economic activities with or without creation of a legal entity, which is a subject to joint control of the two or more parties, under a written agreement between them." [3].
Financial investments play an important role in the activities of these companies.
There are numerous approaches to definitions and classifications of the financial investments both in the scientific and legislation bases. In his recent publications, N.M. Klym offered a quite detailed and comprehensive classification of the financial investments, having classified them by the degree of investor's influence on the invested company, subject to the purpose of their maintenance, by the type of financial investments estimation in the accounting, and by the types of securities.
Depending on the way of acquiring the financial investments by the company, the several estimation methods are used to reflect them correctly in the accounting: primary, and estimation of the financial investments for the balance date.
Primary financial investments estimation. The financial investments, both the current and the long-term, are assessed and reflected by the self-cost. "The self-cost of the financial investment consists of its purchase price, commission fees, customs duties, taxes, obligatory payments and other expenditures directly related to the acquisition of financial investments." [3]. The exception is acquisition of the financial investments through exchange for own-issued securities and through exchange for other assets. Then their self-cost is determined at a fair value.
Acquisition of the financial investments can be done in three ways:
- for cash;
- through exchange for own-issued securities;
- through exchange for other assets.
In the first case, if the company has acquired financial investments for cash, they are assessed at the self-cost, which consists of the paid cash and expenditures related to acquisition of the financial investments. In the second case, the cost of the investments is determined by the fair value of securities. In the third case it is done by a fair value of assets which get into the process of exchange.
The concept of fair value is quite broadly discussed in IFRS 13 "Fair Value Measurement", which comes to force as of January 1st, 2013. [4] It defines the fair value as a price to be received from sales of an asset or paid for transfer of liabilities for the date of estimation in common transactions between market participants. It states that in order to assess an asset at its fair value, it is required the company to identify the following: a specific asset or liability that can be measured, a market where the normal asset or liability operations are to be held, a relevant fair value assessment method. When the prices for the same assets or liabilities are not specified, the economic entity estimates the fair value through another assessment methodology, which allows maximum use of the appropriate materials. That is because the fair value of the market assets is measured through an assumption that the market participants would use such prices in pricing the assets and liabilities.
In establishing the fair value, the company should consider characteristics of an asset or liability for other market participants who will take into account these prices on the assessment date. Such characteristics include, for example, the following: status and location of assets, limitations, if any.
IFRS 13"Fair Value Measurement", notes that if the asset cost cannot be established through market benchmarking and observations, then it is determined by the other more reliable method. In order to determine the fair asset value, three methods are offered:
- Marketing method. The marketing approach uses prices and other relevant information generated by market transactions with identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities.
- Expenditure method. It defines the asset value as an amount of expenditures to be incurred to replace this asset.
- Revenues method. When using this approach, the future amounts (e.g. cash flows or revenues and expenditures) are converted into a single total for the current date (i.e. discounted). Using the revenues approach, the fair value reflects the current market expectations about those future totals. [5]
Financial investments estimation for the balance date. Financial investments (except for the investments held by the company until their maturity or accounted by equity participation method) for the balance date are reflected at their fair value. [3, p.8]. Estimation of the financial investments for the balance date uses three methods:
- equity participation method (financial investments into associated companies and subsidiaries and into joint activities with the creation of a legal entity (joint venture) for the balance date are reflected at their fair value.
- the effective interest rate (financial investments held by the company until their maturity are reflected at their depreciation cost);
- the self-cost with consideration of the reduced investment usefulness (financial investments whose fair value cannot be measured at a reliable way). [3]
Under IAS 28 "Investments in Associated Companies and Joint Ventures'", the equity participation method is considered as an accounting method whereby the investment is initially recognized at the self-cost and then it is subsequently adjusted according to changes of the investor's share in the net assets of the investee upon acquisition. Profits or losses of the investor include investor's share in the investee profits or losses. [1]
Investment calculation by this method leads to recognition of the investor's share in the investee profits or losses upon the date of purchase. Such amounts are accounted in identification of investor's net revenues while disclosure of financial statements information. Dividends received from the investment reduce the investment book value and are not recognized as dividend income. When using the equity participation method, the investment account reflects overrun of the investor's assets over the shareholder's equity in the net assets of the investee.
Declaration of investor's earned revenues and losses reflects the proportional share of net profits separately. Any excess of price paid for the shares in the main net assets value of the subsidiary must be defined at their purchase (e.g. Goodwill) and, if necessary, should not be depreciated.
When the investor owns more than 50% of investments in circulation, he can exercise control over investee's activities; the consolidated financial statements of the affiliated groups usually provides information about them.
Investments into non-consolidated subsidiaries are reflected in the consolidated financial statements by a share participation method. Investments of the parent company into subsidiaries in non-consolidated financial statements are also shown by the share participation method.
The effective interest rate is applied to financial instruments, recognition of interest income while interest depreciation, accruing the interest income or expenditures for payments of interests during the current period.
The effective interest rate in the general example is calculated by formulas (1) and (2).
ЕСВ =
Annual int erest + Discount
(Investment _ cos t + Re payment _ value) / 2' Annual int erest - Pr emium
(1)
ЕСВ =
(Liabilities + Re payment _ value)/ 2
(2)
What concerns identification of the discount or premium depreciation, it is calculated by the formula (3):
A = Fixed _ rate _ revenues _ % - ECB x Depereciation _ cos t( for _ beginning _ of _ period)
(3)
*per UNSA 12 "FinancialInvestment"
IAS 39 "Financial Instruments: Recognition and Measurement' presents somewhat different approach to definition of this method. Its main principle is accurate discounting of future payments, which have been previously evaluated. When calculating the effective interest rate, the company should consider cash flows evaluation, but not taking into account future losses from loans and credits. However, as well as in UNSA, it states that the depreciation cost is calculated through this method.
The self-cost method with consideration of the reduced investment utility value. The reduction of investment utility value can be caused by a drop in its profitability. The reduction of investment utility value is a loss of economic benefits in excess of the carrying the investment value over the amount the company expects to receive during keeping of the investment.
Conclusions. The share of companies engaged in investment activities is growing every year. Investments by the related parties are one of the most important and challenging issues in accounting. The paper analyzes methods of financial investments estimation. Issues to elaborate and review the investment accounting methods both in International Accounting Standards and in National regulations (standards) were studied. Two methods of financial investment estimation were examined, which depend on the acquisition method: the initial financial investments estimation and financial investments estimation for the balance date.
Literature
1. International Accounting Standard 28 "Investments into Associated Companies" [Electronic resource]// The Ministry of Finance of Ukraine: [web-site]- Access: http://www.minfin.gov.ua
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