After studying this chapter, you should be able to do the following:

1. Describe the broad relationship between all the relevant standards from Part I of the CICA Handbook that make up the "big picture."
2. Distinguish between the various types of equity investments measured at fair value.
3. Prepare journal entries to account for investments under the cost and equity methods.
4. Evaluate relevant factors to determine whether an investor has significant influence over an investee.
5. State the main disclosure requirements related to an investment in associate.
6. Analyze and interpret financial statements involving investments in equity securities.
7. Identify some of the differences between IFRSs and ASPE for investments in equity securities.

Equity investments are investments in shares of another company.

There are two main categories of equity investments: strategic and nonstrategic. For strategic investments, the investor intends to establish or maintain a long-term operating relationship with the entity in which the investment is made and has some level of influence over the strategic decisions of the investee company. The level of influence varies between full control, joint control, or significant influence. For nonstrategic investments, the investor is hoping for a reasonable rate of return without having the ability to play an active role in the strategic decisions of the investee company.

As of January 1, 2013, there are five different types of share investments classified as either a strategic investment, or a nonstrategic investment. The following chart displays the reporting methods for investments in equity securities.

Type of Investment	Reporting Method	Reporting of Unrealized Gains
Significant influence	Equity method	Not applicable
Control	Full consolidation	Not applicable
Joint control	Equity method	Not applicable
Fair value through profit or loss (FVTPL)	Fair value method	In net income
Other: elect fair value through OCI (FVTOCI)	Fair value method	In other comprehensive income

IFRS 9 deals with two types of equity investments: fair value through profit or loss (FVTPL) and fair value through OCI (FVTOCI).

FVTPL investments include investments held for short-term trading. These investments are classified as current assets on the basis that they are actively traded and intended by management to be sold within one year. FVTPL investments are initially measured at fair value and subsequently measured at fair value at each reporting date. The unrealized gains and losses are reported in net income along with dividends received or receivable.

FVTOCI investments are equity investments that are not held for short-term trading and those for which management, on initial acquisition, irrevocably elects to report all unrealized gains and losses in OCI. These investments are classified as current or noncurrent assets, depending on how long company managers intend to hold on to these shares. They are initially measured at fair value and subsequently remeasured at fair value at each reporting date. The unrealized gains and losses are reported in OCI. Dividend income is reported in net income as the dividends are declared. The cumulative unrealized gains or losses are cleared out of accumulated OCI and transferred directly to retained earnings. The transfer to retained earnings would usually occur when the investment is sold or derecognized but could be transferred at any time.

When investments are not reported at fair value, they are usually reported using the cost method or the equity method.

The cost method of reporting an equity investment is used under IFRSs in certain circumstances. Under the cost method, the investment is initially recorded at cost. The investor’s share of the dividends declared is reported in net income. The investment is reported at original cost at each reporting date unless the investment becomes impaired. Impairment losses are reported in net income. When the investment is sold, the realized gains or losses are reported in net income. An amendment to IAS 27 in 2009 now requires that all dividends be recognized in net income regardless of whether or not they were liquidating dividends (as prior to this amendment, a liquidating dividend was considered a return of the owners’ original capital investment). The cost method is allowed under ASPE for equity investments that are not quoted in an active market.

An investment where the investor is able to significantly influence the operations of the investee is called an investment in associate and must be accounted for using the equity method, as described in IAS 28. This requires the investor to record its share of all increases in the shareholders’ equity of the investee, adjusted for the amortization of the acquisition differential and the holdback and realization of profits from the intercompany sale of assets.

An associate is an entity over which the investor has significant influence. The following conditions are possible indicators that significant influence is present and that the investee is an associate:

1. Representation on the board of directors or equivalent governing body of the investee;
2. Participation in policy-making processes, including participation in decisions about dividends or other distributions;
3. Material transactions between the investor and the investee;
4. Interchange of managerial personnel; or
5. Provision of essential technical information.

IAS 28 indicates that a guideline (not a rigid rule) in determining whether there is significant influence is 20% to 50% of voting shares.

When an investor has significant influence, the investment should be reported by the equity method. The basic concept behind the equity method is that the investor records its proportionate share of the associate’s income as its own income and reduces the investment account by its share of the associate’s dividends declared. Under the equity method, the investor’s investment account changes in direct relation to the changes taking place in the investee’s equity accounts. The equity method reflects the accrual method of income measurement. As the investee earns income, the investor accrues its share of this income. The associate is not obligated to pay out this income as a dividend on an annual basis.

Investments in associates shall be classified as noncurrent assets. The investor’s share of the profit or loss of such associates, and the carrying amount of these investments, must be separately disclosed. In addition, IFRS 12 Disclosure of Interests in Other Entities prescribes the main disclosures required for investments in associates.