8.2.1: Fair Value Through Net Income (FVNI)

Last updated
Save as PDF

Page ID: 100467

$ \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $

$ \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} $

$ \newcommand{\dsum}{\displaystyle\sum\limits} $

$ \newcommand{\dint}{\displaystyle\int\limits} $

$ \newcommand{\dlim}{\displaystyle\lim\limits} $

$ \newcommand{\id}{\mathrm{id}}$ $ \newcommand{\Span}{\mathrm{span}}$

( \newcommand{\kernel}{\mathrm{null}\,}\) $ \newcommand{\range}{\mathrm{range}\,}$

$ \newcommand{\RealPart}{\mathrm{Re}}$ $ \newcommand{\ImaginaryPart}{\mathrm{Im}}$

$ \newcommand{\Argument}{\mathrm{Arg}}$ $ \newcommand{\norm}[1]{\| #1 \|}$

$ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$

$ \newcommand{\Span}{\mathrm{span}}$

$ \newcommand{\id}{\mathrm{id}}$

$ \newcommand{\Span}{\mathrm{span}}$

$ \newcommand{\kernel}{\mathrm{null}\,}$

$ \newcommand{\range}{\mathrm{range}\,}$

$ \newcommand{\RealPart}{\mathrm{Re}}$

$ \newcommand{\ImaginaryPart}{\mathrm{Im}}$

$ \newcommand{\Argument}{\mathrm{Arg}}$

$ \newcommand{\norm}[1]{\| #1 \|}$

$ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$

$ \newcommand{\Span}{\mathrm{span}}$ $ \newcommand{\AA}{\unicode[.8,0]{x212B}}$

$ \newcommand{\vectorA}[1]{\vec{#1}} % arrow$

$ \newcommand{\vectorAt}[1]{\vec{\text{#1}}} % arrow$

$ \newcommand{\vectorB}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $

$ \newcommand{\vectorC}[1]{\textbf{#1}} $

$ \newcommand{\vectorD}[1]{\overrightarrow{#1}} $

$ \newcommand{\vectorDt}[1]{\overrightarrow{\text{#1}}} $

$ \newcommand{\vectE}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash{\mathbf {#1}}}} $

$ \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $

$\newcommand{\longvect}{\overrightarrow}$

$ \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} $

$\newcommand{\avec}{\mathbf a}$ $\newcommand{\bvec}{\mathbf b}$ $\newcommand{\cvec}{\mathbf c}$ $\newcommand{\dvec}{\mathbf d}$ $\newcommand{\dtil}{\widetilde{\mathbf d}}$ $\newcommand{\evec}{\mathbf e}$ $\newcommand{\fvec}{\mathbf f}$ $\newcommand{\nvec}{\mathbf n}$ $\newcommand{\pvec}{\mathbf p}$ $\newcommand{\qvec}{\mathbf q}$ $\newcommand{\svec}{\mathbf s}$ $\newcommand{\tvec}{\mathbf t}$ $\newcommand{\uvec}{\mathbf u}$ $\newcommand{\vvec}{\mathbf v}$ $\newcommand{\wvec}{\mathbf w}$ $\newcommand{\xvec}{\mathbf x}$ $\newcommand{\yvec}{\mathbf y}$ $\newcommand{\zvec}{\mathbf z}$ $\newcommand{\rvec}{\mathbf r}$ $\newcommand{\mvec}{\mathbf m}$ $\newcommand{\zerovec}{\mathbf 0}$ $\newcommand{\onevec}{\mathbf 1}$ $\newcommand{\real}{\mathbb R}$ $\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}$ $\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}$ $\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}$ $\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}$ $\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}$ $\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}$ $\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}$ $\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}$ $\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}$ $\newcommand{\laspan}[1]{\text{Span}\{#1\}}$ $\newcommand{\bcal}{\cal B}$ $\newcommand{\ccal}{\cal C}$ $\newcommand{\scal}{\cal S}$ $\newcommand{\wcal}{\cal W}$ $\newcommand{\ecal}{\cal E}$ $\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}$ $\newcommand{\gray}[1]{\color{gray}{#1}}$ $\newcommand{\lgray}[1]{\color{lightgray}{#1}}$ $\newcommand{\rank}{\operatorname{rank}}$ $\newcommand{\row}{\text{Row}}$ $\newcommand{\col}{\text{Col}}$ $\renewcommand{\row}{\text{Row}}$ $\newcommand{\nul}{\text{Nul}}$ $\newcommand{\var}{\text{Var}}$ $\newcommand{\corr}{\text{corr}}$ $\newcommand{\len}[1]{\left|#1\right|}$ $\newcommand{\bbar}{\overline{\bvec}}$ $\newcommand{\bhat}{\widehat{\bvec}}$ $\newcommand{\bperp}{\bvec^\perp}$ $\newcommand{\xhat}{\widehat{\xvec}}$ $\newcommand{\vhat}{\widehat{\vvec}}$ $\newcommand{\uhat}{\widehat{\uvec}}$ $\newcommand{\what}{\widehat{\wvec}}$ $\newcommand{\Sighat}{\widehat{\Sigma}}$ $\newcommand{\lt}{<}$ $\newcommand{\gt}{>}$ $\newcommand{\amp}{&}$ $\definecolor{fillinmathshade}{gray}{0.9}$

Types of Investments	Accounting Treatment
Debt (bonds)	Interest and dividends through net income as earned/declared.
Equities2 (shares)	Remeasure investment to fair value at each reporting date or upon sale, with gains/losses through net income. Can be recorded directly to investment or through an asset valuation account.

Investments in debt and equity, including derivatives, are reported at their fair value at each balance sheet date with fair value changes reported in net income. Transactions costs are expensed as incurred. Any gain (loss) upon sale of the investment is reported in net income. FVNI investments are reported as a current asset if they meet the conditions of a current asset, such as; a cash equivalent, are held for trading purposes, or are expected to mature or be sold within 12 months of the balance sheet/SFP reporting date or the normal operating cycle. Otherwise, they are a long-term asset.

Market (fair) values can go up or down while FVNI investments are being held. These increases and decreases are referred to as unrealized gains and losses and are reported in net income. Once a sale occurs, the investment can either be remeasured to its fair value as an unrealized gain/loss followed by the receipt of cash, or the gain or loss will be recorded as realized and reported through net income as a gain (loss) from the sale of the investment. Either treatment is acceptable for FVNI classification, because the unrealized and realized gains/losses are reported the same way in the income statement. For this reason, treatment as either an unrealized or realized gain/loss upon sales can become blurred.

In order to preserve the original cost of the investment, companies may choose to use an asset valuation allowance account instead of directly changing the asset carrying value. This is an option for any of the FVNI, FVOCI, and AC classification discussed in this chapter and will be illustrated in more detail below.

Impairment

Investments are reported at fair value at each reporting date, so no separate impairment evaluations and entries are required.

FVNI Investments in Shares

The accounting for FVNI equity investments such as shares is usually more straight-forward compared to debt investments such as bonds.

Assume that the following equity transactions occurred for Lornelund Ltd. in 2020:

Lornelund Ltd. – Non-Strategic Equity Investments
Dates		# of	Price per	Total
in 2020	Transaction Detail	Shares	Share	Amount
June 1	Purchased Symec Org. shares for $150 per share (transaction costs were an additional $1.25 per share)	1,000	$150.00	$150,000
Aug 15	Purchased Hemiota Ltd. shares	2,500	84.00	210,000
Nov 30	Dividends for Symec declared and received	1,000	6.10	6,100
Dec 31	Market price for Symec shares at year-end		165.00
Dec 31	Market price for Hemiota shares at year-end		82.00
Dates
in 2021
Jan 10	Sold Symec shares	500	165.70	82,850

The journal entries for the FVNI investments are recorded below:

Note that the transaction fees are expensed for FVNI investments. This makes intuitive sense since the shares are being purchased at their fair market value and this represents the maximum amount that can be reported on the investor company's balance sheet. At December 31 year-end, Lornelund makes two adjusting entries to record the latest fair values changes for each FVNI investment. The fair value for Symec shares increased from $150 to $165 per share, resulting in an overall increase in the investment value by $15,000 (from $150,000 to $165,000). Conversely, the fair value for Hemiota shares decreased from $84 to $82 per share, resulting in a decrease in the investment value of $5,000 (from $210,000 to $205,000). In both cases, the gains and losses will be reported in the income statement as unrealized gains (losses) on FVNI investments. The FVNI investment account would appear in the balance sheet as shown below.

Lornelund Ltd.
Balance Sheet
December 31, 2020

Current assets:
FVNI investments (at fair value) *	$	370,000

*())

As previously mentioned, instead of recording the changes in fair value directly to the FVNI investment account as shown above, companies will often record the changes to a valuation allowance as a contra account to the FVNI investment account (asset). This separates and preserves the original cost information from the fair value changes in much the same way as the accumulated depreciation account for buildings or equipment. If a valuation allowance contra account was used, the balance sheet would appear as follows:

Lornelund Ltd.
Balance Sheet
December 31, 2020

Current assets:
FVNI investments (at cost)*	$	360,000
Valuation allowance for fair value adjustments**	$	10,000
	$	370,000

* ()

**()

On January 10, 2021, the Symec shares were sold at $165.70 per share. As previously explained, the shares can be remeasured to fair value prior to recording the sales proceeds, or the entry can skip that step and record the sales proceeds with the gain/loss as realized from sale of the investment. The entry above chose the latter, simpler alternative.

A video is available on the Lyryx web site. Click Here to view the video.

FVNI Investments in Debt

FVNI investments can also be bonds, if market fair values are determinable. On January 1, 2020, Osterline Ltd. purchases 7%, 5-year bonds of Waterland Inc. with a face value of $500,000. Interest is payable on July 1 and January 1. The market rate for a bond with similar characteristics and risks is 6%. The bond sells for $521,326.3

On December 31, the fair value of the bonds at year-end is $510,000. Osterline follows IFRS. The interest is calculated using the effective interest method as shown below.

The bond was initially valued and recorded at its purchase price (fair value) of $521,326. Note that this is higher than the face value of $500,000. This is referred to as purchasing at a premium, which is amortized to the FVNI investment account over the life of the bond using the effective interest method. This method was also discussed in Chapter 6: Cash and Receivables; review that material again, if necessary. There were no transaction costs, but these would have been expensed as incurred just as was done in the previous FVNI shares example.

The July 1, 2020, entry was for interest income based on the market rate (or yield) for 3% (6% annually for six months), while the cash paid by Waterland on that date of $17,500 was based on the stated or face rate for 3.5% (7% annually for six months). The $1,860 difference was the amount of premium to be amortized to the FVNI investment account on that date. On Dec 31, there were two adjusting entries:

The first entry was for the interest income that has accrued since the last interest payment on July 1. This interest entry must be done before the fair value adjustment to ensure that the carrying value is up to date.
The second adjusting entry is for the fair value adjustment which is the difference between the investment's carrying value of $517,550 ($\$ 521,326-1,860-1,916$) and the fair value on that date of $510,000. Since the fair value is less than the carrying value, this FVNI investment (or a valuation allowance) is reduced to its fair value by $7,550 ($\$ 517,550-510,000)$). The investment carrying amount after the adjustment is now equal to the fair value of $510,000.

It is important to note that the July 1, 2021, interest income of $15,527 calculated after the fair value adjustment had been recorded continues to be based on the amounts calculated in the original effective interest schedule. The interest rate calculations will continue to use the original effective interest rate schedule amounts throughout the bond's life, without any consideration for the changes in fair value.

On July 1, 2021, just after receiving the interest, Osterline sells the bonds at the market rate of 107. The entry for the sale of the bonds on July 1, 2021 is shown below.

Recall from the journal entries above that on December 31, 2020, the investment had been reduced to its fair value of $510,000. On July 1, 2021, the interest entry included amortization of the premium for $1,973, resulting in a carrying value as at July 1, 2021 of $508,027. The market price for selling the investment was 107 resulting in a gain of $26,973. Note that this entry skipped the remeasure to fair value as an unrealized holding gain and recorded the sale entry as simply a gain on sale. Either method is acceptable.

ASPE companies can choose to use straight-line amortization of the bond premium instead of the effective interest method. If straight-line was used, the amount recorded to the investment account would be $2,133 ($(\$ 21,326 \div 5$ years $\times 6 \div 12)$) at each interest date until the investment is sold.

Again, note that no separate impairment evaluations or entries are recorded since the debt investment is already adjusted to its current fair value at each reporting date.

A video is available on the Lyryx web site. Click Here to view the video.

Investments in Foreign Currencies

Investments may be priced in foreign currencies, which must be converted into Canadian currency for recording and reporting purposes. Illustrated below are the accounting entries for a FVNI investment priced in a foreign currency.

FVNI investments purchased in foreign currencies are converted into Canadian currency using the exchange rates at the time of the purchase. Also, depending on the accounting standard and the circumstances of the investment, the fair value adjusting entry may have to separately record the foreign exchange gain (loss) from the fair value adjustment amount.

For example, assume that the US dollar is worth $1.03 Canadian at the time of an investment purchase for US $50,000 bonds at par. In Canadian dollars, the amount would be $51,500. The entry to record the purchase would be:

At year-end, the fair value of the bonds is US $49,000 and the exchange rate at that time is 1.05. In Canadian dollars the amount would be $51,450 (US $\$ 49,000 \times 1.05$) compared to the original purchase price in Canadian dollars of $51,500, an overall net loss of $50.

The entry to record the fair value adjustment separately from the exchange gain/loss would be:

Note that the exchange rate increased from 1.03 to 1.05 for the US $50,000 investment amount. This increase in the exchange rate resulted in a gain of Cdn $1,000 which was recorded separately from the fair value adjustment loss of Cdn $1,050.

If there was no requirement to separate the exchange gain from the fair value adjusting entry, the adjusting entry would be:

Search

Text Color

Text Size

Margin Size

Font Type