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Unformatted text preview: 1 The IASB indicates that the business model should be considered first. And, that the contractual cash flow characteristics should be considered only for financial assets (e.g., debt investments) that are eligible to be measured at amortized cost. It states that both classification conditions are essential to ensure that amortized cost provides useful information about debt investments.  C H A P T E R 17 INVESTMENTS This IFRS Supplement provides expanded discussions of accounting guidance under International Financial Reporting Standards (IFRS) for the topics in Intermediate Accounting. The discussions are organized according to the chapters in Intermediate Accounting (13 th or 14 th Editions) and therefore can be used to supplement the U.S. GAAP requirements as presented in the textbook. Assignment material is provided for each sup- plement chapter, which can be used to assess and reinforce student understanding of IFRS. ACCOUNTING FOR FINANCIAL ASSETS A financial asset is cash, an equity investment of another company (e.g., ordinary or preference shares), or a contractual right to receive cash from another party (e.g., loans, receivables, and bonds).  The accounting for cash is relatively straightforward and is discussed in Chapter 7. The accounting and reporting for equity and debt invest- ments, as discussed in the opening story, is extremely contentious, particularly in light of the credit crisis in the latter part of 2008. Some users of financial statements support a single measurementfair valuefor all financial assets. They view fair value as more relevant than other measurements in helping investors assess the effect of current economic events on the future cash flows of the asset. In addition, they believe that the use of a single method promotes consis- tency in valuation and reporting on the financial asset, thereby improving the useful- ness of the financial statements. Others disagree. They note that many investments are not held for sale but rather for the income they will generate over the life of the invest- ment. They believe cost-based information (referred to as amortized cost) provides the most relevant information for predicting future cash flows in these cases. Others ex- press concern that using fair value information to measure financial assets is unreliable when markets for the investments are not functioning in an ordinary fashion. After much discussion, the IASB decided that reporting all financial assets at fair value is not the most appropriate approach for providing relevant information to fi- nancial statement users. The IASB noted that both fair value and a cost-based approach can provide useful information to financial statement readers for particular types of fi- nancial assets in certain circumstances. As a result, the IASB requires that companies classify financial assets into two measurement categories amortized cost and fair value depending on the circumstances....
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- Spring '11