07-13-2003, 11:07 PM
Hi Friend!
I think the answer to ur question is implied in IAS39. This standard is not different from U.S. GAAP. These things r better explained through examples
Assumed we acquired a financial asset in year 01 and classified it as available for sale. Initial recording will be on cost plus transaction expenses i.e basic cost of 100 and transactions cost of 2.
In year 02 we record it at FMV which has gone up to 112, this will give us two choices i.e.
1. Either report 10 as current year's unrealized gain in income statement or show dollars 10 as part of equity. In either case we are carrying the asset at 112 and not at 102 its original cost.
Assuming we sell 50% of financial asset in year 03 at 56, then we have to take 50% of 112 as costs of assets disposed i.e. 56 and recognize no gain loss on that portion, becuase sale price is equal cost. The other half is treated same as previous year and should be mark to market. Besides we have to bring half of cummulative gains from equity into income statement that were related to disposed portion. The question of LIFO or FIFO does not arise here? It is carrying cost at last Balane Sheet date which is relevant.
Now to second part of ur question. Dividends received in the investee corporation's stocks are not included in income of the recepient. Since each shareholder retains the same proportionate interest in the firm, but owns a larger number of shares than before. The question is did the issuing corporation distributed any assets? the answer is no. It has merely transfered a portion of retained earnings to capital stock.
Therefore, the recepient does not recognize any income for following reasons
1. their interest in issuing corporation is unchanged.
2. the issuing corporation has not distributed any of its assets to
them.
However, a memorandum entry should be made and costs of existing shares will be adjusted on their eventual disposition.
Again, FMV does not come into picture here.
Thnks
Edited by - Pervez on Jul 13 2003 64911 PM
Edited by - Pervez on Jul 13 2003 65440 PM
Edited by - Pervez on Jul 13 2003 65634 PM
Edited by - Pervez on Jul 13 2003 70859 PM
Edited by - Pervez on Jul 13 2003 70943 PM
I think the answer to ur question is implied in IAS39. This standard is not different from U.S. GAAP. These things r better explained through examples
Assumed we acquired a financial asset in year 01 and classified it as available for sale. Initial recording will be on cost plus transaction expenses i.e basic cost of 100 and transactions cost of 2.
In year 02 we record it at FMV which has gone up to 112, this will give us two choices i.e.
1. Either report 10 as current year's unrealized gain in income statement or show dollars 10 as part of equity. In either case we are carrying the asset at 112 and not at 102 its original cost.
Assuming we sell 50% of financial asset in year 03 at 56, then we have to take 50% of 112 as costs of assets disposed i.e. 56 and recognize no gain loss on that portion, becuase sale price is equal cost. The other half is treated same as previous year and should be mark to market. Besides we have to bring half of cummulative gains from equity into income statement that were related to disposed portion. The question of LIFO or FIFO does not arise here? It is carrying cost at last Balane Sheet date which is relevant.
Now to second part of ur question. Dividends received in the investee corporation's stocks are not included in income of the recepient. Since each shareholder retains the same proportionate interest in the firm, but owns a larger number of shares than before. The question is did the issuing corporation distributed any assets? the answer is no. It has merely transfered a portion of retained earnings to capital stock.
Therefore, the recepient does not recognize any income for following reasons
1. their interest in issuing corporation is unchanged.
2. the issuing corporation has not distributed any of its assets to
them.
However, a memorandum entry should be made and costs of existing shares will be adjusted on their eventual disposition.
Again, FMV does not come into picture here.
Thnks
Edited by - Pervez on Jul 13 2003 64911 PM
Edited by - Pervez on Jul 13 2003 65440 PM
Edited by - Pervez on Jul 13 2003 65634 PM
Edited by - Pervez on Jul 13 2003 70859 PM
Edited by - Pervez on Jul 13 2003 70943 PM
