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The global body for professional accountants
The global body for professional accountants
Investments - Alternative accounting Options for Managing a substantial Balance Sheet Item
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Accounting for Investments
A credit union may invest any of its funds:•in securities in which trustees are authorised by law to invest•shares deposits or loans to another credit union•shares of Industrial and Provident Societies•other investments as may be prescribed by the central Bank•Other funds on current account with a credit institution
•Other non-permitted investments to be disposed of within 2 years
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Accounting for Investments
Investment prescribed by Central Bank:•Irish and EMU State Securities•Accounts in Authorised Credit Institutions (Irish and Non-Irish based).•Bank Bonds•Investment in Equities•Collective Investment Schemes
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Realised profits
“…only surpluses realised at the balance sheet date shall be included in the income and expenditure account…”
“all income and charges … shall be taken into account without regard to the date of receipt of payment..”
The Credit Union Act
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Realised profits
Realised means received in:1.Cash2.An asset that is readily convertible to cash (traded in an active market)3.accrual of investment income in 2
The Guidance
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Realised profits – Practical examples
• Short term deposits – all realised• Long term deposits – encashment value – realised• Long term deposits – nominal value - unrealised• Government bonds - realised (active market)• Bank bonds - active market - realised • Bank bonds – in-active market - not realised • Bank bonds – encashment value – realised• Equities – realised • Collective Investment Schemes - encashment value –
realised• Collective Investment Schemes - nominal value – not
realised
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Spanish Government Bonds – Extract from investor analysis
“At a current price of c. 100.45, the bond yields c. 2.95% and matures in January 2016. As a comparison, three year Irish Government bonds yield c. 2.10% �and a three year deposit with AIB will pay c. 2.05%. This bond pays a coupon of 3.15% annually which can be �distributed. This will diversify counterparty exposure to sovereign risk and reduce the pressure on domestic bank counterparty exposures Over the life of the investment investing in this Spanish Government bond will generate additional income versus a similar 3 year deposit with AIB yielding 2.05% of c. €13.6k”
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Accounting for Investments 1/5
Irish and EMU State Securities - criteria•Maturity not more than 10 years•30% max in 7+ year bonds•Not more than 70% of CU portfolio
Fair value•Yield = profit•Capital gains and losses booked
Held to maturity•Yield = profit
Capital gains and losses ignoredCheck for impairment
Amortised Cost •Yield = profit•Capital gains and losses booked
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Accounting for Investments
Irish and EMU State Securities - amortised accounting cost model
Issued €0.95 Redeemed €1
Yield = coupon + (1-0.95)/6 periods
The global body for professional accountants
Accounting for Investments
Irish and EMU State Securities - amortised accounting cost model
Credit downgrade Redeemed €1
Held to maturity: ignore downgrade (but consider impairment)Cost and fair value: book downgrade – increased yield in future years
Issued €0.95
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Accounting for Investments
Irish and EMU State Securities - purchase at a premium•Nominal value €1.0m•Coupon 5.5%•Yield 2.556% (monthly yield)•Cost to purchase (@111.6) €1,111,600•Redeemed in 2017 for €1m
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Accounting for Investments
Irish and EMU State Securities - purchase at a premium•Nominal €1.0m, Coupon 5.5%, Yield 3.8% (simple)•Cost €1,111,600 Redeemed in 2017 for €1m
*2 month to coupon date
Opening Yield Coupon Closing year
1111 7.0* 55 1063 2013
1063 40.4 55 1048 2014
1048 39.8 55 1033 2015
1033 39.3 55 1018 2016
1018 38.7 55 1000 2017
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Accounting for Investments
Irish and EMU State Securities
Credit downgrade
Redeemed €1
Held to maturity: ignore downgrade (but consider impairment)Cost and fair value: book downgrade – increased yield in future years
Issued €1.11
2013
2014
2015
2016
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Accounting for Investments 2/5
Irish and EMU State Securities - purchase at a premiumLets be really clear•Purchase a €1m bond for €1.1m•Investment is €1.1m (not €1m)•There is not an expenses of €100k•Coupon is a cash flow number and irrelevant to the income statement •Yield (to maturity) is the key number
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Spanish Government Bonds – Extract from investor analysis
“At a current price of c. 100.45, the bond yields c. 2.95% and matures in January 2016. As a comparison, three year Irish Government bonds yield c. 2.10% �and a three year deposit with AIB will pay c. 2.05%. This bond pays a � coupon of 3.15% annually which can be distributed. This will diversify counterparty exposure to sovereign risk and reduce the pressure on domestic bank counterparty exposures Over the life of the investment investing in this Spanish Government bond will generate additional income versus a similar 3 year deposit with AIB yielding 2.05% of c. €13.6k”
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Accounting for Investments 2/5
Accounts in Authorised Credit Institutions •Maturity not more than 10 years•50% max in 5+ year deposits•20% max in 7+ year deposits•Credit rating of A•Not more than 25% of CU portfolio
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Accounting for Investments
Accounts in Authorised Credit Institutions
Cost and fair value - short term •Interest is income
Held to maturity•Interest is income Early encashment penalty is non distributableCheck for impairment
Cost - long term deposits•Interest less encashment penalty as income
Fair value - long term deposits•Interest = income + gains and losses due to credit risk changes
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Accounting for Investments 3/5
Bank Bonds•Traded on a regulated market•Maturity not more than 10 years•30% max in 7+ year deposits•Credit rating of A (institute not bond)•Not more than 70% of CU portfolio
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Accounting for Investments
Bank bonds – active market
Amortised Cost + Fair value•Book yield as profit•Capital gains and losses booked
Held to maturity•Book yield as profit
Capital gains and losses ignoredCheck for impairment
Must have an “active market” for gains to be realised
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Accounting for Investments
Bank bonds – inactive market
Amortised Cost•Encashment value in excess of cost = income
Held to maturity•Book yield as profit•Encashment value in excess of cost = realised income, balance = unrealised•Check for impairment
Fair value•Yield + capital gains and losses = income•Only encashment excess is distributable Possi
bly Illegal
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Accounting for Investments 4/5
Investment in equities•Euro denominated, traded on regulated EU market •Market capitalisation of €.5bln•Not more than 5% of CU portfolio (total)•Not more than 1% of CU portfolio (any one share)
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Accounting for Investments 4/5
Investment in equities
Held to maturity n/a
Cost and fair valueDividend and gains + losses as profit (gains not distributable)
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Accounting for Investments 5/5
Collective Investment Schemes•No property schemes•Financial Regulator Authorised schemes only•Underlying investments meet requirements in 1-4
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Accounting for Investments 5/5
Collective Investment Schemes
Amortised Cost•Encashment value in excess of cost = income
Held to maturity•Book yield as profit•Encashment value in excess of cost = realised income, balance = unrealised•Check for impairment
Fair value•Yield + capital gains and losses = income•Only encashment excess is distributable Possi
bly Illegal
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Investments - key questions
•Is it on the list of authorised investments for credit unions•Is there a deep and liquid market for the product•Credit rating of the issuer•Credit rating of the bond•Will this product be accounted for as a simple financial instrument under Chapter 11 of FRS 102•Or Will this product be accounted for as an other financial instrument under Chapter 12 of FRS 102
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Investments - myths debunked
•Spanish Government bonds are allowed• (2.9% yield but be careful of volatility and default)
•Junk/subordinated bonds from an A credit rated bank are allowed
• (10% yield but good chance of default)• When referring to investment products, the word “guaranteed” is an single word oxymoron
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