PSAB Matters Article – Valuing Portfolio Investments

Public sector entities invest for various purposes, such as:

  • to promote economic or regional development;
  • to assist an organization in financial difficulties; or
  • to obtain a return on investment.

As a result, their portfolio may include investments that:

  • have significant concessionary terms;
  • have experienced a decline in value that is not temporary; or
  • are held by sinking funds.

Section PS 3041, Portfolio Investments, establishes standards on how to account for and report portfolio investments in the financial statements of public sector entities.

What Are Portfolio Investments?

Portfolio investments normally include debt or equity instruments issued by others. (Investments in other entities that are eliminated on consolidation, in government business enterprises, or loans receivable are not considered portfolio investments.)

How to Account for Portfolio Investments

Portfolio investments are generally accounted for at amortized cost unless it is an equity item or has significant concessionary terms.

Investments in equity instruments quoted in an active market are measured at their market value in accordance with Section PS 3450, Financial Instruments. Increases or decreases in the market value are reported as remeasurement gains and losses until realized. An entity would only recognize revenue from equity instruments to the extent received or receivable. Dividends received in excess of an entity’s pro rata share of post-acquisition income are accounted for as a reduction of the cost of the investment.

The terms associated with a portfolio investment are considered concessionary when the entity expects to make little or no return on its investment and/or does not expect the return of all of its capital in the future. When an entity makes an investment with concessionary terms, all or part of the investment is in the nature of a grant. The grant portion is recognized in accordance with Section PS 3410, Government Transfers, when the investment is made.

If an entity expects little or no return on its investment, and/or expects the return of all or part of its capital, it needs to determine the grant portion of the investment upon its purchase. The grant portion, which is considered an investment discount, is the difference between the cost of the investment and the present value of the expected future cash flows discounted at the entity’s average borrowing rate.

How to Account for Gains and Losses on Sale

A gain or loss on the sale of an investment is included in the statement of operations in the period of sale. For the purpose of calculating the gain or loss, the cost of the investment sold should be the average carrying value of the portfolio investment measured at cost or amortized cost. There is no need to track the cost of specific investments. Gains or losses on individual sales are considered to be part of the ultimate gain or loss on the entire holding of each portfolio investment.

How to Account for a Loss in Value

When there is a loss in value that is other than temporary, an entity should write down the investment recognizing the loss in the statement of operations. The adjusted value is deemed to be the new cost of the investment. The write-down cannot be reversed. Any subsequent increase in value is recognized in the statement of operations when realized.

If the investment is in the fair value category in accordance with Section PS 3450, a reversal of any net remeasurement gain or loss should be reported in the statement of remeasurement gains and losses and the loss recognized in the statement of operations.

A decline in quoted market value below cost or amortized cost of an investment with a fixed maturity amount may be considered temporary unless it is anticipated that the investment will be disposed of before it matures or that the cost or amortized cost may not be realizable.

A loss in value of a portfolio investment that is other than a temporary decline is obvious in some cases (for example, when the investee goes bankrupt or when there is an agreement to sell an investment at an amount which will result in a loss). In less obvious situations, an impairment of an investment may be indicated by conditions such as:

  • the quoted market value of the investment is less than its cost or amortized cost for a prolonged period;
  • severe losses were experienced by the investee in the current year or in the current and prior years;
  • the investee experienced continued losses for a number of years;
  • the investee has liquidity or going concern problems; and
  • the fair value of the investment (for example, an appraised value) is less than its cost or amortized cost.

When a condition like any of these has persisted for a period of three or four years, there is a general presumption that there has been a loss in value that is other than a temporary decline. This presumption can only be rebutted by persuasive evidence to the contrary.

Dividends or interest earned should cease to be accrued when the collectibility of the investment income is not reasonably assured. Any dividends or interest previously accrued but not received, to the extent that their collection is doubtful, are provided for through a valuation allowance or written off in the financial statements.

How to Report Portfolio Investments

Investments should be reported separately on the statement of financial position. Income from investments should be reported separately on the statement of operations. Investments in equity instruments quoted in an active market are presented separately on the statement of remeasurement gains and losses in accordance with Section PS 3450.

Portfolio investments held in externally restricted sinking funds are presented in accordance with Section PS 3230, Long-term Debt.

What Information Is Disclosed

An entity should disclose:

  • the basis of valuation of its portfolio investments; and
  • the quoted market value and the carrying value of portfolio investments that are marketable securities.

An entity may also consider disclosing information about:

  • designated assets in accordance with Section PS 3100, Restricted Assets and Revenues;
  • investments in equity instruments in accordance with Section PS 3450; and
  • investments held by externally restricted sinking funds in accordance with Section PS 3230.

Contact:

Lydia So, CPA, CA
Principal, Public Sector Accounting Board
Phone: +1 (416) 204-3281
Email: lso@cpacanada.ca