Investment Company Limited (ICL) is a private company owned by 10 doctors. The company's objective is to manage the doctors' investment portfolios. It actually began as an invesm1ent club 10 years ago. At that time, each doctor invested equal amounts of cash and the group met every other week to determine where the money should be invested. Eventually, they decided to incorporate the company and each doctor now owns one tenth of the voting shares. The company employs two managers who look after the business full-time and make the invesm1ent decisions with input from the owners. Earnings per year after taxes now average $l.5 million. During the year, the following transactions took place:
Investment A (IA): Purchased common shares of IA for $1 million. IA allows researchers to use expensive Jab equipment (which is owned by the company) on a pay-per-use basis. These shares represent 15% of the total outstanding common shares of the company. Because of its percentage ownership, ICL is allowed to appoint one member of IA's board of directors. There are three members on the board. One of the ICL owners has also been hired as a consultant to the company to advise on equipment acquisitions. The company is unsure of how long it will keep the shares. At least two of tile company owners are interested in holding on to the investments for the longer term as they use the services of lA. The fair value of tile shares of IA is determined annually by a valuations expert.
Investment B (IB): Purchased preferred shares of IB representing 25% of the total outstanding shares. The shares will likely be resold within two months, although no decision has yet been made. The fair value of this investment is known. Investment C (IC): Purchased 25% interest in voting common shares ofiC for $1 million two years ago. The current carrying amount is $950,000 since tile company has been in the drug development stage. IC develops drug delivery technology. In the past week, a major drug on which the company has spent large amounts (approximately $10 million) for research and development was declined by me Food and Drug Administration for sale in tile United States. Most of the $10 million had previously been capitalized in the financial statements of IC. This is a significant blow to IC as it had been projecting that 50% of its future revenues would come from this drug. IC does not produce financial statements until two months after ICI’s year end.
Although the investments have been mainly in private companies so far, the doctors are thinking of revising their investment strategy and investing in more public companies. They feel that the stock market is poised for recovery, and are therefore planning to borrow some funds for investment. The accountant is currently reviewing the above transactions in preparation for a meeting with the bank. The company has never prepared GAAP statements before but is considering doing so. The company has not made a decision as to which GAAP to follow (IFRS or ASPE). They are not planning to early adopt IFRS 9.
Instructions
Adopt the role of the company's accountant and analyze the financial reporting issues.