What Is an Initial Investment?

The initial investment cost refers to the entire price actually paid when the investment is obtained, including taxes, fees and other related expenses

Initial investment cost

The initial investment cost refers to the total price paid when the investment is obtained, including

The initial investment cost of long-term equity investment is recognized in the following situations:

(1) Long-term equity investment purchased in cash shall be the initial investment cost based on the actual paid purchase price and paid taxes, fees and other direct related expenses, excluding the evaluation, audit, and consulting costs incurred to obtain the investment It also does not include cash dividends or profits that have been declared but not yet received in the price paid. This part can only be treated as a receivable item.

(2) The long-term equity investment obtained by issuing equity securities shall be based on the fair value of the equity securities issued as the initial investment cost.

(3) The long-term equity investment invested by an investor refers to the long-term equity investment formed by an investor who uses its investment in a third party as an investment in an enterprise. The initial investment cost shall be the value agreed in the investment contract or agreement, except that the value agreed in the contract or agreement is not fair.

(4) If the long-term equity investment obtained through debt restructuring is about to convert debt into capital, the initial investment cost of its creditors shall be recognized as an investment in the debtor based on the fair value of the shares and related taxes and fees, and the book balance of the restructuring credits and the creditors The difference between the initial investment costs shall be included in the current profit and loss. Where the creditor has made provision for impairment of the creditor's right, it shall first write down the difference to the provision for impairment. The portion of the impairment provision that is not sufficient to offset shall be included in the current profit and loss. If there is still a balance of impairment reserve after offsetting, it shall be reversed and offset the current asset impairment loss. Debt restructuring is carried out by a combination of debt settlement in cash, debt settlement with non-cash assets, debt conversion to capital, modification of other debt conditions, etc. The creditor shall in turn use the cash received, the fair value of the accepted non-cash assets, and the creditor's enjoyment of shares. The fair value and the fair value of the creditor's rights after the modification of other debt conditions are offset against the book balance of the reorganized creditor's rights, the difference between them shall be handled in the same way as the above. Where there is a contingent receivable in the revised debt clause, the creditor should not confirm it.

(5) The initial investment cost of a long-term equity investment obtained through non-monetary asset exchange shall be determined as follows.

1. If the non-monetary asset exchange is of commercial substance, and the fair value of the asset being swapped in or out can be reliably measured, the fair value of the asset being swapped out and the relevant taxes and fees payable shall be used as the swap The initial cost of the long-term equity investment, regardless of whether the premium occurs or not, the difference between the fair value of the swapped out asset and the book value is included in the current profit and loss. When the premium occurs in the above circumstances, the initial cost of the party paying the premium for the long-term equity investment is equal to the sum of the fair value of the asset being exchanged, the relevant taxes and fees payable, and the premium paid; the party receiving the premium is the replacement The sum of the fair value of the issued assets and the relevant taxes and fees payable after deducting the premium received is included in the initial cost. But there is conclusive evidence that the fair value of the asset being swapped in is more reliable than the asset being swapped out. Regardless of whether there is a premium, the initial cost of the long-term equity investment is based on the sum of the fair value of the asset transferred and the relevant taxes and fees payable. to make sure.

2. If it is a non-monetary asset exchange that does not meet the conditions specified in point 1 at the same time, the book value of the swapped out assets and the relevant taxes and fees payable shall be used as the initial cost of the long-term equity investment, and no profit or loss shall be recognized. If the premium occurs in the above circumstances, the party paying the premium shall use the book value of the asset being swapped out, plus the premium paid and the relevant taxes payable as the initial cost of the long-term equity investment. No profit or loss shall be recognized. . The party receiving the premium shall use the book value of the swapped-out assets minus the premium received and add the relevant taxes and fees payable as the initial cost of the long-term equity investment. No profit or loss shall be recognized.

The difficulty in confirming the initial cost of such long-term equity investment is how to define whether the non-monetary asset exchange has commercial substance. The author believes that enterprises should follow the requirements of substance over form to judge. If the future cash flow of the asset being exchanged is significantly different from the asset being exchanged in terms of risk, time and amount, or the present value of the estimated future cash flow of the asset being exchanged and the asset being exchanged is different, and the difference is different from the asset being exchanged in and out A non-monetary asset exchange that is significant in comparison to its fair value can be considered to have commercial substance. In addition, when determining whether non-monetary asset exchange has commercial substance, it should also pay attention to whether there is a related party relationship between the parties to the transaction. The existence of related party relationships may cause non-monetary asset exchanges to occur without commercial substance.

3. If non-monetary assets are exchanged for multiple assets at the same time, the following circumstances shall be dealt with when determining the cost of each asset to be exchanged:

(1) If the exchange of non-monetary assets has commercial substance and the fair value of the assets transferred can be reliably measured, the cost of the assets transferred should be based on the proportion of the fair value of the assets transferred to the total fair value of the assets transferred. The total amount is allocated to determine the cost of each asset transferred.

The cost can be calculated according to the following formula, that is, the cost of each asset transferred = the total cost of the assets transferred × (the fair value of each asset transferred ÷ the total fair value of the assets transferred).

(2) If the exchange of non-monetary assets does not have commercial substance, or although the fair value of the assets transferred cannot be reliably measured, it shall be calculated based on the Proportionally, the total cost of assets transferred in can be allocated to determine the cost of each asset transferred in.

The calculation of its cost can be based on the following formula, that is, the cost of each asset transferred = the total cost of the assets transferred × (the original book value of the assets transferred ÷ the total book value of the assets transferred).

(6) The initial investment cost of a long-term equity investment obtained during a business combination shall be determined as follows:

The methods of business combination can be divided into not only business combinations under the same control and business combinations not under the same control, but also holding mergers, absorption mergers, and new mergers. A controlling merger refers to the merging party obtaining control of the merged party in a business combination. The merged party retains its independent legal personality and continues to operate after the merger. The merging party confirms the investment in the merged party formed by the business combination. Absorption and merger means that the merger party obtains all the net assets of the merged party through a business combination, and the legal personality of the merged party is cancelled after the merger. The assets and liabilities originally held by the merged party become the assets and liabilities of the merger party after the merger. A newly established merger means that all parties involved in the merger are deregistered as legal persons after the merger and re-registered to form a new enterprise. From the above three concepts, it can be found that since the merged party is cancelled after the absorption merger and the newly established merger, they all involve the matter of incorporating the assets and liabilities of the merged party into the company's books of the merged party. matter. However, after the merger of the controlling parties, the combined party will not be involved in the merger of the assets and liabilities of the combined company into the books of the combined party's enterprise, but it will generate long-term equity investment through business combination. Therefore, the business combinations described below refer to the controlling combination. On the premise of the merger of holdings, the long-term equity investment formed by the business combination is divided into business combinations under the same control and not under the same control.

1. Business combination under the same control means that the participating enterprises are ultimately controlled by the same party or the same parties before and after the merger and the control is not temporary. The following methods are used to confirm the initial investment cost of a business holding combination under the same control:

(1) Where the merging party pays cash, transfers non-cash assets, or assumes debt as the consideration for the merger, it shall use the share of the book value of the equity of the acquiree as the initial investment cost of the long-term equity investment on the merger date. The difference between the initial cost of long-term equity investment and the cash paid, the non-cash assets transferred, and the book value of the debts assumed shall be adjusted for capital reserves; if the capital reserves are insufficient to offset, the retained earnings shall be adjusted. The accounting treatment is as follows:

Borrow: long-term equity investment (enjoy the share of the book value of the owner's equity of the merged enterprise)

Loans: bank deposits or non-cash assets, liabilities, etc. (ie the book value of the consideration paid)

The difference between the above two is recorded in the capital reserve account of the loan (or debit). If the capital reserve is insufficient to offset, the shortfall is debited to the retained earnings account.

(2) Where the merging party issues equity securities as the consideration for the merger, the initial investment cost of the long-term equity investment shall be the share of the book value of the owner's equity of the merged party on the date of the merger. According to the total par value of the issued shares as the share capital, the difference between the initial cost of the long-term equity investment and the total par value of the issued shares shall be adjusted for capital reserves; if the capital reserves are insufficient to offset, the retained earnings shall be adjusted. The accounting treatment is as follows:

Borrow: long-term equity investment (enjoy the share of the book value of the owner's equity of the merged enterprise)

Loan: Equity (or paid-in capital) (that is, the total face value of shares issued)

The difference between the above two is recorded in the capital reserve account of the loan (or debit). If the capital reserve is insufficient to offset, the shortfall is debited to the retained earnings account.

All directly related expenses incurred by the merging party for the business combination, including the audit fees, evaluation costs, and legal service costs paid for the business combination, shall be included in the current profit and loss when incurred. Bonds issued for a business combination or commissions and commissions for other debts shall be included in the initial measurement of the bonds and other debts issued. The fees, commissions and other expenses incurred in issuing equity securities in a business combination shall be offset against the premium income of equity securities. If the premium income is insufficient to offset, the retained earnings shall be offset.

2. Business combination not under the same control means that the parties involved in the merger are not ultimately controlled by the same party or the same parties before and after the merger. The steps to confirm the initial investment cost of a business holding combination not under the same control are as follows:

First, the purchaser should distinguish the following conditions to determine the merger cost, that is, the cost of equity investment:

(1) For a business combination realized by an exchange transaction, the cost of the combination is the assets paid by the purchaser to obtain control of the acquiree on the date of purchase, the liabilities incurred or assumed, and the fair value and various items of equity securities issued Directly related costs. The difference between the combination cost and its book value is included in the current profit and loss.

(2) For a business combination that is realized step by step through multiple exchange transactions, the cost of the combination is the sum of the costs of each individual transaction.

(3) All direct related expenses incurred by the purchaser for the business combination shall also be included in the cost of the business combination.

(4) Where a future event that may affect the cost of the merger is agreed in the merger contract or agreement, if it is estimated that future events are likely to occur on the date of purchase and the amount of the effect on the cost of the merger can be reliably measured, the purchaser shall include it in the merger cost.

Secondly, the purchaser should allocate the merger cost on the purchase date, that is, to separately recognize the identifiable assets, liabilities and contingent liabilities of the acquiree. If the merger cost of the purchaser is greater than the difference in the fair value share of the acquiree's identifiable net assets obtained in the merger, it shall be recognized as goodwill. However, when the purchaser's merger cost is less than the fair value of the acquiree's identifiable net assets obtained in the merger, the acquired fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree and the measurement of the merger cost should be reviewed again. If the merger cost is still less than the fair value share of the acquiree's identifiable net assets obtained in the merger after review, the difference shall be included in the current profit and loss.