Two brothers, Adam and Robert Merkle, began A&R Plumbing Ltd. (ARP), a private company, approximately five years ago. Adam performs all administrative tasks (inventory ordering, accounting, payroll, and so on) while Robert provides the skills of the trade. In January 2018, ARP purchased 20,000 common shares of Canadian Plumbing Supplies Ltd (CPS). CPS is a plumbing supply distributor and its shares were acquired for $100,000. The shares represent a 20% ownership holding of CPS and the shares are traded actively on the Toronto Stock Exchange. Since the purchase, neither Adam nor Robert has been actively involved in any decisions related to CPS's operations. However, next year when Robert has more free time, he plans on using ARP's 20% share to obtain a seat on the CPS board of directors. He wants to use his board position to develop a referral system whereby CPS will refer customers to ARP for plumbing services. At the same time, he hopes to obtain additional financing from his bank to expand ARP further. The banker is very interested in ARP's profitability. At December 31, 2018, CPS's shares were trading for $4.50 each.
CPS's year end is December 31. For the year ended December 31, 2018, CPS reported a loss of $30,000. CPS did not declare any dividends. Adam had accounted for the investment in CPS using the cost model.
Instructions
(a) Robert has come to you, an independent public accountant, for advice. He would like you to assess the accounting choice that Adam has made for the investment in CPS.
1. Describe the acceptable accounting policy choices available under ASPE to account for ARP's investment in CPS. Is the cost model an acceptable method under ASPE for this investment?
2. Which accounting policy choice do you think Robert would prefer? Why?
(b) Explain how the accounting policy choices available to ARP for its investment in CPS might be different if it reported its financial results in accordance with IFRS.