Support Ltd's Investment in Always There: Classification and Accounting Treatment

(a) The most appropriate classification of the investment in Always There in Support Ltd's consolidated financial statements at 30 June 2023 is 'equity investment'. According to AASB 9 Financial Instruments, equity investments are those investments that are not classified as financial assets at fair value through profit or loss, loans and receivables, or held-to-maturity investments. Equity investments are measured at fair value through other comprehensive income (FVOCI) or at fair value through profit or loss (FVTPL), depending on the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

In the case of Support Ltd's investment in Always There, the investment is not held for trading purposes, and the contractual cash flow characteristics of the investment are such that it does not meet the criteria for measurement at amortized cost or FVTPL. Therefore, the investment should be classified as FVOCI. As per AASB 9, paragraph 5.7.5, 'an entity shall classify an equity instrument that is not held for trading as a fair value through other comprehensive income (FVOCI) investment if both of the following conditions are met: (a) the objective of the entity's business model is achieved by both collecting contractual cash flows and selling the financial asset, and (b) the contractual terms of the financial asset give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding.'

In this case, Always There's constitution states that the investment is for the purpose of facilitating climate change community support programs and initiatives, and the investment does not entitle Support Ltd to any distributions. Therefore, Support Ltd's business model is achieved by collecting contractual cash flows in the form of dividend income and achieving capital appreciation upon the sale of the investment. Furthermore, the contractual cash flow characteristics of the investment are such that it gives rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding. Therefore, both conditions for classification as FVOCI investment are met for Support Ltd's investment in Always There.

The item of additional information that would further develop Support Ltd's argument is the expected holding period of the investment. If the investment is held with the intention of selling it within the short term, it would be classified as FVTPL rather than FVOCI. This is because the business model for managing the investment would be to sell the investment for profit, rather than to collect contractual cash flows and sell the financial asset. Therefore, the expected holding period of the investment is an important factor in determining the appropriate classification of the investment.

(b) The subsequent accounting treatment for Support Ltd's investment in Always There in its consolidated financial statements would involve recognizing the investment initially at its fair value of $800,000, which is the consideration paid for the 400,000 $1.00 ordinary shares. The fair value of the investment would be re-measured at each reporting date, and any changes in fair value would be recognized in other comprehensive income. Dividend income received from Always There would be recognized in profit or loss when the right to receive payment is established.

As a supporting example, the impact on two specific account balances in Support Ltd's consolidated financial statements at 30 June 2023 would be as follows:

1. Non-current assets: The investment in Always There would be recognized as a non-current asset in the balance sheet at its fair value of $800,000. If the fair value of the investment increases by $50,000 at 30 June 2023, the revaluation gain of $50,000 would be recognized in other comprehensive income. Therefore, the non-current assets balance would increase by $50,000.

2. Equity: The dividend income received from Always There would be recognized in profit or loss when the right to receive payment is established. If Always There declares a dividend of $50,000 during the year ended 30 June 2023, the dividend income would be recognized in profit or loss. Therefore, the equity balance would increase by $50,000.