Problem
Stratego Ltd manages its cash position and financial risk through investments in financial assets. On 15 May 2021, Stratego Ltd acquired 15,000 shares in Palace Ltd for $90,000 and does not intend to trade the shares. The company incurred $500 in costs to acquire the shares. The fair value of the shares are as follows:
30 June 2021: $92,300
30 June 2022: $94,360.
Task
1. How should the investment in Palace Ltd be classified as at 30 June 2022?
2. Assuming the shares are classified as FVTPL, prepare the journal entry to account for the change in fair value as at 30 June 2022.
3. Drawing on agency theory, briefly explain why managers of Stratego Ltd may prefer not to classify financial assets as FVTPL.