FAR F4 M1

Valuation of Available For Sale securities

Fair Market Value

Valuation of Trading Securities

Fair Market Value

Impairment of Held to Maturity

Current Expected Credit Loss = Present Value Less than cost, means profit drops, Retained earnings drops, and Equity Drops DR: Credit loss ( PV - Amortized Cost) CR: Allowance for Credit Losses

Journal Entry for Unrealized Gain on Avail for Sale

DR: Valuation Account (FMV Adjustment) CR: Unrealized Gain

Journal Entry for Unrealized Gain on Trading Securities

DR: Valuation Account (FMV Adjustment) CR: Unrealized Gain

Held-to-maturity securities (HTM)

Debt securities that a company has the intent and ability to hold until they mature. Classification of Current vs Non Current assets depends on the term of maturity. If a debt security is HTM and has a maturity date of less than 1 yr, its current If not, Non-Current

Valuation of Held to Maturity Securities

Amortized Cost

Debt Securities

Any Security representing a creditor relationship with an entity i.e. Corporate Bonds Redeemable Preferred Stock Government Securities Commercial Paper Convertible Debt

Impairment of available-for-sale debt securities

Calculations: FMV - NBV = Impaired Amount No JE = Max Loss NPV - NBV = Expected Credit Loss Dr: Credit Loss (I/S impaired amount only) Cr: Allowance for Credit Loss Impaired Amount - Expected Credit Loss Dr: Unrealized Loss - AFS (OCI) Cr: Valuation Account

Unrealized Gains and Losses (Available for Sale)

Gains and Losses Recognized in other comprehensive income *Net of Tax* Affects equity directly , NO EFFECT on Net Income/RE

Financial Instruments not eligible for Fair Value Option

Investment in Subsidiaries or VIE's than an entity is required to consolidate Pension Benefit assets or liabilities Financial Assets or Liabilities recognized under leases Deposit Liabilities of financial institutions Financial instruments classified as equity

Available-for-sale securities (AFS)

Investments in debt and equity securities that are not classified as trading securities or held-to-maturity securities. Classified as current or non current assets depending on the intent of the company

Reclassification of Debt Instruments (all at FMV) Transferring Held to Maturity -> Avail for Sale

Journal Entry to Other Comprehensive Income

Reclassification of Debt Instruments (all at FMV) Transferring Avail for Sale or Held to Maturity -> Trading Security

Journal Entry to the Income Statement (Recognized in Current Earnings)

Reclassification of Debt Instruments (all at FMV) Transferring Avail for Sale -> Held to Maturity

Move from Other Comprehensive Income unrealized gain/loss to Income Statement as Premium/Discount amortization

Impairment of Trading Securities

N/A

Unrealized Gains and Losses (Held to Maturity)

NONE (Fair Market Value = Distractor Info)

Reclassification of Debt Instruments (all at FMV) Transfer Trading Security -> Avail for Sale or Held to Maturity

No Journal Entry Needed

Journal Entry for Unrealized Gain on Held to Maturity

None

Items excluded from Debt Securities

Option, Futures, Forward Contracts Lease Contracts Accounts and notes receivable

Unrealized Gains and Losses (Trading Securities)

Presentation on the balance sheet is one net amount Gains and Losses are reported/recognized in Net Income Affects Net Income, Retained Earnings, Equity DR. Unrealized Loss CR. Valuation Account

Equity Securities

Reported at Fair Market Value through Net Income. Unrealized Gains and Losses are reported on Net Income as they occur Cost - Fair Value - any dividends received/paid If Fair Value is less than cost, unrealized loss is recorded If Fair Value is greater than cost, gain is recorded

Trading Securities

Securities bought and held primarily for sale in the near term to generate income on short-term price differences. Generally reported as current assets

Realized Gains/Losses on Trading Securities

Selling Price - Carrying Value DR: Cash CR Trading Security Cr Realized Gain on Credit Security

Realized Gain/Losses on Available for Sale Securities

Selling Price - Original Cost Dr Cash Dr Unrealized Gain/Loss on AFS Cr AFS Securities CR Realized Gain on AFS

Realized Gain/Loss on Held to Maturity

Trick Question None, So there should be NO realized Gain/Loss

Impairment

When the Fair market Value is less than the Amortized Cost of the Security

Fair Value Option

allows companies to report specified financial assets and liabilities at fair value Unrealized gains and losses are reported in earnings; irrevocable is applied to individual financial statements

Election Dates (Fair Value)

1. Date the financial instrument is first identified 2. Date that an investment becomes subject to the equity method 3. Date an entity ceases to consolidate an investment in a subsidiary or VIE