F4 Investments, Business Combinations, and Goodwill M1
Equity securities are generally carried at
Fair value through net income (FVTNI) - Public The only exception is for equity investments that do not have a readily determinable fair value - Non Public
Entities should report marketable debt securities classified as trading at
Fair value, with holding gains and losses included in earnings
Financial instruments include
Financial Assets and Financial Liabilities
With Fair value option
Follow the same rules as "trading securities". Unrealized gains and losses are reported in earnings. It is irrevocable and is applied to individual financial instruments.
Debt securities include
Corporate bonds, redeemable preferred stock (this has a maturity date), convertible debt, commercial paper (notes/drafts)
Indicators to determine whether an equity investment with no readily determinable fair value is impaired
1. Heightened concerns regarding the ability of an investee to continue as a going concern 2. Significant and adverse changes in the industry, geographic area, technology or regulatory or economic environment of the investee 3. A significant decline in earnings, business prospects, asset quality or credit rating of the investee 4. Offers to buy from the investee (and willingness to sell on the part of the investee) the same or similar investment for less than the investor's carrying value
Equity securities include
1. Ownership shares (common, preferred and other forms of capital stock) 2. Rights to acquire ownership shares (stock warrants, rights and call options) and 3. Rights to dispose of ownership shares (put options)
Equity securities do not include
1. Preferred stock redeemable at the option of the investor or stock that must be redeemed by the issuer 2. Treasury stock ( the company's own stock repurchased and held); and 3. Convertible bonds
Disclosures for investment in Equity securities are
1. The portion of unrealized gains and losses for the period that relates to equity securities still held at the end of the reporting period. NET (Total) gains and losses recognized during the period on equity securities - Net gains and losses recognized during the period on equity securities sold during the period = Unrealized gains and losses recognized during the reporting period on equity securities still held at the reporting date
Disclosures for investment in Debt securities (AFS & HTM) are
1.Aggregate fair value 2. Gross unrealized holding gains and losses 3. Amortized cost basis by major security type 4. Information about the contractual maturities of debt securities
A liquidating dividend is a
Distribution that exceeds the investor's share of the investee's retained earnings (Div > RE) DR Cash CR Investment in investee (Return of capital)
It an entity has not recorded an equity security's change in fair value up to the point of sale
A gain or loss is recorded at at the time of the sale equal to the difference between adjusted cost (original cost plus or minus unrealized gains and losses previously recognized in earnings) and the selling price. DR Cash CR Equity security CR Gain on equity security Note: Any valuation account would also have to be removed when the security is sold.
A change in FMV brings about unrealized gains and losses and
A valuation account is used DR Unrealized loss on trading securities CR Valuation account (fair value adjustment) OR DR Unrealized loss on available for sale securities CR Valuation account (fair value adjustment)
Investments in equity securities with holdings of less than 20%
Accounting subsequent to acquisition without readily determinable fair value - Value and report the investment using practicability exception (entities report equity investments at cost adjusted for changes in observable prices minus impairment. Entities recognize dividends when received and generally recognize gains or losses when selling the securities
The sale of an equity security does not give rise to a gain or loss if
All changes in the equity's fair value have been reported in earning as unrealized gains or losses as they occurred. DR Cash CR Equity security
All public and private entities must disclose on the balance sheet or in the notes to the financial statements
All financial assets and liabilities, grouped by measurement category (fair value through net income, other comprehensive income or amortized cost) and if a financial asset, the form of the asset.
The fair value option
Applies to financial assets (eg. debt and equity securities) and liabilities (eg notes payable)
Unrealized gains and losses from marking available for sale debt securities to fair value (assuming they are non-impaired) at the balance sheet date
Are treated as other comprehensive income items and bypass the income statement
Debt securities classified as Held to maturity are
Cashflows from Investing activities reported at amortized cost (FMV is distractor information on exam). They are classified this way only if the corporation has the positive intent and ability to hold these securities to maturity. They are classified as as current or non-current assets depending on their time to maturity.
Debt securities classified as Available for sale securities are
Cashflows from investing activities and must be reported at fair value and result in realized G/L (represents sold securities that should go on the income statement) and unrealized G/L (represents only a change in fair value that should go in OCI)
JE - To record unrealized gain/loss on Available for sale securities
Gain - DR Fair value adjustment (AFS) xxxxx CR Unrealized holding gain or loss - Equity xxxxx Loss - DR Unrealized holding gain or loss - Equity xxxxx CR Fair value adjustment (Trading) xxxxx
JE - To record unrealized gain/loss on Trading securities
Gain - DR Fair value adjustment (Trading) xxxxx CR Unrealized holding gain or loss - Income xxxxx Loss - DR Unrealized holding gain or loss - Income xxxxx CR Fair value adjustment (Trading) xxxxx
Debt securities classified as trading securities are
Generally reported as current assets, although they can be reported as non-current (Investing cash flows) if appropriate. As current assets they are cash flows from operating activities. These securities must be reported at fair value and both realized and unrealize G/L are on the income statement.
Equity securities don't have
HTM because stocks don't mature. They only AFS and TS
Bonds purchased at a premium and classified as held to maturity investment and quoted at a small discount in the second year
Has a decline in the bond's market value because interest rates have increased since the bonds were purchased. An increase in interest rates would make the bonds interest rate less attractive to investors than when the bonds were originally issued. This would most likely cause a decline in the bonds market value. Because the bond investment is classified as held to maturity, the investment will be reported at amortized cost and not fair value.
Under IFRS debt investments are classified as either
Held for collection (held to maturity) or trading. There are no Available for sale or trading securities
No unrealized gains and losses are recognized with
Held to maturity securities. The only income that is recognized is interest revenue when earned and gains and losses when sold
A sale of a debt security from any category results
In a realized gain or loss and is recognized in net income for the period.
An equity security (public/non public)
Is a security that represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices
The fair value measurement
Is not an option for investments in subsidiaries, pension benefit assets/liabilities and assets and liabilities recognized under leases
When investing in equity securities, if your investment is valued at less than 50% (investor has significant influence)
It is valued using the equity method
When investing in equity securities, if your investment is valued at less than 20% (Investor has passive interest)
It is valued using the fair value method
Both carrying value (amount) and fair value
Must be disclosed for most financial instruments (when it is practicable to estimate fair value)
With Held to maturity debt securities
No unrealized G/L and since you're supposed to HTM there should be no realized G/L on sale either. (FMV in the exam is only distractor information)
Reclassifications or transfers between categories of debit securities should occur
Only when justified. Also any transfer of a particular security from one group to another group is accounted for at fair value
Debt securities do not include
Options, futures, or forward contracts, lease contracts, accounts and notes receivable
With Financial liabilities
Payments are made (You are the borrower, issuer, seller, loser)
With Financial assets
Payments are received (You are the investor, bondholder, lender, winner)
Dividend income from an equity security investment is
Recognized in net income unless the dividend is a liquidating dividend. DR Cash CR Dividend income
Interest income from an investment in debt securities classified as trading or available for sale is
Recorded on the income statement DR Cash CR Interest income
Marketable debt securities that the company has the intent and ability to hold to maturity both "long" and short" term, are
Reported at carrying amount (amortized cost) unless there is a permanent decline in market value.
A derivative
Represents a contract between parties based on an underlying financial asset. The value of the derivative is driven by the value and activity of the underlying asset. Options, forwards, futures and swaps are common examples of derivatives
A Debt Security
Represents a creditor relationship with an entity (lender/bondholder)
If an investors uses fair value through net income (FVTNI) to account for an investment in common stock
The amount of dividend revenue that should be reported in the investor's income statement would be the portion of the dividends received that were not in excess of the investor's share of investee's undistributed earnings since the date of investment.
When an available for sale debt security is determined to be impaired because of an other than temporary decline in fair value below cost
The asset must be written down to the lower fair value by recording a credit loss that is recognized on the income statement.
Public and private entities must provide fair value information regarding
The classification level in the measurement hierarchy (levels 1, 2, 3)
When selling debt securities classified as trading securities take
The difference between the adjusted cost (original cost plus or minus unrealized gains and losses previously recognized in net income) and the selling price. DR Cash CR Trading security CR Realized gain on trading security (IDA)
When selling debt securities classified as available for sale securities take
The difference between the selling price and the original cost of the security. Any unrealized gains or losses in accumulated other comprehensive income must be reversed at the time the security is sold. DR Cash DR Unrealized gain on available for sale security (PUFIER) CR Available for sale security CR Realized gain on available for sale security (IDA)
If you have an unrealized loss on AFS debt securities
The fair value adjustment account will have a credit balance
If you have an unrealized gain on AFS debt securities
The fair value adjustment account will have a debit balance
When an Available for sale security is impaired
The investor has the option to sell it if the loss on the sale will be less than the Expected Credit Loss (ECL)
When there is an impairment of Available for sale securities
The maximum loss on ECL goes on the income statement and any excess loss goes in Other comprehensive income (OCI)
Market risk
The risk of loss from changes in market prices is encourage, but not required
Concentration of credit risk
The risk that the other party to the instrument will not perform is a required disclosure in the notes to the Financial Statements
By investing in Debt Securities
There is no voting and thus no significant influence
For available for sale securities
Though it would have unrealized gains or losses reflected in other comprehensive income, once transferred to the trading category, those unrealized amounts will need to be recognized in earnings immediately.
Debt securities should be classified into one of three categories based on the intent of the company
Trading securities, available for sale debt securities and held to maturity debt securities
With equity securities
Unrealized holding gains and losses are included in earnings as they occur DR Unrealized loss on equity security CR Valuation account (fair value adjustment)
Realized gains or losses are recognized
When a debt security is sold and when an available for sale debt security is deemed to be impaired. All realized gains or losses are recognized in net income
An impairment of Held to maturity securities exist when it is determined that all amounts due (principal and interest)
Will not be collected on a debt investment. Thus this results in an expected credit loss which is the difference between the present value (principal and interest expected to be collected) and the amortized cost. The Expected credit loss (ECL) goes on the income statement to write down to PV. DR Credit loss CR Allowance for credit losses
Unrealized holding gains and losses
Would be included in earnings for trading debt securities (reported at fair value) and not held to maturity to debt securities (reported at amortized cost)
