12 - Intermediate Acctg 9th Ed McGraw Hill Ch-12 Investments - Learning Objectives

LO12-2 Demonstrate how to identify and account for debt investments classified for reporting purposes as held-to-maturity. (p. 648)

If an investor has the positive intent and ability to hold the securities to maturity, investments in debt securities are classified as Held-to-Maturity (HTM) and reported at amortized cost in the balance sheet. These investments are recorded at cost and holding gains or losses from fair value changes are ignored.

LO12-8 Explain how electing the fair value option and how impairment recognition affect accounting for investments. (p. 661 & 679)

Impairment recognition requires that, even if a debt investment is accounted for as HTM or AFS, unrealized holding losses are included in net income when the impairment is judged to be Other-Than-Temporary (OTT). The fair value option allows companies to account for most financial assets and liabilities in the same way they account for trading securities, with unrealized holding gains and losses included in net income and the investment carried at fair value in the balance sheet. For equity method investments, this requires clearly identifying the portion of those investments classified in the significant-influence category that is being accounted for at fair value.

LO12-3 Demonstrate how to identify and account for debt investments classified for reporting purposes as trading securities. (p. 649)

Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as trading securities. They are reported at their fair value. Holding gains and losses for trading securities are included in earnings.

LO12-4 Demonstrate how to identify and account for debt investments classified for reporting purposes as Available-For-Sale securities (AFS). (p. 653)

Investments in debt securities that don't fit the definitions of the other reporting categories are classified as available-for-sale. They are reported at their fair values. Holding gains and losses from retaining securities during periods of price change are not included in the determination of income for the period; they are reported as a separate component of other comprehensive income in shareholders' equity.

LO12-5 Demonstrate how to identify and account for equity investments classified for reporting purposes as fair value through net income. (p. 667)

Investments in equity securities for which the investor lacks the ability to exercise significant influence over the investee are accounted for using a fair value through net income approach. They are reported at their fair values. Holding gains and losses are included in earnings.

LO12-1 Describe the key characteristics of a debt investment and demonstrate how to account for a purchase and for interest revenue. (p. 644)

Key events in the life of a debt investment are purchases, recording interest revenue, incurring unrealized holding gains and losses due to fair value changes, and recording sale or maturity.

LO12-6 Demonstrate how to identify and account for equity investments accounted for under the equity method. (p. 672)

The equity method requires the investor to recognize investment income equal to its percentage share (based on share ownership) of the net income earned by the investee, rather than the amount received as cash dividends. The investment account is adjusted for the investor's percentage share of net income or loss reported by the investee. When the investor actually receives dividends, the investment account is reduced accordingly.

LO12-9 Discuss the primary differences between U.S. GAAP and IFRS with respect to investments (pp. 660-663, 671, 680, & 690)

U.S. GAAP and IFRS are similar in most respects concerning how they account for investments, but accounting in this area is being overhauled by both the IASB and the FASB, and IFRS companies may report under tow different standards (either IAS No. 39 or IFRS No. 9) until 2018. IFRS allows proportionate consolidation as well as the equity method to account for joint ventures, although the option to use proportionate consolidation may be eliminated soon. IFRS is more restrictive in terms of the circumstances in which the fair-value option can be used. Finally, as discussed in Appendix 12B, IFRS recognizes different amounts of OTT impairment for HTM and AFS debt investments, and allows recovery of OTT impairments for debt investments (but not equity investments).

LO12-7 Explain the adjustments made in the equity method when the fair value of the net assets underlying an investment exceeds their book value at acquisition. (p. 661 & 674)

When the fair value of identifiable net assets acquired exceeds the book value of the underlying net assets acquired in the purchase of an equity investment, both the investment account and investment revenue are adjusted for differences between net income reported by the investee and what the amount would have been if consolidation procedures had been followed.