ch 16 hee: debt securities

t/f: AFS is a part of NI

false- it's reported as "other" on the BS equity section but not as net income (it's too volatile)

What are important facts about Cash Flow Hedging?

-designed to minimize the risk that a company will have to pay more than it expects -If the price of my commonly purchased materials increases, I go into a contract to "lock in" a price to prevent volatility -HAS to be recorded at FV on BS, but the changes flow through stockholder's equity

What are important facts about FV Hedging?

-if you worry about prices dropping, you try to mitigate risk of changes in value of something you own by entering a FV hedge -HAS to be recorded at FV on BS, but the changes flow through net income

Derivatives are reported at ________ __________. Gains/losses from speculation recognized in _____________. Derivatives derive their value from other assets' values and are used to ___________/mitigate risks

1) fair value 2) income 3) hedge

How do you do the FVA for AFS/TS each year?

1) find the difference between FV and amortized cost. Do FV- Amortized Cost and that difference is the unrealized gain or loss. 2) sum the gains and losses, and the overall net gain/loss is your FVA amount

What determines the security's classification?

1) intent 2) ability to hold securities

What is consolidation?

-This type of reporting is required when you own more than 50% of a company. -The investor (Meta) is the parent and the investee (Instagram) is the subsidiary. -They have 1 single, consolidated set of financials for all the companies

What reporting approach do companies use for AFS securities that reduces the volatility of net income?

AFS are reported as OCI as separate component of stockholder's equity instead of as NI (but they report the securities at fair value on the balance sheet)

Why are held-to-maturity securities reported at amortized cost rather than fair value?

Because these aren't going to be sold, so they don't technically have a market (fair) value

What are the column headings for security amortization (buyer perspective)

Date Cash Received Interest Revenue Bond Discount Amortization CV of Bonds

The ______ number is like the "x" in a BDE t-chart

FVA

What do you report H2M, TS, and AFS at?

H2M- amortized cost TS and AFS- FV

For TS and AFS, you still have to amortize these, but what other adjustment do you have to do?

Make a Fair Value Adjustment each year! *FVA can have a debit (loss) or credit (gain) balance

Do you record premium/discount on these securities?

No, you use the net method and just take it directly

What's the FVA entry for TS? What about AFS?

TS: dr: FVA x cr: Unrealized Holding Gain or Loss- Income x AFS: dr: FVA x cr: Unrealized Holding Gain or Loss- Equity x

You record both cash flow and FV hedging at FV, but changes flow through ____________ for cash flow hedging and ___________ for FV hedging

balance sheet; income

What is the accounting for a H2M security on 1) date of issuance 2) first interest payment received?

date of issuance: dr: debt investments cr: cash first interest received: dr: cash* dr: debt investments** cr: interest revenue *cash could be interest receivable if it's just accrued until tmrw **this is for a discount. for a premium, CREDIT the debt investments

-intended not to be sold -amortized cost -an asset for a company -any interest is revenue for us -unrealized holding gains/losses aren't recognized

held to maturity securities

TS is considered _________, while AFS is considered _______________

income, equity

Now that we are looking at securities from the buyer/holder's perspective, instead of interest expense, we record

interest revenue

What are some facts about the Fair Value Option?

▪Companies can choose to report financial assets and liabilities at fair value ▪ Results in all gains/losses from fair value changes to be reported in net income ▪ Can be applied to specific assets/liabilities ▪ Once the FV option is chosen, the company CANNOT go back and report at something other than FV