FAR 4 M1 (Financial Instruments)
credit loss
IFRS 9 requires a forward looking impairment model referred to as the expected ______ model
derivatives
IFRS 9 requires a single model for classification and measurement that applies to all types of financial assets, including those that contain embedded __________. the model consists of two parts: a business model for managing the financial assets and a contractual cash flow model.
market risk
______ is the possibility of loss from changes in market value (not necessarily due to the failure of another party, but due to changes in economic circumstances)
debt securities
______ should be classified into one of three categories based on the intent of the company - trading securities - available for sale debt securities - held to maturity debt securities
debt securities
_______ include: - corporate bonds - redeemable preferred stock - government securities - convertible debt - commercial paper - debt securities do not include: - option, futures or forward contracts - lease contracts - accounts and note receivable
credit risk
_______ is the possibility of loss from the failure of another party to perform according to the terms of a contract. a concentration of credit risk occurs when an entity has contracts of material value with one or more parties in the same industry or region or having similar economic characteristics (e.g. a group of highly leveraged entities)
reclassification
_______ of financial assets between amortized cost and fair value are required only when the entity changes the business model under which it manages financial instruments. such changes should be infrequent and are accounted for prospectively. the asset should be remeasured at fair value on the date of the reclassification, with any gain or loss recognized in earnings.
public business entities (PBEs)
________ must provide fair value information regarding the classification level in the measurement hierarchy (levels 1, 2 or 3). for assets and liabilities measured at amortized cost, fair value should be disclosed in accordance with the exit price. exceptions are for payables and receivables due within one year, deposit liabilities with no defined maturities and equity investments reported under the practicability exception.
trading securities
_________ are debt securities that are brought and held principally for the purpose of selling them in the near term. trading securities generally reflect active and frequent buying and selling with the objective of generating profits on short term differences in price. debt securities classified as trading securities are generally reported as current assets, although they can be reported as non current if approciate.
available for sale debt securities
_________ are those not meeting the definitions of the other two classifications (trading or held to maturity). debt securities classified as available for sale securities are reported as either current assets or non current assets depending on the intent of the corporation
equity securities
_________ include: - ownership shares (common, preferred, and other forms of capital stock) - rights to acquire ownership shares (stock warrants, rights, and call options) and - rights to dispose of ownership of ownership shares (put options) do not include: - preferred stock redeemable at the option of the investor or stock that must be redeemed by the issuer - treasury stock (the companys own stock repurchased and held) and - convertible bonds
liquidating dividend
a ______ is a distribution that exceeds the investors share of the investees retained earnings, a liquidating dividend is a return of capital that decreases the investors basis in the investment
financial liability
a _______ is a contract that imposes on one entity an obligation to: - deliver cash or another financial instrument to a second entity - exchange other financial instruments on potentially unfavorable terms with the second entity
creditor relationship
a debt security is any security representing a _______ with an entity
amortized cost
a financial asset that is a debt instrument is measured at _______ if both of the following conditions are met: 1. Business model test: the asset is held in a business model in which the objective is to hold assets in order to collect contractual cash flows 2. cash flow characteristics test: the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest
equity instrument
a financial asset that is an ________ is reported at fair value with gains and losses recognized in earnings (FVPL), unless the entity makes an irrevocable election on initial recognition to present gains and losses in other comprehensive income (FVOCI). gains and losses recognized in other comprehensive income are never recognized in earnings, but may be reclassified within equity
balance sheet
all public and private entities must disclose on the _______ or in the notes to the financial statements all financial assets and liabilities, grouped by measurement category and if a financial asset, the form of that asset
equity security
an _______ 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.
impairment loss
an ________ must be recorded when the decline in fair value below the adjusted or amortized cost of any debt security classified as either available for sale or held to maturity is other than temporary. under us gaap if the decline in fair value is other than temporary, the cost basis of the individual security is written down to fair value as the new cost basis and the amount of the write down is accounted for as a realized loss and included in earnings.
fair value earnings immediately other comprehensive income
any transfer of a particular security from one group to another group is accounted for at _________. any unrealized holding gain or loss on that security is accounted for as follows: - from trading category: the unrealized holding gain or loss at the date of the transfer is already recognized in __________ and shall not be reverse - to trading category: the unrealized holding gain or loss at the date of transfer shall be recognized in earnings _________ - held to maturity transferred to available for sale: the unrealized gain or loss at the date of transfer shall be reported in ___________. remember that this debt security was valued at amortized cost as a held to maturity security and is being transferred to a category valued at fair value - available for sale transferred to held to maturity: the unrealized holding gain or loss at the date of transfer is already reported in other comprehensive income. the unrealized holding gain or loss shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
fair value
debt securities classified as trading and available for sale must be reported at _______. fair value is the market price of the security or what a willing buyer and seller would pay and accept to exchange the security. changes in the fair value of trading and available for sale debt securities result in unrealized holdings gains or losses. the reporting of these gains or losses in the financial statements depends on the classification of the securities. although two general ledger accounts are normally maintained (i.e. one for the original cost of the security and the other for the valuation account), the presentation on the balance sheet is one net amount
liquidating dividend
dividend income from an equity security investment is recognized in net income, unless the dividend is a ___________
available for sale equity method
entities may elect the fair value option for recognized financial assets and financial liabilities. for example, an entity can choose to measure a fair value a debt investment that would otherwise be classified as _______ with unrealized gains and losses recorded in earnings rather than OCI. or an entity can choose to measure at fair value an equity investment that would otherwise be accounted for using the ________ financial instruments not eligible for the fair value option include investments in subsidiaries or VIEs that an entity is required to consolidate, pension benefit assets or liabilities, financial assets or liabilities recognized under leases, deposit liabilities of financial institutions, and financial instruments classified as equity
credit risk
entities must disclose all significant concentrations of _______ arising from all financial instruments, whether from a single party or a group of parties engaged in similar activities and that have similar economic characteristics
cost minus impairment
equity investments that do not have readily determinable fair values are measured at __________ (the practicability exception). an entity should consider the following qualitative indicators in order to determine whether an equity investment that is measured using the practicability exception is impaired: - heightened concerns regarding the ability of an investee to continue as a going concern due to factors such as noncompliance with capital or debt requirements, deficiencies in working capital, or negative operating cash flows - significant and adverse changes in the industry, geographic area, technology, or regulatory or economic environment of the investee. - a significant decline in earnings, business prospects, asset quality, or credit rating of the investee - offers to buy from the investee the same or a similar investment for less than the investors carrying value
fair value
equity securities are generally carried at ______ through net income (FVTNI). this requirement does not apply to investments accounted for under the equity method, consolidated investees, or when the practicability exception is applied.
earnings
equity securities are generally reported at fair value through net income. unrealized holding gains and losses on equity securities are included in _________ as they occur.
fair value
fair value measurement: if the conditions for amortized cost measurement are not met, the debt instrument is measured at fair value: 1. financial assets that are held in a portfolio where an entity holds to collect cash flows (SPPI) from portfolio assets and also sells portfolio assets may be classified as FVOCI. 2. financial assets that do not contain cash flows that are SPPI must be measured at FVPL (e.g. derivatives)
debt instruments
financial assets that are ________ are reported at amortized cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVPL)
assets
financial instruments include financial ______ and financial liabilities
fair value through profit or loss
financial liabilities may be subsequently measured at fair value in certain circumstances, such as when an entity at initial recognition irrevocably designates a financial liability as measured at _________. gains and losses on financial liabilities measured at fair value are recognized in earnings, unless the entity is required to present the effects of changes in the liability's credit risk in other comprehensive income.
reclassified
financial liabilities may not be ________ between amortized cost and fair value
financial liabilities
for _________ other than derivative liabilities that are designated under the fair value option, the portion of the change in fair value that relates to a change in instrument-specific credit risk is recognized in other comprehensive income. derivative liabilities recognized these changes in net income. once the financial liability is derecognized, any accumulated gains or losses in other comprehensive income are recognized in earnings
practicability exception
for entities that have elected the ________ the following must be disclosed: - the carrying amount of all investments without readily determinable fair values - any impairment charges incurred during the reporting period - the amount of the upward or downward adjustment made to the carrying amount due to any observable price changes
amortized cost
held to maturity debt securities are reported at ___________. unrealized gains and losses on held to maturity securities are not recognized in the financial statements, as held to maturity securities are not marked to market at period end
selling price
if an entity has not recorded an equity securitys change in fair value up to the point of the sale, a gain or loss is recorded at the time of the sale equal to the difference between adjusted cost and the _________
interest method
in general, financial liabilities are subsequently measured at amortized cost using the effective ___________
income statement
interest income from an investment in debt securities as trading or available for sale is recorded on the _________
held to maturity
investments in debt securities are classified as ________ only if the corporation has the positive intent and ability to hold these securities to maturity. if the intent is to hold the security for an indefinite period of time, but not necessarily to maturity, the the security is classified as available for sale. if a security can be paid or otherwise settled in a manner that the holder may not recover substantially all of its investment, the held to maturity classification may not be used. securities classified as held to maturity are reported as current or non current assets based on their time to maturity
irrevocable
on specified election dates, entities may choose to measure at fair value eligible financial instruments that are not typically measured at fair value. under the fair value option, unrealized gains and losses are reported in earnings. the fair value option is _______ and is applied to individual financial instruments.
impaired
realized gains or losses are recognized when a debt security is sold and when an available for sale debt security is deemed to be ________. all realized gains or losses are recognized in net income.
business model
the _______ for managing the financial assets is the entitys purpose for holding the assets (e.g. for collecting contractual payments or for holding assets in order to realize returns upon the sale of the assets)
practicability exception
the ________ allows an entity to measure an equity investment at cost less impairment, plus/minus observable price changes (in orderly transactions) of identical or similar investments from the same issuer. this exception is applicable for equity investments that do not have a readily determinable fair value. reporting entities that are broker dealers in securities, investment companies, or post retirement benefit plans cannot used this exception.
fair value option
the ________ may only be applied on certain dates, including the date than an entity first recognizes an eligible financial instrument, the date than an investment becomes subject to equity method accounting, or the date that an entity ceases to consolidate an investment in a subsidiary or VIE.
contractual cash flow
the _________ model refers to how cash is received, either solely payments of principal and interest (SSPI) or the collection of proceeds upon the sale of the asset
financial assets
the following are ________: - cash - evidence of an ownership interest in an entity (e.g. stock certificates, partnership interests, and LLC interests) - a contract that conveys to one entity a right to receive cash or exchange other financial instruments on potentially favorable terms with the second entity
financial statements
the following information concerning securities classified as available for sale and separately for held to maturity securities must be disclosed in the ________ or appropriate notes thereto: - aggregate fair value - gross unrealized holding gains and losses - amortized cost basis by major security type and - information about the contractual maturities of debt securities
occured
the sale of an equity security does not give rise to a gain or loss if all changes in the equitys fair value have been reported in earnings as unrealized gains or losses as they ________
justified
transfers between categories should occur only when _______. transfers from the held to maturity category should be rare and should only be made when there is a change in the entity's intent to hold a specific security to maturity that does not call into question the entity's intent to hold other debt securities to maturity. transfers to and from the trading category should also be rare.
other comprehensive income
under us gaap the new cost basis should not be changed for subsequent recoveries in fair value. subsequent changes in fair value are not recognized if the security is classified as held to maturity. if the security is classified as available for sale, a subsequent increase in fair value is included in ___________. subsequent increases in fair value are not recognized in net income. subsequent decreases in fair value of available fore sale securities, if not other than temporary are also included in other comprehensive income and accounted for as an unrealized loss.
encouraged
under us gaap, all entities are ________ but not required to disclose quantitative information about the market risk of financial instruments that is consistent with the way it manages or adjusts those risks.
other comprehensive income
unrealized holding gains and losses on available for sale securities are recognized in ____________
earnings
unrealized holding gains and losses on debt securites classified as trading securities are included in _______. therefore, the unrealized gain or loss on trading securities is recognized in net income
impairment exists
when a qualitative assessment indicates that __________ the cost basis of the security is written down to fair value and the amount of the write down is accounted for as a realized loss and included earnings.
