ACCT 405 Chapter 12 investments

Under the fair value option

1. investment is carried at fair value 2. unrealized gains and losses are included in income 3.for htm and afs investments, the investment is classified on the balance sheet as 'trading'. 4. for equity method investments, the investment is still classified on the balance sheet with equity method investments but the portion at fair value must be clearly indicated.

Discounts and premiums are

amortized to interest revenue.

the equity method is used when the investor has significant influence (20-50%)

anything less than 20% is what we've discussed and anything over 50% is consolidated statements which we do in 501.

Two classifications of investment securities

debt and equity securities.

Financial statement presentation for trading securities: 1. income statement and statement of cash flows

fair value changes are included in the income statement in the periods in which they occur, regardless of whether they are realized or unrealized. Do not affect comprehensive income.

Companies may invest in other securities (stocks and bonds) for

1. to earn a return on temporarily idle cash 2. to secure certain operating or financing arrangements with another company.

Key IFRS vs. GAAP difference

IFRS does not allow the fair value option for most investments that qualify as the equity method.

Transfer from AFS to HTM

No current income effect; don't write off any existing unrealized holding gain or loss in AOCI, but amortize it to net income over the remaining life of the security.

AFS securities are initially recorded

at cost including any brokerage fees

When a security is reclassified between two reporting categories, any unrealized holding gains and losses

at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.

Held to maturity can only be a debt security

because it is the only one with a 'maturity' date.

3. cash flow statement (trading securities)

cash flows from buying and selling trading securities typically are classified as operating activities.

3. cash flow statement (AFS)

cash flows from buying or selling AFS securities typically are classified as investing activities.

Investment is initially recorded at

cost which includes incidental costs such as broker's fees.

When the cost of an investment exceeds the book value of the underlying net assets acquired, additional adjustments to both the investment account and investment revenue may be needed by...

excess of price paid for the investment over the proportionate share of the book value; allocate to identifiable tangible and intangible assets that are depreciated/amortized over the respective useful lives (investment income is reduced by this additional expense) AND any additional excess is treated as goodwill which is not amortized.

When the investor lacks significant influence, the investment is classified in three ways

held to maturity (debt), trading securities ( debt/equity), AFS ( debt/equity)

There are three types of debt securities

held-to- maturity, trading and available for sale (AFS).

Transfer from trading to either HTM/AFS

include in current net income any unrealized gain or loss that occurred in the current period prior to the transfer; so moving forward will be put in OCI etc, but the current period remain treated as trading.

Transfer from HTM/AFS to TRADING

include in current net income the total unrealized gain or loss, as if it all occurred in the current period.

Accounting under equity method: balance sheet

investment initially recorded at cost, carrying amount is subsequently increased by investor's percentage of net income or decreased by dividends paid.

2. balance sheet (AFS)

investments in AFS securities are reported at fair value; unrealized gains/losses affect AOCI in shareholder's equity and are reclassified out of AOCI in the periods in which securities are sold.

Trading securities are

investments in debt or equity securities principally for the purpose of selling them in the near term for the purpose of profiting from short-term price changes.

Securities classified available for sale

investments in debt or equity securities that are not for active trading and not to be held to maturity are classified as available for sale.

Accounting under equity method: income statement

investor recognizes investment income in the amount equal to the investor's percentage share; not the amount of net income received as cash dividends.

Fair value option is something GAAP allows you to elect

it is irrevocable; only can sell the security to end this option.

HTM initially recorded at cost and

may include a premium or discount.

Unrealized holding gains and losses for trading securities are reported as

net income.

Transfer from Held to Maturity to AFS

no current income effect; report total unrealized gain or loss as a separate component of shareholder's equity in AOCI.

AFS changes in fair value are not accounted for

on the income statement; changes are reported in OCI accounts and flow to the AOCI in comprehensive income.

Financial statement presentation for AFS securities: 1. income statement and statement of comprehensive income

realized gains and losses are shown in net income in which securities are sold; unrealized gains and losses are shown in OCI in the periods in which changes in fair value occur and reclassified out of OCI when sold.

Remember we do NOT

recognize unrealized holding gains and losses for HTM investments.

For AFS and HTM, if there is a decline below the cost that is designated other-than temporary, OTT, it must be managed by

reducing the carrying value to its fair value by the amount of the impairment loss.

2. balance sheet (trading securities)

securities are reported at fair value, typically as current assets, and do not affect comprehensive income.

Following their purchase, bonds are carried on

the balance sheet at amortized cost (face amount less unamortized discount or plus unamortized premium) and not adjusted for changes in the fair value.

If the investor's level of influence changes so that must go from equity to another method (lose ownership interest)

the carrying value of the investment at the date of transfer becomes the cost basis under the new method.

when an investment is acquired mid year

the journal entries would be modified to include the appropriate fraction of each of the amounts recorded.

main difference between equity and consolidation method is

the level of detail reported in financial statements; equity method is often referred to as one-line consolidation.

To be classified as held to maturity the investor must have

the positive intent and ability to hold debt securities to their scheduled maturity date.

When a security is reclassified between two reporting categories

the security is transferred at its fair value on the date of the transfer.

For AFS under the fair value option

they are still listed as investing in the statement of cash flows!!!

If the investor has to change from another method to the equity method

this must be a RETROSPECTIVE CHANGE; at transfer date, adjust the investment to appear as if we had always used the equity method. Any unrealized gains or losses and fair value adjustment accounts are closed at the date of transition to equity method.

Adjustments to trading securities are usually made

to a fair value adjustment account but can also be made directly to the investment account.

Just as with trading securities, AFS are written

up or down to fair value for the balance sheet.

Key concept: under the equity method

we do NOT adjust for changes in fair market value.

Trading securities are initially recorded at cost including any brokerage fees but

when a balance sheet is prepared in subsequent periods, this type of investment is written up or down to its fair value, or 'market to market'.