FAR: Investments - Debt & Equity Sec.

Trading securities (HFT - Held for Trading)

*Current Asset* investments in debt instruments, such as bonds, which the investor has acquired to make a profit by buying and selling within a short period of time.

What amounts should be included in the initial recording of a held-to-maturity investment?

- Purchase price of security - Directly related cost of acquisition (e.g., brokerage fee, transfer fee, etc.) - Accrued interest, if any, is not included in the cost of the investment.

What amounts should be included in the initial recording of a held-for-trading investment?

- Purchase price of the debt security - Directly related cost of acquisition (e.g., brokerage fee, transfer fee, etc.)

Recording method for: Nominal: Readily determinable FV vs not?

- Readily determinable FV = record at FV - NOT readily determinable FV = record at cost *On B/S as current or non-current investment, depending on intent to hold

For all debt securities, dividends or interest income is reported in_____________________, including the ___________________.

1) current-period earnings 2) Prem / Disc Amortization

Nominal ownership

<20% equity ownership

Control ownership

>50% equity ownership

Significant ownership

>=20% - 50% equity ownership

Where are held-to-maturity investments reported on the statement of cash flows?

As an investing activity

At what cost are held-to-maturity securities carried and reported?

At amortized cost

AFS = B/S at

FMV

HFT = B/S at

FMV

Where are unrealized holding gains and losses on investments held-for-trading reported?

In income (income statement) as part of income from continuing operations

Yr 1 - OCI reported unrealized losses on an AFS investment. Yr 2 - The sec. was sold at a loss equal to the unrealized loss previously recognized. What is the adjustment to OCI?

The unrealized loss should be credited to the OCI. *Unrealized losses cause a debit balance in accumulated OCI. We must eliminate it with a credit to OCI.

__________________securities would not be subject to impairment losses.

Trading

How are unrealized G/L reported for Trading vs AFS?

Trading = Reported to net income AFS = Reported to OCI

What is the required accounting treatment when an investor has control of an investee?

Treat as a subsidiary and consolidate investee with investor (consolidated financial statements)

HTM = _____________cost

amortized

HTM = carried at...

amortized cost

Realized G/L

occurs when the investment is sold (or disposed). The diff. b/t the cash or other consideration received and the carrying value of the investment is a realized G/L

Trading sec. transactions are normally reported in the _____________section of the statement of cash flows

operating activities

AFS - _________________ appear on the income statement as does interest income

realized G/L

How are available-for-sale investments accounted for and reported in financial statements?

- Recognize interest income. - Amortize discount or premium, if any, on debt securities. - Adjust investment to fair value at balance sheet date with any gain/loss reported as an item of other comprehensive income.

List the investor's considerations in selecting the correct accounting for an investment.

- The nature of the investment - The extent of the investment - Management's intent

List the investor's considerations in selecting the correct accounting for an investment.

- Whether the investment is a debt or equity security - Whether there is readily determinable fair value - Management's intent on how long the investment will be held

The objectives of financial reporting include:

1) Providing information that is useful to investors and creditors 2) Providing information about an entity's resources and claims against them 3) Reporting changes in the entity's economic resources and claims 4) Reporting performance measured using accrual accounting 5) Measuring financial performance in terms of cash flows 6) Reporting changes in economic resources and claims from sources other than the entity's financial performance.

GAAP: The only times that FV is required to be applied include:

1) Recognition of assets acquired 2) Liabilities assumed 3) Minority interest in bus. acq. 4) Reporting of asset after impairment loss 5) Reporting of certain marketable sec. that are reported as trading or AFS 6) ALL derivatives

List the criteria for held-for-trading securities.

1. Applies to investments in debt securities. 2. Investor buys for the purpose of selling in the near term.

Identify the three possible levels of influence over an investee for accounting purposes.

1. Not significant 2. Significant influence but not control 3. Control

Classify: Unrealized G/L are reported in OCI?

AFS

If a question asks you to calculate the net unrealized loss in the statement of stockholders equity, what type of security is it asking for?

AFS (Unrealized G/L reported in OCI) *Trading - reported on I/S

Crick Co. purchased bonds at a premium on the open market as an investment and intends to hold these bonds to maturity. Crick should account for these bonds at

Amortized cost

Kale Co. purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale should account for these bonds at

Amortized cost

What investments are classified as available-forsale?

Any debt investments not classified as either held-to-maturity or held-for-trading. The available-for-sale category is the default category if an investment in debt does not meet the requirements of either held-to-maturity or held-for-trading.

When AFS sec. are sold, what must be eliminated?

Any net amount of unrealized gains and losses that had been reported in OCI.

How are available-for-sale investments reported in the balance sheet?

At fair value as either current or noncurrent assets (based on the entity's policy).

How are held-for-trading investments carried and reported?

At fair value, with changes in fair value reported in current income

Long Co. invested in marketable debt securities. At year-end, fair-value changes in this investment were included in Long's other comprehensive income. How would Long classify this investment?

Available-for-sale securities *Absent a FV election, FV changes in AFS sec. are reported in OCI.

Both Trading sec AND AFS sec. - Originally recorded at ___________but carried at__________.

Cost FMV

AFS - Purchase JE

DR - Investment in AFS sec. CR - Cash

AFS - EOY FMV Increase JE

DR - Market Adj. AFS Sec (BS) CR - Unrealized gain (Smt of comp inc)

AFS - EOY FMV decrease JE

DR - Unrealized loss (Smt of comp inc) CR - Market Adj. AFS sec (BS)

List the criteria for a held-to-maturity classification.

Debt security Investor has intent to hold to maturity. Investor has ability to hold to maturity.

Beach Co. determined that the decline in the fair market value (FMV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach's books. The controller would properly record the decrease in FMV by including it in which of the following?

Earnings section of the income statement and writing down the cost basis to FMV.

Investments in debt securities that are recorded at FV:

Either trading or AFS, depending on intent to hold

Classify: Unrealized G/L resulting from changes in the value of the security receive no accounting treatment?

HTM

The unrealized G/L on a trading sec. are recognized in the ...

I/S over the period of ownership. *G/L during the holding period are unrealized because the security is not yet sold, but the G/L parallel the movement in FV each reporting period.

AFS - Where are the cash flows (Inflows / Outflows) reported?

Investing activities on the statement of cash flows

Recording method for: Control ownership >

Recorded using Equity Method or Cost Method *Consolidated F/S

Recording method for: Significant ownership >

Recorded using the Equity Method, unless the FV option is elected. *B/S investment, normally non-current

How is interest earned on held-to-maturity investments reported in the income statement?

Reported as another income item in the income statement

Equity sec. w/ readily determinable FV - reported at....and the unrealized G/L are reported how?

Reported at FV Unrealized G/L are reported in net income

Equity sec. NOT readily determinable FV - reported at....and what is reported to net income?

Reported at cost Impairment losses and observable price changes to net income

Define "equity securities."

Securities representing ownership or the right to acquire ownership interest

Define "debt securities."

Securities representing the right of the creditor to receive from the debtor a principal amount at a specified future date and to receive interest as payment for providing use of funds

__________________held for investment are derivatives that are required to be reported at FV

Stock Options

U.S. GAAP requires which of the following to be reported at fair value in a company's financial statements? Bonds payable Stock options held as an investment Written loan commitments

Stock options held as an investment

AFS > Temporary vs permanent losses

Temporary losses are treated as an unrealized loss and reported in OCI. Permanent losses are treated a realized losses equal to the excess of cost over market.

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

The *income approach* for measuring fair values involves evaluating the future benefit that will be derived from the asset and determining the appropriate amount of investment that would be justified to obtain such a return. A common application of this approach is to measure the present value of expected future positive cash flows.

What method is used to amortize a premium or discount on a security?

The effective interest method or straight-line method if not materially different

What amounts are included in a gain or loss recognized on the sale of an available-for-sale investment?

The gain or loss recognized on the sale of an available-for-sale investment includes: - The difference between the carrying value of the investment and its selling price; and - Any unrealized gain or loss in accumulated other comprehensive income related to the securities sold.

List the guidelines for determining no significant influence in an investment.

The investment is: - In debt securities; - In nonvoting stock; - Temporary in nature; - Less than 20% ownership of voting stock.

What is the basis for general guidelines for determining the level of influence over an investee?

The nature and extent of ownership

What is the basis for general guidelines for determining the level of economic influence over an equity investee?

The nature and extent of ownership rights

Under what conditions can a debt security sold before maturity be considered held-tomaturity?

The sale is near enough to the maturity date so that interest rate risk is substantially eliminated. The sale occurs after the investor has collected a substantial portion (at least 85%) of the principal outstanding at acquisition date.

AFS - ____________appear on the statement of comprehensive income as a component of Other comprehensive income and accumulated on the B/S.

Unrealized G/L

Unrealized G/L can be recognized in other comprehensive income for debt investments accounted for at the ______________method.

available-for-sale method

Trading sec. - What is adjusted every period?

carrying value to current market price

Trading sec. are recorded at

cost (part of entity's working capital)

ONLY investments in ___________securities are considered either trading or AFS.

debt

A stock option is a __________________

derivative

Debt securities - Any discount or premium is then amortized using the ____________________ method over the term of the securities

effective interest

Unrealized G/L can be recognized in net income for certain equity and debt investments accounted for at _____________.

fair value

Trading sec - Realized G/L are always on the I/S along with...

interest and dividend income

HTM

investments in bonds and other debt that the investor has the ability and intent to hold until the due date for repayment (Non-current assets, until maturity date is less than 1 yr)

AFS

investments in marketable debt instruments that do not fit the definition of HTM or trading. (Current or non-current, depends on expected date of sale)

Debt sec. transferred from trading to AFS are initially recorded at the _____________ on the date of transfer

market value

When a security is reclassified from trading to available for sale, the amount reported as an available for sale is the...

market value on the date of transfer.

When an investment in a debt security is reclassified from available for sale (AFS) to held to maturity (HTM), the transfer occurs at its....

market value on the date of transfer.

AFS - When sold > Diff. b/t cost and proceeds is treated as...

realized G/L. *Ignore allowance acct and adj. to target balance w/o the sec. that was just sold, unless it is the last investment, then the allowance and the unrealized G/L must both be eliminated

Amortized cost is..

the amount at which the investment is reported on the BS

When investments in marketable debt securities are transferred between the trading and available for sale categories, the transfer is always recorded at.....

the fair market value of the securities on the date of the transfer

Trading sec - fluctuations in market prices create...

unrealized + realized gains / losses reported in net income each period