Chapter 4 Marketable Securities
A financial liability is
A contractual obligation - to deliver cash or another financial asset to another entity or to exchange financial assets in the entity's own equity instruments
How to reclassify a security?
In other words, current market price is used to determine the transfer. 1. reclassify at Fair market Value 2. The difference is treated as a realized gain/loss on the income statement. 3. Eliminate any related valuation allowance accounts
Available for Sale Securities
Securities that are all investments in marketable equity or debt instruments that do not fit the definitions of HTM or trading securities. These may be classified as current or noncurrent assets, depending on the expected date of sale. If the holding period of the securities is indefinite, they should be classified as noncurrent assets.
How to determine if a decline in value is other than temporary.
Step 1 - Determine whether an investment is impaired If the fair value is less than its cost, the investment is considered to be impaired Step 2 - Evaluate whether an impairment is other than temporary
Held to Maturity
These are classified as noncurrent assets unless the maturity date is less than 1 year from the balance sheet date
Financial Assets and liabilities are
generally measured at fair value through profit or loss, when measurement at FTVPL, increases or decreases in fair value are reported as gains or losses on the income statement
When an entity elects the Fv option, certain disclosures are required as of each balance sheet date, which include:
management's reasons for electing the fair value option for each item for which the election was made If elected for some, but not all, items within a group of similar items, a description of the similar items, the reasons for a partial election, and how the similar items affect line items on the statement of financial position. The differences between fair value amounts and principal balances of receivables or payables with contractual principal amounts. Disclosures required when applying the equity method if the fair value election had not been made
Some of the specific applications of the fair value option include the following
1. An investment accounted for under the equity method would be reported at fair value on each balance sheet date, increases or decreases will be recognized as unrealized gains, or losses on the income statement, and dividends received will be recognized as income 2. AFS will be reported at fair value on each balance sheet date, Unrealized gains or losses are reported as a component of net income , however, instead of other comprehensive income. 3. Trading securities is not affected (since it is already reported at fair value) 4. Held to Maturity - Securities continue to be accounted for at amortized cost, recognizing interest income under the effective interest method. In addition, the carrying value is adjusted to fair value on each balance sheet date with the increase or decrease recognized as a component of net income. One the fair value option is elected, it is irrevocable until a subsequent election date
How to determine if an impairment loss has occurred for debt securities
1. If the entity intends to sell the security, a nontemporary loss is considered to have occurred. 2. If the entity does not intend to sell the security, a nontemporary loss will be recognized if it is more likely than not that the entity will be required to sell the security before the value is recovered or if the present value of the amount expected to be recovered is less than the carrying value
How to determine if an impairment loss has occurred for investments in equity securities
1. If the investor intends to sell theinvestment before it recovers in value, an impairment is considered nontemproary and recognized int eh period in which the decision is made to sell the investment 2. If the investor does not intend to sell the investment, the loss is recognized int eh period in which the loss that is considered nontemporary occurs. 3
What are characteristics of held to maturity Securities?
1. Non-current, unless maturity date is LESS than 1 year from the balance sheet date, bonds only. 2. Bonds Only (no stocks) 3. Record at cost 4. Carry At amortized cost (face of net unamortized discount or premium) 5. Unrealized gains and losses are not applicable 6. Realized gains and losses shouldn't happen, but could 7. report interest income net of amortization on the income statement 8. Investing activity on the statement of cash flows 9. Considered held to maturity if sale occurs after at least 85% of principle has been collected
Reclassifications between Held to Maturity and AFS follow as?
1. Reclassify at FMV 2. If HTM to AFS, then record in Other comprehensive income (OCI) 3. IF AFS to HTM - then the unrealized holding gain/loss is reported on the balance sheet as part of Comprehensive income and amortized over the remaining life of the security.
Under certain circumstances, financial assets are measured at amortized cost - this is the only case if 2 conditions are met
1. The entity's business model is to hold the asset to collect scheduled cash flows 2. The terms of the instrument call for cash flows that are exclusively payments of principal and interest on specified dates.
Election dates for the fair value option may include
1. the date on which the entity enters into an eligible firm commitment 2. When an item that was reported at fair value due to specialized accounting principles,. with unrealized gains or losses reported in earnings, no longer qualifies for the specialized accounting treatment. 3. An investment that becomes subject to the equity method or a retained interest in a subsidiary or VIE that no longer qualifies for consolidation 4. A circumstance requiring the item to be reported at fair value at a point in time or each reporting date, other than impairment
Gains and losses on financial assets or liabilities measured at fair value are generally recognized in profit or loss, this is not the case when
1. the instrument is part of a hedging relationship, in which case hedge accounting would apply It is an investment in an equity instrument and the entity has elected to report gains and losses in other comprehensive income It is a financial liability designated as FVTPL - increases or decreases in value resulting from changes in credit risk are recognized in other comprehensive income - remaining increases or decreases in value are recognized in profit or loss.
Disclosures are also required for each period for which an income statement is presented:
Amounts of each gain or loss recognized in earnings as a result of changes in fair values An indication as to where interest and dividends are reported on the income statement and how they are measured For receivables held as assets, the gains or losses resulting from changes in the instruments credit risk, including how it is measured. For liabilities affected by changes in the instrument's credit risk during the period, the gains or losses resulting from changes in the instruments credit risk, reasons for the change, and how the gains or losses are measured.
AFS characteristics
Are either debt or equity that don't fall into the other 2 categories Current or noncurrent (if holding period is indefinite, assume noncurrent) Include both debt and equity securities Initially recorded at cost but carried at FMV Any unrealized gains and losses appear on the balance sheet as part of Comprehensive income int he stockholders equity section. Realized gains and losses are always on the income statement as well as interest and dividend income The acquisition and disposal of AFS Investments is an investing activity on the statement of cash flows
Trading Securities (HFT - Held for Trading)
Are investments in equity instruments, such as stocks, options, rights, warrants, or debt securities such as bonds, which the investor has acquired in an attempt to make profits by buying and selling within a short period of time. These are normally classified as current assets.
Held for Trading Securities Overview
B/S Current only Debt/equity FMV I/S Unrealized gains/losses realized gain/loss interest 7 dividend income Cash Flows Operating Activity (could be investing if non-current)
Held to Maturity Overview
B/S Non-current (current) Debt Only Amortized Cost I/S Realized gain/loss Interest Income Cash Flows Investing Activity
Example of loss events include those that normally surround significant financial difficulty on the part of the other party including:
Breach of contract, such as default or delinquency Granting concession tot he borrower for economic or legal reasons related to the debtor's financial circumstances Likelihood of the debtor going into bankruptcy Inactivity of the market for the instrument due to the financial difficulty Observable data indicating an expected decrease in future cash flows Economic conditions contributing to default
IFRS What is a financial asset
Cash An equity instrument of another entity A contractual right - to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity on potentially favorable terms A contract that will be settled int eh entity's own equity instruments.
What is a financial instrument
Cash, a security representing an ownership interest in another entity, or a contract that has 2 components: 1. it represents a potential financial liability for one party by imposing an obligation to do one of the following 1. deliver cash or another financial instrument to another entity 2. Exchange other financial instruments with the other entity on potentially unfavorable terms It represents a potential financial asset for the other party by conveying a right to one of the following: 1. Receive cash or another financial instrument from the other entity 2. Exchange other financial instruments with the other entity on potentially favorable terms
Trading Securities characteristics
Current asset on the balance sheet if operating and noncurrent if investing Include both debt and equity securities (bonds & stocks) Initially recorded at cost, but carried at FMV Any unrealized gains and losses may appear on the income statement Realized gains and losses are always on the income statement along with interest and dividend income The acquisition and disposal of trading securities is normally an operating activity on the statement of cash flows.
Available for Sale Overview
Current/non-current Debt/equity FMV Unrealized gains/losses on B/S as part of comprehensive income I/S Realized gain/loss Interest & dividend income Cash Flows Investing Activity
If the decline is determined to be other than temporary, the amount of loss will be For Debt securities
If the investor expects to sell, or to be acquired to sell the security before recovery, the difference between the fair value at the balance sheet date and the amortized cost If the investor does not expect to sell, or to be acquired to sell the security before recovery, a portion of the loss attributable to credit
When an investment in an equity instrument is not held for trading, the entity may elect to recognize changes in fair value in other comprehensive income rather than in profit or loss. The following must occur with regard to the election
The election must be made at initial recognition the election is irrevocable dividends are recognized in profit or loss If the value is impaired, the loss would go tot the income statement. If the previously recorded loss is recovered. It first goes tot he income statement to offset the previously recorded impairment loss, the remainder would go to OCI to bring the asset to fair value.
Sale of AFS
When the investment in AFS is sold, the difference between the cost and proceeds is treated as a realized gain/loss Ignore the allowance account and adjust to the new target balance without the security that was just sold.
If the decline is determined to be other than temporary, the amount of loss will be For equity securities
the difference between the fair value at the balance sheet date and the amortized cost
