11.01 Investments Overview Flashcards
What are the two basic categories securities fall into?
Debt securities and Equity securities.
What are debt securities?
Debt securities are securities that represent the right of buyer/holder (creditor) to receive from the issuer (debtor) a principal amount at a specified future date and, generally, to receive interest as payment for providing use of funds.
Examples: bonds; notes; convertible bonds; redeemable preferred stock.
What are equity securities?
Equity securities are securities that represent ownership interest or the right to acquire or dispose of ownership interest.
Examples: common stock; preferred stock; stock warrants; call/put options
What is the concept of recognition?
Recognition is an accounting concept. It means that the company has reported the item on its financial statements. Recognized gains or losses occur when a gain or loss related to an investment (or other item) is recorded (recognized) in the FS, regardless of whether the investment has been sold.
What is the concept of realization?
Realization is an economic concept. It means that there is a culmination of the earnings process and cash or other consideration is given or received. A realized gain/loss occurs when the investment (or other item) is sold (or otherwise disposed of). The difference between the cash or other consideration received and the carrying value of the investment is a realized gain or loss. An unrealized gain or loss occurs from holding an investment. Unrealized gains and losses may be recognized but are not realized.
What is the fair value option?
In addition to those items that are required to be measured at fair value (FV), an entity can elect to report some or all of its financial instruments at their FV. When the FV option is elected, the eligible item will be measured at its FV on each balance sheet date, and unrealized gains and losses are reported in income. If an entity decides to elect the FV option, the entity may apply the FV option to any qualifying financial instrument, without being required to apply it to others, including those that are similar. An election may be made only when a financial asset or liability is acquired or in other limited circumstances, referred to as “election dates.” Likewise, once elected, the FV option is permanent and may only be discontinued on a subsequent election date.
