2E Investments Flashcards
Held to Maturity debt securities
- Carrying value amortized for any discounts or premiums.
- No unrealized gains/losses
- returns recorded to interest income
Trading debit securities (short term)
- Measured at fair value
- Changes in fair value recorded as unrealized gain/loss
- Returns recorded to interest income
Available for sale debt securities (long term but not to maturity)
- Measured at fair value
- Changes in fair value recorded to OCI/AOCI
- Returns recorded to interest income
Readily determinable fair value of equity securities 0.01% to < 20%
- Measured at fair value
- Changes in fair value recorded as unrealized gain/loss
- Returns recorded to dividend income
No readily determinable fair value of equity securities 0.01% to < 20%
- Measured at historical cost less impairment
- No unrealized gain/loss
- Returns recorded to dividend income
Equity method investment 20% to 50%
- Investment account adjusted for gain/loss and dividends
- Changes in fair value recorded as adjustments to investment account (BS) and equity in earnings (IS)
- Returns adjust investment account for dividends paid
20% to 50% - Fair value option, if elected
- Measured at fair value
- Changes in fair value recorded Other Income/Loss
- Returns recorded to dividend income
50%+ - Consolidation(Acquisition) method
- Eliminate investment account
- Non-controlling interest account for less than 100% ownership
- Subsidiary balance sheet accounts at fair value
- Changes in value recorded to Goodwill (debit) or Gain on bargain purchase (credit)
Levels of the fair value hierarchy
Level 1 - Observable, quoted prices in active markets for identical assets
Level 2 - Observable prices for similar assets in active markets OR identical assets in inactive markets
Level 3 - Unobservable inputs using the best information reasonably available
Changes in fair value for trading security
Increase in Fair Value:
Dr - Valuation allowance
Cr - Unrealized gain
Decrease in Fair Value:
Dr - Unrealized loss
Cr - Valuation allowance
Change in fair value for Available for Sale security
Increase in Fair Value:
Dr -Investment in AFS securities
Cr - Unrealized gain-OCI
Decrease in Fair Value:
Dr - Unrealized loss-OCI
Cr - Investment in AFS securities
Impairment of Available for Sale securities
Cost > fair value, permanently. Recognize immediately.
Dr - Impairment loss on AFS securities
Cr - Investment in AFS securities
Sale of Available for Sale securities
- Adjust to fair value
- Record the sale
Dr - Cash
Dr - Loss on disposal
Cr - Investment in AFS
Cr - Gain on disposal
Held to Maturity debt investments
must have positive intent and ability to hold the security until maturity
Held to maturity initial measurement
Present value of $1 = face value x market rate (divided by 2, if semi-annually)
+ Present value of annuity = face value x contract rate (divided by 2, if semi-annually)
= Cash amount paid
Purchaser:
Dr - Investment in bonds Face value
Cr - Cash Present value of $1 + Present value of annuity
Cr - Unamort. bond discount Plug
Issuer:
Dr - Cash Present value of $1 + Present value of annuity
Cr - Bonds Payable Face value
Dr - Unamort. bond discount Plug
Held to maturity Interest Payment
Purchaser:
Dr - Cash Face value x stated rate (divided by 2, if semi-annually)
Dr - Bond discount Plug
Cr - Interest income Cash paid amount x market rate (divided by 2, if semi-annually)
Issuer:
Dr - Interest expense Cash paid amount x market rate (divided by 2, if semi-annually)
Cr - Bond discount Plug
Cr - Cash Face value x stated rate (divided by 2, if semi-annually)
Accrual at end of year will hit interest receivable/payable instead of cash
Conditions for selling HTM security prior to maturity date
- Sale is close to maturity date (within 3 months)
- Sale after substantial portion of principal is collected (85%+)
Realized gain/loss is recognized if carrying value differs from selling price
HTM sale JE
Dr - Cash Plug
Cr - Interest income (Face value x contract rate)x(length of time since last payment ie 5/6)
Cr - Bond Carrying value (including last weighted interest payment)
Cr - gain on sale of bond Selling price less carrying value
Impairment of HTM bonds
Carrying value > fair value, permanently
Dr - Impairment loss on bond
Cr - Investment in bonds
When the equity method is applicable
20-50% or significant influence. Adopted prospectively.
Under IFRS, Fair Value option not permitted for entities with significant influence
True
Effect of net income (loss) under equity method
Net income:
Dr - Investment in Company
Cr - Equity in earnings
Net Loss:
Dr - Equity in earnings
Cr - Investment in Company
Based on % of ownership. Prorate income based on ownership date.
Dividend income under the equity method
Dr - Cash or dividends receivable
Cr - Investment in Company
Do NOT prorate dividends. Multiply by ownership %.
Changing to/from the equity method
Change is prospective. Make changes going forward, not backward.
