Ch 17 Flashcards
Debt securities
Represent creditor relationship with another entity
2 common motivations for investing in securities issued by other companies?
1 earn a high rate of return
2 secure certain operating or financing arrangements with
Other companies
3 debt investment classifications
1 held to maturity
2 trading
3 available for sale
Under IFRS debt investments are classified as either…
Held for collection or trading
Debt: held-to-maturity
Debt securities that company as positive intent and ability
To hold to maturity
Debt: trading
Debt securities bought and held primarily for sale in near
Term to generate income on short-term price differences
Debt: available for sale
Debt securities not classified as held to maturity or trading securities
Debt: held to maturity- valuation
Amortized cost
Debt: trading securities- valuation
Fair value
Debt: available for sale- valuation
Fair value
Debt: held to maturity- treatment of unrealized holding gains or losses
Not recognized
Debt: trading securities- treatment of unrealized holding gains or losses
Recognized in net income on income statement
Debt: available for sale- treatment of unrealized holding gains or losses
Recognized as other comprehensive income and as separate component of stockholder’s equity
Amortized cost
Acquisition cost adjusted for amortization of discount or
Premium
Fair value
Fair value price thats received to sell an asset or paid to
Transfer liability in orderly transaction btw market participants
At measurement date
For debt investments, companies must amortize premium or discount using the…
Effective-interest method
What does the use of the fair value adjustment account enable a company to do?
Maintain a record of its amortized cost
Gains trading
Selling the winners and holding the losers
Way companies can manage their net income
Holding gain or loss
Net change in fair value of security from one period
To another
exclusive of dividend or interest revenue recognized but
not received
Equity securities
Ownership interests in common, preferred or other
Capital stock, warrants, call and put options
Investor and investee
Investor acquires interest in common stock of another
Corporation (investee)
Classification of investments on a companies balance sheet depends on…
The percentage of the investee voting stock that is held
By the company
Classification of investments if investor (corporation) holds less than 20%, what accounting method is used?
Investor has passive interest
Acct m: fair value method
Classification of investments if investor (corporation) holds 20% to 50%, what accounting method is used?
Investor has significant influence
Acct. m: equity method
Classification of investments if investor (corporation) holds more than 50%, what accounting method is used?
Investor has controlling interest
Acct m: consolidated statements
Equity: fair value method
Recording at Market price
5 indications of significant influence in the company?
1 representation in the board of directors 2 participation in policy making process 3 material inter company transactions 4 interchange of managerial personnel 5 technological dependency
Unrealized holding gains and loses for over 20% ownership in company
Not recognized
Equity method, define, how are dividends treated
Company originally records investment at cost of shares
Acquired and subsequently adjusts amount each period
For change in investee’s net assets
Dividends received by investor decrease the investment’s
carrying amount
When a corporation holds more than 50% or a company (controlling interest) what is the investor corporation referred to as? What is the investee corporation referred to as?
Investor: parent
Investee: subsidiary
How do consolidated financial statements treat the parent and subsidiary corporations?
As a single economic entity
IFRS has similar accounting rules for significant influence
Equity investments
In contrast to US firms, financial statements of non-US companies often include both…
Consolidated (group) statements and parent company
Financial statements
IFRS doesn’t not allow the use of the……….. For equity method investments
Fair value option
Impairment, how often should it be evaluated?
Loss in value that is other than temporary
Evaluated at each reporting date
Impairment for debt securities
Company uses impairment test to determine whether it’s
Probable that investor will be unable to collect all amounts
Due according to contractual terms
2 ways companies may display components of comprehensive income
1 combined statement of income and comprehensive income
2 separate statement of comprehensive income
Reclassification adjustment
Ensures that gains and losses aren’t counted twice when
Sales occur
Companies account for transfers between categories (available for sale or trading) at…
Fair value
Transfer from trading to available for sale to trading or trading to available for sale. What is the transfers impact on stockholder’s equity?
Unrealized holding gain/loss at date of transfer increases
Or decreases stockholder’s equity
Transfer from trading to available for sale to trading or trading to available for sale. What is the impact of the Transfer on Net Income?
Unrealized holding gain or loss at date of transfer is
Recognized as net income
Transfer from trading to available for sale to trading or trading to available for sale. Measurement basis?
Security transferred at fair value at date of transfer, which is
New cost basis of security
Transfer from held to maturity to available for sale. Measurement basis?
Security transferred at fair value at date of transfer
Transfer from trading to available for sale to trading or trading to available for sale. Impact of transfer on stockholder’s equity?
Separate component of stockholders’ equity is increased
Or decreased by unrealized gain or loss at date of transfer
Transfer from trading to available for sale to trading or trading to available for sale. Impact of transfer on net income?
None
Transfer from available for sale to held to maturity. Measure,emit basis?
Security transferred at fair value at date of transfer
Transfer from available for sale to held to maturity. Impact of transfer on stockholders’ equity?
Unrealized gain/loss at date of transfer carried as separate
Component of stockholders’ equity is amortized over
Remaining life of security
Transfer from available for sale to held to maturity. Impact of transfer on net income?
None
Reporting of trading (debt and equity securities) on the balance sheet?
Investments shown at fair value, in current assets
Reporting of trading (debt and equity securities) on the income statement?
Interest and dividends are recognized as revenue
Unrealized holding gains and losses are included in net
income
Reporting of Available for sale (debt and equity securities) on the balance sheet?
Investments shown at fair value
Current or long term assets
Unrealized holding gains and losses are separate component
Of stockholders’ equity
Reporting of available for sale (debt and equity securities) on the Income statement?
Interest and dividends are recognized as revenue
Unrealized holding gains and losses aren’t included in
Net income but in other comprehensive income
Reporting of held to maturity (debt securities) on the balance sheet?
Investment’s shown at amortized cost, current or Longterm
Assets
Reporting of trading (debt securities) on the income statement?
Interest recognized as revenue
Reporting equity securities using the equity and/or consolidation methods the balance sheet?
Investments originally are carried at cost, are periodically
Adjusted by investor’s share of investee’s earnings or losses
Decreased by all dividends received from investee and
Classified as long term
Reporting equity securities using the equity and/or consolidation methods the income statement?
Revenue is recognized to extent of investee’s earnings or
Losses reported subsequent to date of investment
