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AE 121 > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

Investment in debt securities are classified as _________ of the issuer.

A

Liabilities

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2
Q

What are the components of return of investment in debt securities?

A

Interest income and gains from changes in fair value.

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3
Q

This kind of investment is a contract usually available to the general public.

A

Investment in bonds

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4
Q

How can investment in debt securities be classified as?

A

FVTPL
FVTOCI
at Amortized Cost

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5
Q

Can an entity choose any of the three classifications, at its discretion, to account for each of its debt securities?

A

No.

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6
Q

What should be considered in classifying debt securities?

A

1.) The business model of managing the financial asset

2.) The contractual cash flow characteristics of the financial asset

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7
Q

This is how an entity manages its investments in debt securities to generate cash flows.

A

Business Model

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8
Q

This business model refers to holding debt securities until maturity in order to collect the contractual cash flows.

A

Held-to-maturity

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9
Q

This business model is the middle ground for debt securities.

A

Both held-to-maturity and held-for-selling

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10
Q

This business model is selling debt securities to receive cash flows.

A

Held-for-selling

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11
Q

This business model is evaluated in terms of performance based on interest income and credit quality of the securities.

A

Held-to-maturity

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12
Q

This business model is evaluated in terms of performance based on overall return or the credit quality plus the fair valuation of the securities.

A

Both held-to-maturity and held-for-selling

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13
Q

This business model is evaluated in terms of performance based on the realized and unrealized gains and losses and fair value of the securities.

A

Held-for-selling

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14
Q

What risk affects the performance of held-for-maturity securities?

A

Credit risk

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15
Q

What risk affects the performance of both held-for-maturity and held-for-selling securities?

A

Credit risk and market risk

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16
Q

What risk affects the performance of held-for-selling securities?

A

Market risk

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17
Q

True or False: The business model both held-to-maturity and held-for-selling possess the characteristics of both of the other business models.

A

True.

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18
Q

This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

A

Credit Risk

19
Q

This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.

A

Market Risk

20
Q

This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

A

Interest rate risk

21
Q

This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

A

Currency risk

22
Q

True or False: The business model assessment shall be based on assertion or the intention of the management.

A

False. It should be based on facts.

23
Q

True or False: The business model assessment is made on an investment-by-investment basis.

A

False. It should be made on portfolio basis.

24
Q

This is defined as a collection of different financial assets for the purpose of managing investments.

A

Portfolio

25
Q

True or False: An entity can utilize all of the different classifications at the same to account for debt securities.

A

True.

26
Q

True or False: In assessing the business model, the worst case scenarios should be incorporated and considered.

A

False.

27
Q

What is the SPPI test?

A

The test whether the contractual cash flows are solely payment of principal and interest.

28
Q

How can an entity pass the SPPI test?

A

If it is consistent with a basic lending arrangement.

29
Q

Illustrate the summary of classification of debt securities.

A
30
Q

What are the circumstances that will fail the SPPI test?

A

1.) Leverage or the complex criteria in determining the amount of interest are considered as containing leverage.

2.) Excessive prepayment penalties

3.) Convertibility option on bonds

31
Q

True or False: An entity cannot apply the fair value option or irrevocably designate a debt security at FVTPL even if doing so will eliminate or significantly reduce the accounting mismatch.

A

False. An entity may be able to do this.

32
Q

When irrevocably designating a debt security, when is it made?

A

On the date of initial recognition

33
Q

True or False: The irrevocable designation at FVTPL will disqualify a debt security to be subsequently reclassified to either FVTOCI or at amortized cost later on.

A

True

34
Q

What rate should be used in the calculations of present values?

A

The market rate on the measurement date.

35
Q

This determines the amount of interest that can be actually received from the debt security.

A

Stated rate

36
Q

This is a type of debt security where there is a one-time principal payment on maturity date.

A

Term debt security

37
Q

This is a type of debt security where there are periodic payments of principal.

A

Serial debt security

38
Q

What PV factors are relevant for term debt securities?

A

Principal/Face amount: PV factor of single payment

Periodic interest payments: PV of ordinary annuity

39
Q

What PV factors are relevant for serial debt securities?

A

series of PV factors of single payment

40
Q

What are the other names for stated rate?

A

Nominal rate or interest rate

41
Q

What are the other names for market rate?

A

Effective rate or discount rate

42
Q

What is the effect of fair value > face amount?

A

Premium

43
Q

What is the effect of fair value < face amount?

A

Discount

AE 121 (14 decks)

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