Chapter 3: Marketable Securities & Business Combinations Flashcards
On the balance sheet, marketable securities classified as Trading or Available-for-sale are valued…
at Fair Value
On the balance sheet, marketable securities classified as Held-to-maturity are valued…
at amortized cost
How are unrealized gains/losses on Trading Securities recognized?
unrealized gains and losses on trading securities are recognized on the income statement
How are unrealized gains/losses on Available-for-sale securities recognized?
unrealized gains and losses on Available-for-sale securities are reported in OCI
Note: under IFRS, foreign exchange gains and losses on available-for-sale debt securities are reported on the income statement
List 3 conditions when losses on marketable securities classified as Available-for-sale are recognized in income
- sale of the security
- transfer of the security to trading classification
- Other than temporary decline of individual security below cost (impairment)
When a marketable equity security is transferred from trading to Available-for-sale, or vice versa, at what cost is it transferred?
- Transferred at fair value, which then becomes new basis
- for a security transferred into the trading category, the difference is treated as a realized gain or loss and is recognized on the income statement
- For a security transferred from the trading category, the unrealized holding gain or loss will already have been recognized in earnings
Note: transfers to and from the trading category should be rare
How are gains and losses on financial instruments that hedge Trading Securities reported?
Reported in earnings, consistent with reporting unrealized gains and losses on trading securities
How are gains and losses on financial instruments that hedge Available-for-sale securities reported?
Reported in earnings together with the offsetting gains or losses on the Available-for-sale securities attributable to the hedged risk
What disclosures should be made for Available-for-sale and held-to-maturity securities?
- Aggregate fair value
- Gross unrealized holding gains and losses
- Amortized cost basis by type
- Information about the contractual maturity of debt securities
State the criteria to consolidate subsidiaries
- Consolidated when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary
- Do not consolidate when control is not with owners (as in bankruptcy of subsidiary)
Identify the 3 levels of control and the appropriate accounting method for each
- No significant influence (0-20%): use Cost Method: Trading or Available-for-sale securities, at fair value
- Significant influence but 50% or less ownership: Equity method
- Control:
- Cost or equity method (internal accounting)
- Consolidated financial statements (external reporting)
How is the year-end “investment in investee” reported on the balance sheet calculated under the Equity method?
Beginning investment in investee \+ investor's share of investee earnings - Investor's share of investee dividends - Amortization of FV differences = Ending investment in investee
How is an investor’s equity method investment reported on the income statement?
Investor’s share of investee earnings
- Amortization of FV differences
= Equity in earnings/ investee income
How are joint ventures accounted for under IFRS and US GAAP?
Joint ventures are accounted for using the Equity Method under both IFRS and US GAAP
In a step-by-step acquisition, what is the accounting treatment when significant influence is acquired?
- Going from the Cost Method to the Equity Method is handled like a change in accounting principle - retroactively
- Go back retroactively with the Equity Method with the OLD ownership percentage
- Prior period financial statements are restated
