Debt & Equity Securities Flashcards
Debt Securities - Trading Securities (Held for trading)
B/S, I/S, Cash Flows
B/S - usually current FMV (Initially recorded at cost)
I/S - unrealized gain/losses (hasn’t sold it), realized gain/loss, interest income
Cash flows - usually operating activity (purchase or sale)
Debt Securities - Available for sale (AFS)
B/S, I/S, Cash Flows
No intentions to sell it until maturity (but not for sale immediately) - carry at amortized cost
B/S - Current/non-current FMV (**Unrealized gains/losses OCI on statement of comprehensive income & accum. on B/S in stkhldrs’ eq as accum OCI.
I/S - Realized gain/loss, interest income
Cash flows - Investing Activity
Debt Securities - Held to maturity (HTM)
B/S, I/S, Cash Flows
Ability & Intend to hold until the maturity
B/S - Non-current (current at the end of maturity year), Amortized cost
I/S - Realized gain/loss, interest income
Cash flow - Investing activity
Journal Entry - Debt Security AFS - Purchase, FMV adjustment
Debit: Invest in AFS Security
Credit: Cash
When the value goes up:
Debit: Market Adjustments - AFS Security (B/S)
Credit: Unrealized Gain (Stmt of Comp. Inc)
When the value goes down:
Debit: Unrealized Loss (Stmt of Comp. Inc)
Credit: Market Adjustments - AFS Security (B/S)
IFRS - What happens to Impairment Loss recorded when the FMV goes up again for AFS securities
The impairment loss is reversed; therefore, it is recorded as a gain in PL. The remaining of the increase is recognized in OCI.
What is marketable securities and how it is recognized?
Publicly-held entity securities (stocks, option warrants, or debt instruments) are considered marketable securities and recognized on the B/S at their FMV as of the date of B/S (recording where would depend on the intent and ability of the security: HFT, AFS, or HTM).
When an investment in a debt security is reclassified AFS to HTM or HTM to AFS, how to recognize its change?
The transfer occurs at its market value on the date of transfer.
HTM => AFS - record in OCI
AFS => HTM - unrealized holding gain/loss is reported on the statement of comprehensive income, transferred to the B/S in accum. OCI and amortized over the remaining life of security
When the investment in AFS is sold - how do you record it?
The difference between the cost and the proceeds is treated as a realized gain/loss. **Ignore the allowance account and adjust to the new target balance without the security that was just sold, unless it is the last investment.
**last investment => allowance and the unrealized gain/loss must both be eliminated
Impairment loss treatment for trading securities, AFS, and HFM
Trading sec - not subject to impairment loss
HFM - subject to impairment loss ONLY IF the investor had reason to believe that the principal/interest isn’t paid as scheduled
AFS - subject to impairment loss
What is the treatment and JE for AFS Impairment loss - other than temporary
Write down amount = original cost - declined value from which it is not expected to recover
Credit: Investment
Debit: Realized Loss in IS
Reclassification between Trading securities and AFS - how to record them?
Treat the securities as if they are being sold from the portfolio they are leaving, then repurchased at the current market price into the portfolio they are entering.
Reclassify at FMV
Difference => realized gain/loss on the IS
Eliminate any related valuation allowance accounts
HFM - Investor stand-point Fair Value option
Securities are reported at FMV on the B/S and both realized & unrealized gain/loss will be reported on I/S, as a component of income from continuing operations in the same period as the a change in FMV or disposal, as appropriate
Equity Securities - what is equity security? and how do you record it?
E.g. Corporate stocks (microsoft)
Record it as trading securities:
B/S - usually current FMV (Initially recorded at cost)
I/S - unrealized gain/losses (hasn’t sold it), realized gain/loss, interest income
Cash flows - usually operating or investing activity (purchase or sale)
When fair value option is unavailable, what do we do?
Use adjusted cost method (cost - impairment cost)
When the fair value option is elected, what happens to Trading Securities, AFS, HTM?
Trading securities - not affected
AFS - Unrealized gains / losses => NI
HTM - carrying value is adjusted to fair value, increase/decrease => NI
