E. INVESTMENTS - 3. FINANCIAL ASSETS Debt Securities

Question 1

_{E. INVESTMENTS}

_{<u>4. FINANCIAL ASSETS DEBT SECURITIES</u>}

Debt Securities

Define:

Answer 1

Debt securities—Securities that represent the right of buyer/holder (creditor) to receive from the issuer (debtor) a principal amount at a specified future date and (generally) to receive interest as payment for providing use of funds.

Includes

• bonds,
• notes,
• convertible bonds/notes,
• redeemable preferred stock.

Excludes

• common/preferred stock,
• stock warrants/options/rights,
• futures/forward contracts.

Question 2

_{E. INVESTMENTS}

_{<u>4. FINANCIAL ASSETS DEBT SECURITIES</u>}

Decision Tree

Debt Securities

Answer 2

Is investment a Debt or Equity Security?

If Debt, then ability and intent to hold to maturity?

Yes -

• Classified as Held-to-Maturity
• Balance Sheet(amortized cost)
• Income Statement (Dividend or Interest income)

No -

• Classified as Trading, or
• Classified as Available-for-Sale

Question 3

_{E. INVESTMENTS}

_{<u>4. FINANCIAL ASSETS DEBT SECURITIES</u>}

For Debt Securities

Answer 3

For Debt Securities:

The entity has several options for how they carry debt securities as investments:

The entity will either classify the investment as:

• trading,
• available-for-sale (AFS), or
• held-to-maturity (HTM)

If they have the ability and intent to carry the debt securities until maturity, then they will be classified as ‘held to maturity’ (HTM)

If they don’t have the ability to hold until maturity, or if they don’t plan to hold until maturity, then the investments will be classified as ‘available for sale’ securities (AFS)

If a debt security is acquired with the intent to sell in the short-term, then it is classified as a trading security

For trading securities, both realized and unrealized gains & losses are recognized in the income statement