F4 M1 Flashcards
On specified election dates, entities may choose to measure at FV eligible financial
instruments that are not typically measured at FV (irrevocable when comp decides to do
this)
Financial instruments that can’t be recorded at FV: Leases, financial instruments
classified as equity, and pensions
For financial liabilities other than derivative liabilities that are reported under FV,
the portion of the change in FV that relates to a change in instrument-specific
credit risk is recognized in OCI
FV option can only be applied on certain dates
Debt securities: TS, AFS, and HTM (ex: gov’t securities, bonds, convertible debt,
commercial paper, redeemable PS, NP)
Non-debt securities: Leases, derivatives, or AP
Trading securities: Current or non-current asset, G/L reported on IS, purpose of these is
to sell them in the short term, and current are reported in operating section of SCF (non-
current are reported in CFI)
AFS: Current or non-current asset, doesn’t meet definition of HTM or TS, unrealized G/L
is reported on OCI, and they are reported in investing section of SCF (even if current)
HTM: Corp has intent/ability to keep investments until maturity, and they can be reported
as current or non-current assets (FV DOESN’T MATTER FOR THESE)
If a HTM investment is not held until maturity, it will be classified as an AFS security
Debt securities reported at FV: TS and AFS
Unrealized gains and losses are recognized for both TS (IS) and AFS (OCI)
To recognize loss in IS for TS and OCI for AFS: debit loss and credit valuation acc
(contra-asset)
If the problem does not say that the company uses a valuation method to value their
equity, then Instead of debiting or crediting a valuation acc when there is an unrealized
G/L, then I must debit or credit the investment itself instead
Realized G/L are only recognized when a TS or AFS is sold and when an AFS security
is impaired (all realized are recorded in NI)
If any of the 3 securities are transferred to any other type of security (ex: AFS to HTM),
then action must be taken (ex: HTM to AFS must report unrealized G/L on OCI)
All transfers are accounted for at FV
Recording unrealized G/L is only done for TS and AFS while recording impairment is
only for AFS and HTM
Under the current expected credit losses (CECL) model, AFS debt securities and
HTM securities should be reported at net amt expected to be collected using an
allowance for expected credit losses
Expected credit losses are determined based on current conditions, past experience,
and future expectations
Expected credit loss (PV - amort cost) is used to find the full amt of impairment for HTM
securities and it is also used to find the amt of impairment loss that will be recognized as
operating loss on IS and which will be classified as unrealized G/L On OCI for AFS
securities
For HTM, PV is the total of PV of pmts (new pmts expected to be received which will be
less than before) and PV of the bond
For HTM, amort cost is the full price of the bond
If it is expected that I will be receiving less than what I am owed in interest pmts on a
HTM bond, then I will debit credit loss and credit allowance for credit losses (just
like BDE)
Credit loss and allowance for credit losses can also be recognized for AFS
securities (this is only if the investment is impaired)
AFS debt securities will result in a loss when the FV is less than the PV of expected
cash flows (loss in OCI) and the PV is below amortized cost (loss in income)
Credit loss is an exp on IS and allowance is a liability on BS
For TS that are sold, I would debit cash, credit TS (orignal) and credit realized gain (SP -
CV at time of sale)
For AFS that are sold, I would debit cash, debit any unrealized gain (must be closed
out), credit AFS (CV), and debit realized gain (SP - orig cost)
When calculating a sale of AFS securities, I do SP - orig cost because there have not
been any realized losses on the IS, therefore, the stock is not at CV yet
Equity: CS or PS (not convertible bonds)
Equity is recorded at FV and all unrealized G/L is recorded in NI (debit loss and credit
valuation acc)
Unrealized G/L for equity investments is technically just realized bc the value of the
investments is the same as the FV at any point in time
Any type of equity that does not have a FV is recorded as cost - impairment
If there is an equity w/no FV, a comp should do an assessment to get an estimate of the
FV. Once this is done, the comp can compare FV to cost to see if there is impairment. If
there is, it will be recognized as a realized loss in NI and equity will be written down
Div received from comp I am invested in is recorded by debiting cash and crediting div
income (it increases NI)
Stock dividend doesn’t result in an increase in NI
When I am given a liquidating dividend (dividend paid > investee RE), I will debit cash
(dividend x % of ownership I have in comp), credit dividend income (investee RE x % of
ownership I have in comp), and credit the investment in the comp (the plug)
When an equity is sold at the same as its CV, I would debit cash and credit investment
(If it is sold at a gain, I would credit gain along with these entries)
If you buy a stock and there are legal fees associated with buying it, these are included
in the price of the stock
FOR ALL SECURITIES (DEBT & EQUITY), THE FV AT YE BECOMES THE NEW CV
OF THE SECURITIES
If there is a 20k realized loss and a 10k realized gain for a certain period of equity
securities, I should net them to get a 10k loss
If a problem asks me what amt of income or loss is attributable to an equity investment
account, I must net the dividend income and the loss for the year
