F4 - M1 - Financial Instruments Flashcards
Two types: Financial Assets and Financial Liabilities
Financial Assets - Receiving Payments; Investor, bondholder, lender
- Cash, stock, partnerships, contract with one entity to receive cash
Financial Liabilities - Make payments; Borrower, issuer, seller bond
- Deliver cash; exchange other financial instruments on potentially “loser”, stocks, futures/forwards, derivatives
Fair Value Option
Follow same rules as “trading securities”
Unrealized gains and losses are reported in earnings
Eligible Financial Instruments - Available for Sales and Equity Method, significant influence
Fair Value Changes to Instrument-Specific Credit Risk
Financial Liabilities - (OCI) Notes / Bonds, Derivatives liabilities
Credit risk is recognized, “loser”, in OCI
Investments in Debt Securities
Asset; Buy somebody’s else’s bond, no voting rights or influence
3 WAYS TO ACCOUNT - HEAVY ON EXAM
- Trading Securities - “TS”
- Available for Sale - “AFS”
- Held to Maturity - “HTM”
Creditor Relationship = Lender / Bondholder
- Corporate Bonds, Redeemable preferred stock (maturity date); government securities; convertible debt; commercial paper
Classification - Heavy on Exam - “TS”, “AFS”, “HTM”
Trading Securities - current asset, day trader, not long term, its cash flow from operations or investing, mark it FMV, all G/L on I/S
Available for Sale - Current or noncurrent, Cash flow from investing, mark to FMV, if sold g/l is I/S, if unrealized g/l is OCI
Held to Maturity Debt Securities - Current or noncurrent, Cash flow from investing, Amortized Cost, do not mark to FMV; intent and ability to hold to maturity.
Valuation
Debt Securities reported at Fair Value; TS or AFS; FV is the market price; Changes in FV may result in unrealized holdings g/l; Reporting of g/l depends on classification
- Change in FMV, no sale
Unrealized Gains and Losses (TS) - INCLUDED IN EARNINGS, in NET INCOME
Dr. Unrealized loss on trading security
Cr. Valuation account (FV adjustment)
Unrealized Gains and Losses (AFS) - INCLUDED IN OCI, pUfier, to EQUITY
Dr. Unrealized loss on available for sale securities
Cr. Valuation account (FV Adjustment)
Realized (Sold / impaired) Gains and Losses - Recognized in NET INCOME
Reported at Amortized - HTM; debt only; Do not mark to FMV
Reclassification
Transfers between categories, only when justified; accounted for at FV.
Income from Debt Securities
Interest income from investment debt securities classified as trading or available for sale recorded on INCOME STATEMENT
Dr. Cash
Cr. Interest Income
Expected credit loss = PV - Amortized Cost
Impairment of Debt Securities
AFS,
- change in FMV G/L,
- Loss - Max loss is ECL (Expected credit loss); Excess loss OCI
HTM: ECL on IS = PV - Amortized Cost
Impairment of Held to Maturity Securities
ECL on IS to write down to PV
Impairment of Available for Sale Debt Securities
Change in FMV, G/L
Loss - Max. loss on IS ECL, Excess loss OCI
Investor has option to sell it
Sale of Debt Securities
Trading Security - different of adjusted cost (CV) and the selling price:
Dr. Cash
Cr. Trading Security
Cr. Realized gain on trading security (IDA)
Available for sale security - Selling price - Original Cost
Dr. Cash
Dr. Unrealized gain on available for sale
Cr. Available for sale security
Cr. Realized gain on available for sale security
Investments in Equity Securities
Preferred Stock - No voting / significant influence - TS
Common Stock - Significant influence, greater 20%?; if no significant, its a trading security; If you have 25% - 50%, use equity method.
Equity Securities
Public or Nonpublic
Ownership interest in an enterprise or right to acquire /dispose
- Ownership shares (common, preferred)
- Rights to acquire ownership shares
- Rights to dispose of ownership shares (put option)
Does NOT include:
- Redeemable preferred stock at option
Equity Securities - Fair Value through Net Income FVTNI
TS - FMV Public; all G/L on I/S
If not public, account at COST - IMPAIRMENT, there’s no trading exchange
