F5 Flashcards
Describe the financial instrument fair value option under U.S. GAAP
On specified election dates, an entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings. The fair value option is irrevocable.
On the balance sheet, debt securities classified as trading or available-for-sale are valued how?
At fair value.
How are unrealized gains/losses on debt securities classified as trading securities recognized?
Unrealized gains/losses on trading securities are recognized on the inocme statement.
How are unrealized gains/losses on debt securities classified as available-for-sale recognized (assuming no expected credit loss)?
Unrealized gains and losses on available-for-sale securities with no expected credit loss are reported in other comprehensive income.
On the balance sheet, debt securities classified as held-to-maturity are valued how (assuming no expected credit loss?)
At amortized cost.
List 3 conditions when losses on debt securities classified as available-for-sale are recognized in income.
1 Sale of the security
2 Transfer of the security to trading classification
3 When there is an expected credit loss on the available-for-sale security, the credit loss reported in net income cannot exceed the amount by which fair value is below amortized cost.
When a marketable debt 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.
When does credit loss have to be booked for debt investments?
A credit loss must be reported on an available-for-sale or held-to-maturity debt security when it is probable that the amounts due (principal and interest) will not be collected.
How is a credit loss recognized for an available-for-sale or held-to-maturity debt security?
When there is an expected credit loss, the investment should be reported at the present value of the principal and interest that is expected to be collected. The credit loss is the difference between amortized cost and the present value.
For an available-for-sale security, the credit loss cannot exceed the amount by which fair value is below amortized cost, becasue the investor has the option to sell an available-for-sale ivnestment if the loss on the sale will be less than the expected credit loss.
How is the realized gain or loss calculated for trading and available-for-sale debt securities when they are sole?
TRADING SECURITIES
realized gain/loss = selling price vs adjusted cost (original cost +/- unrealized gains or losses previously recognized in net income)
AVAILABLE FOR SALE SECURITIES
realized gain/loss = selling price vs original cost adjusted for any credit losses recorded on the income statement from previous periods (note that any unrealized gains or losses in AOCI must be reversed)
How are equity securities typically valued?
Equity securities are typically carred at fair value through net income (FVTNI), with unrealized gains/losses included in earnings.
Describe3 the “practicality exception” for equity securities.
For equity investments that do not have a readily determinable fair value, this exception allows an entity to measure equity investments at cost, less impairment, +/- observable price changes of identical or similar investments from the same owner.
