F5 - INV, STMTS OF CF, & INCOME TAXES

Question 1

FAIR VALUE METHOD

Answer 1

Are measured at fair value BUT the treatment of changes in FV depends on the class of the instrument

Trading Securities ( under fair value method ) are recognized in income stmt

AFS: Changes in FV are recognized in OCI, not the IS
UNLESS
They are sold or impaired

Question 2

FAIR VALUE OPTION ELECTION

Answer 2

Allows a company to elect to measure any qualifying financial asset or liability at fair value
Recognized in IS

Election overrides the standard classification rules and can be applied to instruments normally carried at amortized costs ( HTM ) or those that would typically have changes recorded in OCI (AFS)

Once election the Fair Value OPtion is Irrevocable

Question 3

HTM Bonds are usually carried at Amortized costs
BUT
Once Fair Value Option is elected …..

Answer 3

Then the HTM bonds all changes in that FV are directly recognized on the INCOME STMT

Question 4

STATED RATE

Answer 4

Other names: COUPON RATE, Nominal Rate, Face Interest Rate

Is always the payment - bond issuer agrees to pay the bondholder

This rate does NOT change over the life of the bond

Question 5

MARKET RATE

Use this rate to discount future cash flows to their present value when determining the bond’s price

Answer 5

Other names: Effective Interest Rate or YIELD RATE

Rate of return that investors demand for a bond in the market

Reflects the current cost of borrowing

Question 6

Leases are NOT eligible for the fair value option

Answer 6

FV Option applies to financial assets
(Debt & Securities) and Liabilities (Notes Payable)

Excluded are:
Investments in subsidiaries
Pension benefit (assets/liabilities)
AND
Assets & Liabilities recognized under leases

Question 7

Fair Value Option may be chosen for eligible financial instruments that don’t usually get measured at FV

Answer 7

Picking this option is irrevocable
Applied to individual financial instruments (in their entirety)
NOT applied to specific risks

Question 8

A most likely reason for a decline in bond’s market value is that

Answer 8

Interest Rates have gone up

Which can make the bonds seem less appealing to new investors
AND
Leads to a decrease in the bond’s market value

Question 9

Bond Investments
That are HTM - Held-to-Maturity

Answer 9

Should be accounted at their
Amortized Costs - Question will always mention the Stated rate and Market Rate

Amortized costs deal with the differences between Stated Rate and Market Rate

Question 10

When a bond is classified as trading securities

Answer 10

Then they are classified as:

Trading Securities

Trading Securities are reported at Fair Value on BS

Question 11

CECL - CURRENT EXPECTED CREDIT LOSSES MODEL

Answer 11

When an AFS Debt Security has a FV that is below amortized cost

Then it has to be written down to the lower FV by recording a credit loss that is recognized in the IS

EVEN THOUGH the FV is above the Present Value of expected cash flows,

AFS can be sold at any time so that the Credit Loss is limited to the difference between Amortized and FV