F5 M1 Flashcards
Financial instruments
fair value option
-entities can choose fair value option on instruments not typically measured at FV
-unrealized gains and losses reported in earnings
-cannot change out of the fair value option
financial assets and liabilities eligible for fair value option
1) debt investment otherwise classified as AFS
2) equity investment
financial assets and liabilities NOT eligible for fair value option (IV PLED)
1) investments in subsidiaries
2) VIES required to consolidate
3) pension benefits assets and liabilities
4) leases
5) deposit liabilities of financial institutions
6) equity financial instruments
fair value changes in instrument specific credit risk
-part of the change in fair value related to instrument specific credit risk recognized in OCI
-derivative liabilities recognize it in net income
-once liability derecognized, and remaining AOCI gains and losses recognized in earnings
when can a fair value option be applied?
1) date entity recognizes an eligible financial instrument
2) investment treated under equity method accounting
3) date entity stops consolidating investment in subsidiary or VIE
trading securities
-securities bought and held for purpose of selling it in near term
-generally reported as current assets (sometimes non-current assets)
-gains and losses (realized and unrealized) reported in net income
available for sale security
-not an AFS or HTM
-holding a security for an indefinite period of time
-reported current assets or non-current assets
-unrealized gains and losses reported in OCI
-realized gains and losses move to earnings
held to maturity
-entity has intent to hold security to maturity
-reported as current or non-current assets
-no gains and losses are reported
when can the HTM security classification not be used?
when an entity cannot get nearly all of the money it anticipated from its investment
how are trading securities and AFS securities measured at?
fair value
what is a HTM security measured at?
amortized cost
what is fair value?
the market price of a security a buyer and seller would pay and accept for it
unrealized holding gain for trading securities journal entry
Dr. Valuation account
Cr. Unrealized gain on trading securities
unrealized holding loss for trading securities journal entry
Dr. Unrealized loss on trading securities
Cr. Valuation account
unrealized holding gain for AFS journal entry
Dr. Valuation account
Cr. Unrealized gain on AFS
unrealized holding loss for AFS journal entry
Dr. Loss on AFS
Cr. Valuation account
realized gains and losses for trading securities and AFS
-occurs when debt security is sold OR AFS security deemed to be impaired
-realized gains and losses recorded in net income
are HTM unrealized gains and losses recognized?
No, because they are not marked to market
security transferring out of trading category
unrealized gains and losses already recognized in I/S, no adjustment to be made
security transferring to trading category
unrealized hold gains and losses recognized in earnings immediately
HTM to AFS transfer
unrealized holding gains and losses recorded in OCI
AFS to HTM transfer
amortize gains and losses from OCI with any bond premium or discount amortization
journal entry to record interest income on trading or AFS security
Dr. Cash
Cr. Interest income
credit losses under CECL?
-determined based on past, current and future conditions
-recognized as current expense on I/S and allowance on B/S
-increases and decreases in credit loss changes reflected in I/S
impairment for HTM
=the PV of expected cash flows (includes PV of loan and PV of interest payments) - amortized cost
-loss reported on net income
impairment of AFS
=fair value - amortized cost
-credit loss reported on net income
-any additional unrealized loss reported in OCI
impairment of AFS and there is a loss
1) fair value - amortized cost
2) the PV of expected cash flows - amortized cost = expected credit loss
3) remainder is unrealized holding loss on AFS
journal entry for allowance on credit loss if loss is less than expected credit loss calculation
Dr. Credit loss
Cr. Allowance for credit losses
journal entry for allowance on credit loss if loss is greater than expected credit loss calculation (AFS)
Dr. Credit Loss (PV of expected future cash flows - amortized cost)
Dr. Unrealized loss on AFS (total loss - expected credit loss calc)
Cr. Allowance for credit losses (PV of expected future cash flows - amortized cost)
Cr. Valuation account (total loss - expected credit loss calc)
journal entry for sale of trading security
Dr. Cash
Cr. Trading security
Cr. Realized gain on trading security
realized gain or loss on trading security calculation
selling price - adjusted cost
Note: adjusted cost (original cost +/- unrealized holding gains or losses previously recognized in net income)
journal entry for sale of AFS security
Dr. Cash
Dr. Unrealized gain on AFS
Cr. AFS
Cr. Realized gain on AFS
realized gain or loss on AFS calculation
= selling price - original cost of security
Note: any unrealized holding gains and losses recorded in AOCI should be reversed at time of sale
equity security
-an ownership interest in an enterprise or right to get or dispose of interest in an entity
put options
right to dispose of ownership shares
equity securities are valued at
fair value through net income
practicability exception to FVTNI can be used for:
equity investments that do not have determinable fair value
unrealized loss on equity security journal entry
Dr. Unrealized loss on equity security
Cr. Valuation account
unrealized gain on equity security journal entry
Dr. Valuation account
Cr. Unrealized gain on equity security
treatment of non-liquidating and liquidating dividends for equity securities
-dividends treated as dividend income if a non-liquidating dividend
-liquidating dividends treated as return of capital and reduce investor’s basis in investment
journal entry for non-liquidating dividend
Dr. Cash
Cr. Dividend income
journal entry for liquidating dividend
Dr. Cash (dividend * % ownership)
Cr. Dividend income (RE * % ownership)
Cr. Investment in Investee (plug)
equity investment valued if fair value not determinable
= cost - impairment
Note: if impairment exists, cost is written down to fair value and write down considered as realized loss in earnings
instances where equity investment considered impaired
1) going concern (noncompliance to debt)
2) adverse changes in industry, geography, tech etc.
3) significant decline in earnings, business prospects etc.
4) offers to buy from investee for less than investor’s carrying value
sale of equity security journal entry (no gain or loss)
Dr. Cash
Cr. Equity security
sale of equity security with a gain journal entry
Dr. Cash
Cr. Gain on equity security
Cr. Equity security
AFS and HTM items disclosed in notes to F/S
1) aggregate fair value
2) gross unrealized holding gains and losses
3) amortized cost basis by major security type
4) info about contractual maturities of debt securities
disclosure for equity securities and calculation
-unrealized holding gains and losses during reporting period
Calculation:
Net gains and losses recognized during period on equity securities
(Net gains and losses recognized during period on equity securities sold)
disclosures for entities opted for practicability exception
1) carrying amt of investments without readily determinable FV
2) any impairment charges during period
3) adjustments to carrying value from price changes to reflect FV of security
disclosure of concentration credit risks
-risk of loss from failure or another party to meet contract terms
-concentration of credit risk occurs when entity has contracts of material value with parties in same industry
-disclosures apply to all entities (except nonpublic entities < $100M and no derivatives)
market risk disclosure
-risk of loss due to changes in market value
-entities not required (encouraged) to disclose quantitative info of market risks of financial instruments
