FAR - Financial Instruments and Equity Method Flashcards
What assets and liabilities are eligible for the fair value option? What is excluded?
it applies to financial assets (ie debt and equity securities) and financial liabilities (ie notes payable)
it does not apply to investment in subsidiaries, pension benefit assets/liabilities, assets/liabilities recognized under leases.
What is the impact of rising interest rates on bond investments?
An increase in interest rates will lead to a decrease in the bond market value
If an AFS investment experiences a decline due to a credit loss, does this get recorded in OCI or the earnings section of the Income Statement?
Earnings section of the Income Statement
How are unrealized gains or losses recorded in the Income Statement for:
- Trading Securities
- Held to Maturity
- Available for Sale
- Trading Securities - reported in earnings
- Held to Maturity - reported at their amortized costs
- Available for Sale - reported in OCI (net of tax)
The Fair Value Option is selected. Stock is originally purchased for $35K and at year end is worth $32K. The stock had $1.8K in dividends during the year. What is the income or loss reported in earnings?
The reported is $1.2 (loss). This is the difference between the FV and BV of investment and includes the dividend received.
If you have HTM debt when would you record a loss based on the CECL (current expected credit losses) model?
A loss is recorded when the amortized cost exceeds the PV of the Principal and Interest to be collected. Additionally the amortized cost must be between FV and PV, AND FV is greater than PV.
= the loss recorded will be amortized cost - PV of Principal/Interest
**if the fair value is higher than the amortized cost, there will be NO loss recorded)
A company must record an investment using the equity method if:
the company has less than 50% ownership in the investment AND the company has significant influence on the investment
General rule: 20 to 25% ownership in investee
For an equity method investment, what would be considered significant influence?
- participation in policy making processes
- has material intercompany transactions
- interchanges managerial personnel
- investee has technological dependency on investor
- investor is on the board of the investee
**investment must have voting rights…Preferred Stock or debt has no voting rights so would not be considered significant influence
How is a liquidating dividend recorded on the financials under the equity method?
it is a reduction of the investment account on the balance sheet. does not impact net income.
Relating to the equity method, how does the investor account for an investment where the fair value of total assets is greater than its book value?
when the fair value exceeds the book value of an investment, the excess is amortized over the life of the asset
For the equity method, if the fair value of inventory and PPE is in excess of carrying value at acquisition how does this get recorded by the investor?
PPE - the difference between FV and CV is depreciation over the remaining useful life and it lowers the Investor’s Net Income
Inventory - the difference between FV and CV is EXPENSED upfront and it lowers the Investor’s Net Income
What is the proper accounting treatment for goodwill in an equity investment?
There is no accounting necessary. The goodwill does not get tested for impairment annually . The WHOLE investment gets tested for impairment annually
How to calculate expected credit loss for debt securities?
Expected credit loss is PV minus amortized cost. This is used for HTM and AFS securities. Both are recorded to the income statement with an offsetting loss on the balance sheet.
What should be disclosed for financial instruments?
Carrying value?
Fair value?
carrying value and fair value should be disclosed for financial instruments…fair value is disclosed only if practical
SHould brokerage fees be included in the gain/loss of a financial security sale?
yes
