Investment Flashcards
HTM Securities
(Debt & Redeemable Prefer Stock)
-Measured & Reported at amortized cost
-HTM are only debt securities & redeemable prefer equity.
-No unrealized gains or losses
-Interest income & impairment only on Income statement
{Cv Beg par X YTM at purchase=interest income I/S}
{Par X Coupon rate =Coupon cash payment}
Interest income -Coupon payment= amort of discount/prem
Equity Method Income Treatment
-Recognize % of investee net income or loss.
% Profit the CV goes up (equity earnings goes up).
-Recognize % of investee dividend.
% Dividend reduces the Carrying Value.
-% Share of excess depreciation.
% of depreciation reduces CV, equity earning earning goes down.
-One line accounting on income statement and balance sheet
-Intercompany transaction eliminated.
HTM Impairment
Compare impairment:
*AFS-mark to FMV-unrealize G/L goes to OCI.
*Amortized cost for HTM={do not mark to FMV, no unrealized gain or loss}
*Measured at each balance sheet date
*Allowance for credit loss is estimated and deducted from amortize cost reduces CV of asset and loss.
*The allowance is a contra account.
Investment Credit Loss
-Investment Credit Loss are reported in income from continuing operations as a credit loss expense.
-Excess loss as unrealized loss is market risk. Investment is adjusted by a valuation account and reported in other comprehensive income (OCI).
Equity Method Accounting @ acquisition
-Purchase price = summation of cash+debt+FMV stock issue
-Significant influence 20%-50%
-Noncurrent asset
-Record on B/S at price paid, *expense other cost(donot capitalize)
-Investment reported in a single line on B/S including goodwill.
-Step1 Book value of Investee {30% ownership}
BVA- BVL=BVE $100
-Step 2 Fair Value
FMV Asset-FMV Liabilities =$250 FMV Equity 30%
-Step 3 Goodwill
Purchase price $300(30%)-FMV$250(30%)
=Unidentified excess $50 Goodwill
GL
Dr.Equity Method Investment xxx
Cr.Cash xxx
Equity Method General
-Significant Influence 20%-50%
-Do not Mark to FMV
-Dividend not is income= carry value will be reduced
-Investor has significant financing & operating activity=equity method
[PERMIT] Significant Influence
Participate in policy making
Extent of ownership
Representation in Board of director
Material Intra-entity transaction
Interchange of managerial personnel
Technological Dependency
Equity Method Adjusting Difference Between Cost & Book Value
-Excess of cost over book value is not reported separately on the financial statement
-FV of net asset greater than CV, differences relate to depreciable & amortizable assets (not land)
-% share “excess depreciation”
–>reduce carrying value
–>reduce equity earning
-$price > FV asset, the difference is goodwill.
-Goodwill is tested for impairment; loss reduce income not amortized. Impairment loss reduces CV and equity earnings.
!Exceptions private company applied, goodwill is amortized.
Equities Fair Value Method GL entry
Purchase Investment:
Dr.Investment XXX
Cr. Cash XXX
Investor Receives Stock Dividend:
!!No entry made; increase number of shares
Investor Receives Cash Dividend :
Dr.Cash xxx
Cr. Dividend Income (I/S)xxx
Equity Method G/L Entry
Investor’s Share of Investee’s Reported Earning
& Share of Investee Dividends
Investee Reports Net Income:Profit
{Equity earning & CV goes up}
Dr.Asset {Equity Method} xxx goes up
Cr. Equity Earning{I/S} xxx NI, RE ,E goes up
Investee Reports Net Loss:
Dr. Equity in losses(I/S) xxx NI, RE, Equity goes down
Cr. Asset {Equity Method} xxx goes down
-Investor Recognize “proportionate share” of investee dividend
-Only has balance sheet effect, no effect on income statement
->Reduce investment account
(not income, return capital CV reduces)
Dr.Cash on dividend receivables asset up xxx
Cr. Equity Method Investment asset down xxx
-If investee losses reduce the investment to zero. the Investor should discontinue applying the equity method unless future profitability is assured.
Equity Securities at Cost
Adjusted cost method
Cost - impairment losses
-Initial Equity Investment at cost = not MKT FV
-Dividend income recognized in net income
-No entry recorded when investee earns money
-Qualitative factor indicate impairment, loss is recorded
-Tested excess of CV over FV of equity security
-FV= summation of PV Future Cashflow
-Impairment loss recorded in net income
-FV becomes the new basis of the equity investment
-Impairment reversal-> similar or identical security yes allowed. Limited to the extent of previous writedown reversal
-Sale or Disposal
Realized Gain&Loss= CV - Selling Price
Investment in Securities at Fair Value
On Balance Sheet->Current or Noncurrent Asset
On Income Statement->all unrealize & realize(gain/loss)
On Statement of Cashflow->Investing or operating activities
*No impairment losses on trading securities
Less than 20% ownership in equity securities:
Yes-Readily Determinable FV? If Yes; Use FV method. Report dividend, unrealize & realize in net income
No-Not able to determine FV? Use ADJUST COST METHOD(elected). Valued at cost- impairment loss
Available For Sale Impairment
Steps
AFS Debt FV OCI
FMV Delta-unrealized gain-OCI gain
-unrealized loss-OCI down *test for impairment
FV<Amortized cost=impaired=max loss-ready to sell->(I/S)
FV<Amortized cost=impaired=max loss-Not to sell->ECL I/S
ECL=Summation PVFCF < Amortized Cost=Loss on I/S
(expected credit loss)
Total Loss - Loss on I/S= Loss to OCI
(max loss) - “ECL”
Dr.Credit Loss Expense (I/S)
Cr. Investment AFS Securities-Allowance for credit loss(B/S)
!!!above entry ECL credit Loss portion on I/S
Dr.Unrealized Loss(B/S-OCI)
Cr. Investment AFS securities-unrealized loss
Cr. Valuation Account(B/S)
!!!above entry, reamining loss post to Balance Sheet
