Investments Flashcards
HTM securities are carried at an amortized cost and thus are not adjusted for ______________
Changes in market value (unlike AFS) (Do not mark to FMV, it will be a distractor information in the exam. Therefore, no unrealized gain or loss)
Convertible preferred stock is an equity security that is nonvoting. As it is nonvoting, it does not provide the holder the ability to exercise significant influence. Since the preferred stock is traded in an active market, it would be reported at ____________
Fair Value
Common stock is bought, which results in ownership of 10% of the shares outstanding and gives significant influence over the operating and financial activities of the investee.
Equity Method due to significant influence even if the level of stock ownership is 10%.
Stocks cannot be classified as held-to-maturity because they have no maturity date.
True
The temporary unrealized gain or loss from HTM securities must be reported in income for the current period.
True
If a security is transferred from AFS to trading securities classification, unrealized holding gains and losses are recognized immediately in the income statement.
True, Unrealized gains or losses are recognized when transferred.
Stock dividends require a memo entry to show receipt of additional shares of stock.
The company then recomputes the cost per share based upon the new number of shares.
Bond issue costs are treated as a reduction in bond proceeds and net bond liability and are amortized over the bond term to interest expense.
True
Losses shall be recognized in the period of extinguishment.
True
Unrealized holding gains and losses due to market risk if Fair Value Option is elected.
Recognized in net income
The difference between the cost of the investment and the carrying value of the net assets is known as the DIFFERENTIAL, which is periodically __________ to REDUCE the INVESTMENT ACCOUNT in the investee company.
AMORTIZED
Factors to consider regarding an investor’s significant influence over an investee (PERMIT)
- Participation in policy making processes
- Extent of ownership in relation to the concentration of other shareholding
- Representation on the board of directors
- Material intra-entity transactions
- Interchange of managerial personnel
- Technological dependency
True. Hiring is not included
Only cash dividends with no significant influence are included and not the stock dividend
The ones with significant influence will be adjusted in the equity on the BS. Dividends are adjusted only for BS reporting and only Income from Inv is reported on IS (and not dividends)
Preferred stock or Debt
No Voting Rights, no significant influence
Preferred Equity
Equity - No maturity date
Trading security
FV though PL or FVPL (All gains and losses, interest, dividends - go to Income Statement (IS)
AFS
FV through OCI (unrealized gains going to OCI and not to IS)
HTM or DEBT only
Amortized Cost (do not mark to FMV)
No significant influence
- Trading security
- AFS
- HTM
Only publicly traded can be marked to FMV. Whether the fair value is readily determinable.
If it’s not publicly traded - General Rule - You cannot mark to FMV
Do Common stock, Preferred stock, Stock warrants and call/put options have maturity?
No, No maturity
Debt Securities - Redeemable preferred stock (treat as debt) - Bonds, notes, convertible bonds, redeemable preferred stock (only type of preferred stock that falls under Debt, rest all are part of equity) is ______________
MATURE or have maturity
Equity Securities (Common stock, preferred stock, stock warrants, call/Put options)
We do not mark to market
Consolidation
We do not mark to market
Realization
Income Statement
The FV is reported on each balance sheet date and unrealized gains and losses are reported in income.
No impairment losses on trading securities
True
AFS
Always cash flow from Investing activities
AFS
Must be assessed for impairment
AFS impaired : if FV is less than the Amortized cost
(a) If you plan to sell soon - report on IS
(b) If you hold it - Expected Credit loss
Expected credit loss : sum of PV of Future cash flows less than the amortized cost (portion goes to IS)
True
If you buy at par, amortized cost remains same as PAR
True
If one security is sold in the current year, then unrealized loss/gain claimed in previous year will have to be reversed.
AFS
Realized gain and loss always go to IS
True
HTM - Impairment (rule of Conservatism).
Ques - A CO. HAS A $100,000 HTM with an unamortized premium of $2,775 and an allowance for credit loss of $1,500. The net amount reported on the balance sheet would be the _________
JE for impairment
CECL - Current Expected CREDIT LOSS model (IS): If sum of the PV of Future Cash flows is less than the AMORTIZED COST
Ans - FV 100000+Premium 2,775 = CV 102,775
CV - Allowance for credit loss = 102,775 -1500
BS = $101,275
JE
Credit loss expense (IS) XXX
Investment in HTM securities - allowance for credit losses XXX
Equity method (significant influence)
Investor recognizes in INCOME STATEMENT its share of investee earnings in its own income and not the dividends. Dividends are a return of capital to the investor.
Any unrealized holding gain/loss due to market risk is reported in OCI because of the conservatism principle
Electing the FV OPTION for AFS securities allows unrealized holding gains or losses due to market risk to be recognized in ________NI (Component of Income from Continuing Operations.
NET INCOME
STOCK DIVIDENDS are NOT income
True
EQUITY METHOD - Factors to consider regarding an investor’s significant influence - PERMIT , Significant influence (over the operating and financing activities of the investee) even if ownership is less than 20%
- PARTICIPATION in policy making ( to pay dividends or not to pay)
- EXTENT of ownership in relation to the concentration of other shareholdings
- REPRESENTATION on the board of directors
- MATERIAL intra-entity transactions
- INTERCHANGE of managerial personnel
- TECHNOLOGICAL dependency
EQUITY METHOD - (1) DO NOT mark to FMV (It is a distractor information) (2) DIVIDEND is not income but return of capital (Div is not reported in IS but only adjusted for BS purpose), (3) CV will be adjusted over time
True (only report earnings)
If FV method is ELECTED, apply TRADING Securities rule. Changes in FV recorded in NET INCOME. Investment will be carried at FV. Use EQUITY METHOD ACCOUNTING unless the question says that the FV option is elected.
TRUE
ACQUISITION - EQUITY METHOD - Components or steps
Step 1 - BV Assets - BV Liabilities = BV Equity
Step 2 - FV FMV Assets - FMV Liabilities = FMV Equity, Identifiable Excess
Step 3 - Goodwill = (Purchase Price - Fair Value) or Unidentifiable Excess
Goodwill per ownership % =
PP-FV
Intercompany receivables remain separate from the investment account. Intercompany profit or loss is eliminated.
True
No Significant Influence changes to SIGNIFICANT influence or FV method to Equity Method
Accounted for prospectively (Do not restate PY)
FV option is elected, Net Income =
Dividend share + holding gain (FV-PP)
Undiscounted Cash Flows less than the CV - Impairment loss exists
True
If there are no sources of FV quotations, including no bid-and-ask quotations in an exchange of over-the-counter markets, then the entity can elect the practicability exception and use the cost method.
True
When the decline in FV is considered to be associated with the declining credit of the issuer (a credit loss), the unrealized losses in OCI are reclassified to earnings.
True
Trading securities are investments that an investor acquires with the intent to make a profit by selling them in the near future.
BS measurement - FV, Holding gains and losses reported in NI
AFS - all other securities not classified as trading or HTM
BS measurement - FV, Holding gains and losses reported in OCI
HTM - Investor has intent AND ability to hold until the due date for repayment
BS measurement - AMORTIZED COST, Holding gains and losses reported in _________
EQUITY METHOD , Significant influence : While calculating CV of investment
adjust Dividend and add NI share in equity method (do not adjust dividend for IS purpose)
Change in equity method should be reported __________
PROSPECTIVELY
(1) Stock dividend is not revenue
(2) Equity method - treats all dividends as a reduction in the investment account
Stock dividend is not treated as revenue but rather reduces the cost per unit
Gain on sale of Trading security or FV through P&L (report gain on IS)
Gain on sale on AFS or FV through OCI
Gain on Trading security = SP-CV
GAin on AFS security = SP - Original cost
From Pete Olinto, AFS debt security: change in FMV resulting in a loss, (1) we need to check for impairment (2) Impaired if FV is less than the amortized cost. If you are selling soon, it will go to IS, if you are holding it, Calculate Expected Credit loss
(3) Expected Credit loss is Sum of PV of Future Cash Flows less than Amortized Cost = portion of total loss that will go to INCOME STATEMENT, rest goes through OCI
Total or maximum or impairment loss = FV - Amortized Cost
Total loss is not same as Expected Credit loss
Expected Credit loss (cannot exceed impairment loss)= Sum of PV of FCF less Amortized Cost (I/S)
Remaining loss goes to OCI (Investment in AFS securities-valuation Account as JE in BS, reversing the entry)
HTM, Credit expected credit loss
First calculate
(1)PV factor of sum of future cash flows * PV factor + (Int payment of bond - int not received)*PV factor
(2) Subtract PV total calculated in point 1 from Amortized cost provided in the question
e.g. holding the bonds for 5 years and then selling
consider as AFS
Trading are for near term sale or within 12 months
Leases are not eligible for the FV option
True (FV Only applies to financial assets such as debt and equity securities and liabilities (e.g. notes payable).
Excluded from FV (Inv in subsidiaries, pension benefit assets/liabiltiies and assets and liabilities recognized under leases)
Equity Securities
FV becomes new Cost
Mktable debt securities report at carrying value or amortized cost
unless there is permanent decline
FV method
recognized in the income statement as dividend revenue(portion of dividend received this year that were not in excess of the investor’s share of investee’s undistributed earnings since the date of investment.
Int rate up in mkt will cause ____
Decline in Bond market value
Disclosure of Credit risk is REQUIRED
Not required for mkt risk
Accrued int should be reduced from Issued price of Bond (e.g. issued at discount) so new Carrying value will be
=946000-40000=906000
AFS unrealized gain and loss : only consider current year FMV change e.e.g if Yr 2 is Current year and ignore Yr 1 except when
it is sold then we need to write off Yr 1 unrealized gain and loss of Sec XYZ which was sold in yr 2
PV of FCF =
Amortized cost - Credit Loss
Investment value in BS under FV method
Do not report dividend income in BS as that will go to Income statement , report in Income statement
Equity securities are generally reported at FV through Net income FVTNI and therefore, unrealized holding gains and losses are included in ____
Earnings or Income statement
