Investments, Cash Flows and Income Taxes

Question 1

How to recognize Gain / Loss on AFS, Trading and Held-to-Maturity Securities?

Answer 1

• AFS (Available for Sale) - This is recognized in OCI, and each time a loss happens, it is recognized vs. the original cost. Any previously recognized losses are acknowledged in determining the new loss amount
• Trading and Held-to-Maturity securities are recognized in net income
• Trading securities are recognized to the extent of CECL on the income statement, and the rest is direct-to-equity (direct debit to an equity-related account)

Question 2

How is dividend revenue from an investment recognized based on the fair value through net income (FVTNI) method?

Answer 2

Dividend revenue is recognized to the extent that it is not in excess of the investor’s share in the investee’s undistributed earnings. The rest is recognized as return on capital

Question 3

How is fair value applied to valuing of financial assets and liabilities?

Answer 3

It must be applied to assets or liabilities not typically valued at fair value, AND it must be applied to the entire instrument - it is irrevocable and cannot be applied to specific risks

Question 4

When is a CECL (Current Expected Credit Loss) recorded?

Answer 4

A CECL is recorded when the amortized cost of a debt security is greater than the present value of future cash flows of the security

Question 5

When will AFS Debt Securities result in a loss?

Answer 5

AFS Debt security will result in a loss when the fair value is less than the present value of future cash flows, and when the present value of future cash flows is less than amortized cost

Fair value - $8,000
PV of Future Cash Flows - $10,000
Amortized Cost - $12,000

In this case, record a CECL to write down the amortized cost to the PV of Future Cash Flows;

THEN write down the PV of Future Cash Flows to the Fair value by recognizing.a loss to OCI

Question 6

What is the difference in recording gains / losses for Equity investments held for trading vs. held long term?

Answer 6

No difference. Intent only matters for debt securities, but not for equity. For equity securities in both cases the gain / loss is recognized on the income statement

Question 7

How to treat equipment when calculating cash flow from investing activities?

Answer 7

If equipment sale:

• Actual cash received will increase cash from investing activities
• Cost less accum dep will increase cash
• Gain will increase cash

Question 8

How to differentiate between Investing vs. Financing Activities?

Answer 8

Financing Activities:

• Any activity that provides funding for running the business. This will include any cash inflows / outflows related to taking on debt, or selling equity in a company, and any of the activities associated with them
• issuing bonds
• paying back bonds
• taking funds from an LOC
• paying back money to an LOC

Investing activities:

Any cash inflow or outflow that leads to the acquisition of non-current assets to aid in business operations

• Buying / selling PPE
• Buying / selling land