Investments & Derivatives Flashcards

Question

What is included in the I/S for HTM debt securities? (not using fair value option)

Answer 1

* -Gains/Losses on securities sold during the period * -Permanent decline in value Current year gains included in the disclosures, but are only recognized when realized (sold).

Answer 2

It meets any of these conditions: 1) Sales prices or bid-and-ask quotes are available on securities exchange 2) Price or quotes are in a foreign market 3) Prices or quotes for mutual funds when FV per share is published If none of these conditions exist, consider recording investment using cost method

Answer 3

\*Fair Value\* - Dividends are income, Investment is measured on published prices \*Cost\* - Dividend Income, investment recorded at cost when FV not available, impaired if needed \*Equity\* - Dividends reduce the carrying amount of investment.

Answer 4

* When no fair value is readily determinable, use the cost method. * Records investment at cost. * Record dividends received as income. * If impairment is required, expense is reported in current earnings.

Answer 5

A derivative is a financial instrument or other contract that derives its value from the movement of prices, interest rates, or foreign exchange rates associated with an underlying asset or financial instrument. A notional amount is a number of currency units, shares, bushels, pounds, or other units specified in the contract. The notional amount is called a face amount in some contracts. A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner. Derivatives are the only financial instruments to have such notional amounts or payment provisions based on underlying variables.

Answer 6

A notional amount is a number of currency units, shares, bushels, pounds, or other units specified in a derivative instrument.

Answer 7

* The requirement of a very small or negligible investment fee * Option to settle the transaction at a net amount * An underlying asset that decides the settlement amount of the derivative

Answer 8

Fair Value through net income

Answer 9

Current exchange rate F/X gains / losses are reported as part of income from continuing operations and are remeasured at period end

Answer 10

When it is proportionate dollars to buy ONE Foreign currency EX $1.32 dollars = 1.00 YEN

Answer 11

* **all assets and liabilities** at the _current exchange rate_ at the balance sheet date; * **revenues and expenses** at the e_xchange rate at the time the revenue or expense was recognized_, however, due to the impracticability of this where rates change frequently, a _weighted-average exchange rate_ for the period may be used; * **contributed capital** at the _historical exchange rate;_ and * **retained earnings** at the translated amount of retained earnings for the prior period, plus (less) _net income(loss) at the weighted-average rate,_ less dividends declared during the period at _the exchange rate when declared_. * The weighted average exchange rate would be an appropriate exchange rate for salaries expense and sales to external customers.

Answer 12

* Forward - Establishes an **obligation** to buy or sell FC at a price determined today, but to be performed in the future. This contract requires performance. * Option - establishes the **right**, rather than an obligation to buy or sell foreign currency at a price determined today, but performance is not required. Option would expire.

Answer 13

* Functional - currency of the primary economic environment in which the foreign company transacts (important - will be used to determine conversion) * Recording - currency which the entity's general ledger is maintained ( may or may not be same as functional) * Reporting - currency of US parent company

Answer 14

* When the local currency is the functional currency, the conversion process is _translation_ aka current rate method . * Foreign currency _translation_ gains and losses are recorded in OCI * Income statement - at _weighted average rate_ * current assets & liabilities - _year end rate_ * stock and APIC - _historic rate_ * dividends - exchange rate at _date of declarations_ *

Answer 15

* Remeasurement aka temporal- for example, the subsidiary is highly integrated with US operations * Monetary assets (cash, receivables, bonds) - current rate at year end date * non monetary assets (inventory, PPE)- historical rate * Income statement - weighted average * depreciation - historic rate of fixed asset * Gain/loss is recorded in **Net Income** (Not OCI) Think about it this way, many the transactions were already based around the USD, so remeasure based on historic rate - non monetary assets, depreciation,

Answer 16

Translation goes to OCI Remeasurement goes to IS

Answer 17

* The hedged item is specifically identified as either all or a specific portion of a recognized asset or liability or of an unrecognized firm commitment. * The hedged item is a single asset or liability (or a specific portion thereof) or is a portfolio of similar assets or a portfolio of similar liabilities. * The hedged item presents an exposure to changes in fair value attributable to the hedged risk that could affect reported earnings.