Lecture 4: Marketable Securities Flashcards
Marketable Securities
ASC
Assume ownership in another entity is 0-20%. When an investment is made in securities (debt or equity) that are publically traded, and the investment is not large enough to provide the investor with any significant influence, the accounting depends on its classification (HFT, AFS, HTM)
Trading Securities (Held for Trading HTF)
investments in equity instruments (stocks, options, rights warrants or debt instruments) investor has acquired with the intent to sell within a short period of time. Profit minded. Purchases primarily to gain short term profits from resale.
Available for Sale Securities (AFS)
all investments in marketable equity or debt instruments that do not fit the definition for HTM or trading. these may be classified as current or noncurrent depending upon the holding period (date of sale).
Held to Maturity (HTM)
investments in bonds and other debt instruments which the investor has the ability and intent to hold until the due date for repayment. Noncurrent assets (unless maturity date is less than one year from the BS date)
Trading securities are recorded at __________ but then carried at ______ due to the fluctuations in market price. The acquisition and disposal of HTF investments are reported in ______on the statement of cash flows.
cost, FMV, operating activities
For trading securities, any unrealized gains or losses are reported on the ________ and realized gains or losses are reported on the _______.
IS (income from continuing operations), IS along with any dividend income or interest income
JE to purchase HFT
Dr. Investment in trading securities XX
Cr. Cash XX
JE for HFT if the FMV increased from 100 to 140
Dr. market adjustments HFT (BS) 40
(increases the CV of the trading security in the current asset section)
Cr. unrealized gain (IS) 40
(part of income from continuing operations)
JE for HFT if security FMV decreased from 140 to 90
Dr. unrealized loss (IS) 50
Cr. market adjustments HFT (BS) 50
Available for Sale Securities are initially recorded at _____but then carried at _____. The acquisition and disposal of AFS investments is an _______ on the CF statement.
cost, FMV, investing activity
Any unrealized G/L for AFS appear on the _______ and all realized G/L appear on the ______.
BS as a part of OCI in the SH Equity section, the cumulative amount is Accumulated OCI. IS
- JE to Purchase AFS 100 date of purchase
- JE AFS is now 140 X1
- JE AFS is now 90 X2
- Dr. Investment in AFS 100
Cr. Cash 100 - Dr. Market Adjustment- AFS (BS) 40
Cr. Unrealized Gain (BS) 40 - Dr. Unrealized Loss (BS) 50
Cr. Market Adjustments- AFS (BS) 50
*Market Adjustments account is a “Valuation” account.
When an AFS is sold, the difference between the cost and the proceeds is treated as a _____.
Realized Gain or Loss. Ignore the allowance account and adjust to the new target, unless it was the last investment, then the allowance and the unrealized G/L must be eliminated.
When and what type of security is subject to an impairment loss?
They are impaired when the decline in value is considered to be other than temporary, AFS investments are subject to impairment loss. HFT would not be since they are held at FMV and any unrealized g/l are already recognized in income. HTM would only be subject to impairment loss if the investor had reason to believe that the issuer of the debt would not make all principal and interest payments.
The impairment loss amount is calculated for AFS by?
the amount is the difference between the original cost and the declined value from which it is not expected to recover. It will be reclassified out of OCI on the BS and recognized as a loss in calculating NI on the IS.
Under GAAP, once an asset is written down recoveries______.
will not be recognized. The realized loss is recognized on the IS and the remaining balance is the new cost.
2 Step Process to determine if a decline in value is other than temporary, requiring an adjustment
Step 1: Determine whether investment is impaired, if FV is less than cost
Step 2: Evaluate whether an impairment is other than temporary (series of operating losses, inability to maintain an earnings, investor intends to sell before it recovers in value a non temporary loss is considered in the period the investor decided to sell, if investor does not intend to sell the loss is recognized the period which the loss considered non temporary occurs)
The amount of impairment loss for Equity Securities (HFT or AFS) is calculated by:
the difference between the FV at the BS date and the cost of the investment
The Amount of Impairment Loss for Debt Securities (Bonds) is calculated by:
if investor expects to sell: difference between FV at the BS date and the amortized cost
if the investor does not expect to sell, a portion of the loss is attributable to credit factors and will be recognized in earnings and the remainder will be recognized in OCI.
Reclassifications (ASC 320) between Trading and AFS
treat securities as if they are being sold from the portfolio they are leaving and repurchased the current market price into the new portfolio.
- Reclassify to FMV
- difference is treated as a realized gain/loss on the IS
- eliminate any related valuation allowance accounts
Reclassifications between HTM to AFS
- Reclassify at FMV
- If HTM to AFS, record in OCI on BS
- If AFS to HTM, record unrealized holding gain/loss on BS as a part of Comprehensive Income and amortized over the remaining life of the HTM security.
A HTM investment is recorded at _______ and carried at______,and the difference between cost and maturity value is______.
Cost, amortized cost (Face net of unamortized discount or premium), Amortized over the life of the security using the effective rate method.
Record interest income for HTM on______. This is an________activity on the Statement of Cash FLows.
Income Statement less amortization, Investing activity
Considered held to maturity if sale occurs after at least _____% of principle has been collected.
85%
Under the FV Option, an investment accounted for under the equity method would be reported at _____ and on each BS date, increases or decreases will be recognized as _______ on the _________. Dividends received will be recognized as_____.
FV, Unrealized G/L, Income Statement, Income
Under FV option, AFS will be reported at ______on each BS date and unrealized G/L are reported as________.
FV, a component of NI NOT OCI
Under FV option, HFT securities are _____.
not affected
Under FV Option, HTM continue to be accounted for at _______ recognizing interest income under the effective interest method. The CV is adjusted to _____ on each BS date with the increases/decreases recognized as a part of _____.
amortized, FV, Net Income
Under IFRS, marketable securities are reported at ______ or _______.
FVTPL, Amortized Cost
Under IFRS, impairment losses in securities are reported at _______ and if written down may be _______.
amortized cost, reversed but may not increase the asset above the amount that would have been recorded at its amortized cost, any G/L are recognized in Income.
