M4- investments Flashcards
Describe the financial instrument fair value option under US GAAP
on specified election dates, an entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings. The FV option is irrevocable
on the balance sheet, debt securities classified as trading securities or available for sale are valued how?
At fair value
how are unrealized gains and losses on debt securities classified as trading securities recognized?
unrealized gains and losses on trading securities are recognized on the income statement
How are unrealized gains/losses on debt securities classified as AFS recognized?
Unrealized gains and losses on available for sale securities are reported in other comprehensive income
on the balance sheet, debt securities classified as held to maturity are valued how?
at amortized cost
List three conditions when losses on debt securities classified as available for sale are recognized in income.
sale of security
transfer of the security to trading classification
other than temporary decline of individual security below cost (impairment)
When a marketable debt security is transferred from trading to available for sale, or vice versa, at what cost is it transferred
-Transferred at FV, which then becomes net basis
- for a security transferred into the trading catoegry the diffrence is treated as a realized gain or loss and is recognized on the income statment.
- For a security transferred form the trading category, the unrealized holding gain or loss will already have been recognized in earnings
Note: Transfers to and from the trading category should be rare
when does an impairment loss have to be booked for debt investments and how is it recognized?
an impairment loss must be booked when there is an “other than temporary” decline in fair value below the adjusted cost (availabl-for-sale securities) of amortized cost (held to maturity securities)
The cost basis will be written down to FV as the new cost basis, with the write-down reflected as a realized loss and included in earnings
how is the realized gain or loss calculated for trading and available for sale debt securities when they are sold?
trading securities- realized gain/loss = selling price versus the adjusted cost (original cost +/- unrealized gains or losses previously recognized in net income
Available for sale securities- realized gain/loss = selling price versus the original cost (note that any unrealized gains or losses in AOCI must be reversed)
How are equity securities typically valued?
equity securities are typically carried at FV through net cinome (FVTNI), with unrealized gains and losses included in earnings.
describe the practicality exception for equity securities
For equity investments that do not have a readily determinable fair value, this exception allows an entity to measure equity investments at cost, less impairment, plus/minus observable price changes of identical or similar investments from the same owner.
How are nonliquidating and liquidating dividends distributed by equity securities reported by the investor receiving them
Non-liquidating dividends received by the investor are accounted for as dividend income
Liquidating dividends- received by the investor are accounted for as a return of capital
describe the recognition of an impairment loss on equity securities if a qualitative assessment indicates that impairment exists.
impairment losses apply to equity securities valued using the practicality exception. If impirament exists, the cost basis of the security will be written down to fair value with the write-down reflected as a realized closs and included in earnings.
How is realized gain/loss calculated for equity securities when they are sold?
realized gains/losses = selling price versus the adjusted cost (Original cost +/- unrealized gains or losses previously recognized in net income
