Marketable Securities Flashcards
What are Trading Securities?
Investments in debt or equity instruments acquired by investor to profit from buying and selling within a short period of time
What are Available-For-Sale Securities?
Investments in all marketable debt or equity instruments that don’t fit either the trading or held-to-maturity classifications
What are Held-To-Maturity Securities? What two qualities must they possess?
BONDS and other DEBT instrument investments in which the investor has the “INTENT” and “ABILITY” to hold until the due date for repayment
Trading Securities are classified as what asset type?
Typically a Current Asset, but a non-current asset in rare circumstances
Available-For-Sale Securities are classified as what asset type?
Can be classified as current or noncurrent, depending on expected date of sale
Held-To-Maturity Securities are classified as what asset type?
Classified as noncurrent, unless maturity is less than one year from balance sheet date
Upon purchase, Trading Securities are recorded at what value? What value are they carried at?
Initially recorded at cost; carried at FMV
Upon purchase, Available-For-Sale Securities are recorded at what value? What value are they carried at?
Initially recorded at cost; carried at FMV
Upon purchase, Held-To-Maturity Securities are recorded at what value? What value are they carried at?
Initially recorded at cost; carried at amortized cost (face net of unamortized discount or premium) as unrealized gains and losses are not applicable
Where are unrealized gains and losses on Trading Securities recognized?
Income statement
Where are unrealized gains and losses on Available-For-Sale Securities recognized?
Initially in Other Comprehensive Income (on Multiple-step Statement of Earnings & OCI, separte Statement of Comprehensive Income). Ultimately, it reaches the balance sheet as a part of comprehensive income (in stockholders’ equity)
Where are unrealized gains and losses on Held-To-Maturity Securities recognized?
Trick question, as they are not applicable!
If selling a Held-To-Maturity security prior to the due date of repayment, how much of the principle needs to have been collected in order for it to stay recorded as Held-To-Maturity?
85% of the principle needs to have been collected (otherwise reclassification is necessary)
Where are REALIZED gains and losses on ALL marketable securities recognized?
Income statement
Where are interest and dividend income on ALL marketable securities recognized?
Income statement
The Acquisition and Disposal of Trading Securities affect which section of the statement of cash flows?
Operating cash flows
The Acquisition and Disposal of Available-For-Sale Securities affect which section of the statement of cash flows?
Investing cash flows
The Acquisition and Disposal of Held-To-Maturity Securities affect which section of the statement of cash flows?
Investing cash flows
For Trading and Available-For-Sale Securities, when unrealized gains or losses occur, what is the best practice for the opposing debit/credit?
Have a “market adjustment” valuation allowance account SEPARATE from the booked investment amount. Netting these two provides the FMV of the investment. Could think of it as a contra-asset account (similar to depreciation) when losses occur. *Could also book the changes directly to the investment account instead, but makes tracking discrete investments at initial cost very difficult.
Are Trading Securities subject to impairment losses?
No, as they are continually adjusted to FMV
When are Available-For-Sale Securities subject to impairment losses?
When the decline in value is considered “other than temporary”
Are Held-To-Maturity Securities subject to impairment losses?
Yes, but it’s rare…and the accounting is tricky
For Held-To-Maturity Securities, if the entity intends (or is required) to sell the security prior to recovery, how is the nontemporary loss recognized?
By taking the difference between the fair value (amount to be realized) at the balance sheet date and the amortized cost (carrying value)
For Held-To-Maturity Securities, if the entity does not expect to sell the security prior to recovery, how is the nontemporary loss recognized? (By what factors?)
The portion of the loss attributable to credit factors is recognized in earnings, while the remainder will be attributable to other comprehensive income.
Once written down, can recoveries in value on Available-For-Sale or Held-To-Maturity Securities be recognized?
No, only on date of realization (i.e., when sold)
What approach is used if reclassifying between Trading and Available-For-Sale?
Treat the securities as if they are being sold from the portfolio they are leaving and repurchased at the current market price (FMV) into the portfolio they are entering. Price difference is realized on the income statement. **Eliminate any related valuation allowance accounts
What approach is used if reclassifying from Held-To-Maturity to Available-For-Sale?
Realize the difference between amortized cost and FMV in OCI.
What approach is used if reclassifying from Available-For-Sale to Held-To-Maturity?
Report the unrealized holding gain/loss on the Balance Sheet as a part of OCI and amortize this amount over the security’s remaining life.
If the firm elects the Fair Value Option for its Marketable Securities investment(s), how are gains or losses treated?
The revaluations in the Investment are accompanied by gains and losses shown on the Income Statement. Interest income on HTM securities is still treated the same, and carrying value adjustments are treated as gains and losses on the Income Statement.
Is the Fair Value Option broadly required for all Marketable Securities the firm/investor holds, or can it be elected on an instrument by instrument basis?
Can be elected on an instrument by instrument basis, but rationale needs to be disclosed.
If an investment is made in publicly traded (ala “marketable”) securities (debt or equity), and it isn’t large enough to provide the investor with significant influence, what three classifications can it be?
1) Trading Securities
2) Available-For-Sale
3) Held-To-Maturity
Which securities are investments in debt or equity instruments acquired by investors to profit from buying and selling within a short period of time?
Trading Securities
Which securities are investments in marketable debt or equity instruments that don’t fit either the trading or held-to-maturity classifications?
Available-For-Sale Securities
Which securities are BONDS and other DEBT instrument investments in which the investor has the “INTENT” and “ABILITY” to hold until the due date for repayment?
Held-To-Maturity Securities
Which securities are almost always a Current Asset?
Trading Securities
Which securities can be classified as current or noncurrent, depending on expected date of sale?
Available-For-Sale Securities
Which securities are classified as noncurrent, unless maturity is less than one year from balance sheet date?
Held-To-Maturity Securities
Which securities are initially recorded at cost and carried at FMV?
Trading Securities and Available-For-Sale Securities
Which securities are initially recorded at cost and carried at amortized cost?
Held-To-Maturity Securities
