No Significant Influence

Question 1

At what cost are held to maturity securities carried and reported on the balance sheet?

Answer 1

At amortized cost

Question 2

List the criteria for a held to maturity classification

Answer 2

1. Debt security;
2. Investor has intent to hold to maturity;
3. Investor has ability to hold to maturity.

Question 3

How are unrealized holdings gains and losses recorded for held to maturity securities?

Answer 3

Unrealized holding gains and losses are excluded from earnings

Question 4

How are realized holdings gains and losses recorded on the income statement for held to maturity securities?

Answer 4

Recognized in accordance with amortized cost method - Interest Income including increase/decrease from amortization discount or premium.

No dividends on debt

Question 5

What method is used to amortize a premium or discount on a security?

Answer 5

Effective interest method or straight-line method if not materially different.

Question 6

Where are held-to-maturity investments reported on the statement of cash flows?

Answer 6

Investing

Question 7

What amounts should be included in the initial recording of a held-to-maturity investment?

Answer 7

1. Purchase price of security;
2. Directly related cost of acquisition, e.g., brokerage fee, transfer fee, etc.;
3. Accrued interest, if any, is not included in the cost of the investment.

Question 8

Under what conditions can a debt security sold before maturity be considered held to maturity?

Answer 8

1. Sale is near enough to maturity date so that interest rate risk is substantially eliminated;
2. Sale occurs after investor has collected a substantial portion (at least 85%) of the principal outstanding at acquisition date.

Question 9

What is considered an available for sale security?

Answer 9

Debt and equity securities not considered trading or held to maturity

Question 10

How are AFS securities reported on the balance sheet?

Answer 10

Reported as fair market value

Question 11

How are unrealized gains and losses reported for AFS securities?

Answer 11

Excluded from earnings, and reported as OCI

Question 12

How are AFS investments carried and reported?

Answer 12

Debt:
Recognize periodic interest income
Recognize periodic amortization of premium or discount

Equity:
Dividends received are income

Question 13

What amounts are included in gains and loss recognized on the sale of an AFS investment?

Answer 13

1. The difference between the selling price and the carrying value
2. Any unrealized gain or loss in AOCI related to the investment sold

Question 14

What are trading investments?

Answer 14

Debt and equity securities bought and held for the purpose of selling them in the near future

Question 15

How are trading investments reported on the balance sheet?

Answer 15

At fair market value

Question 16

How are unrealized holdings gains and losses reported for trading securities

Answer 16

Unrealized gains and losses are reported in the income statement in the period they occur

Question 17

What amounts should be included in the initial recording of a trading investment?

Answer 17

Initial purchase price and directly related cost of acquisition

Question 18

How are trading securities carried and reported?

Answer 18

At fair market value, with changes in fair value reported in current income

Question 19

What are unrealized gains and losses?

Answer 19

Gains or losses from the change in fair market value

Question 20

When are unrealized holding gains and losses included in the income statement?

Answer 20

1. They are included for trading investments

2. For AFS and HTM, they are included if the decline is considered permanent

Question 21

How do we account for the transfer of an investment from HTM to AFS?

Answer 21

1. Establish AFS account at FV

2. Unrealized G/L is recorded in AOCI

Question 22

How do we account for the transfer of an investment from HTM to Trading?

Answer 22

1. Establish trading account at FV

2. Unrealized G/L is recorded in income

Question 23

How do we account for the transfer of an investment from AFS to HTM?

Answer 23

1. Establish HTM account at FV

2. Unrealized G/L in AOCI is amortized over remaining life of the debt

Question 24

How do we account for the transfer of an investment from AFS to trading?

Answer 24

1. Establish trading account at FV

2. Unrealized G/L in AOCI is recorded in income

Question 25

How do we account for the transfer of an investment from trading to AFS?

Answer 25

1. Establish AFS account at FV
2. Unrealized G/L is recorded in income

THIS IS VERY RARE

Question 26

How do we account for the transfer of an investment from trading to HTM?

Answer 26

1. Establish HTM account at FV
2. Unrealized G/L is recorded in income

THIS IS VERY RARE

Question 27

What causes transfers between classifications for investments which do not give the investor significant influence?

Answer 27

Changes in investor intent or changes in investor’s ability to hold the the investment to maturity (ie. they need cash asap)

Question 28

What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the cost method?

Answer 28

The carrying amount does not change because investment is reported at historical cost; it does not change with the market

Question 29

What major transactions/events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?

Answer 29

1. The subsidiary pays a liquidating dividend

2. The investor buys additional shares of the subsidiary or sells some of the shares it already owns

Question 30

What is a liquidating dividend?

Answer 30

Dividend > net income

When the subsidiary pays out more than its earnings, it starts tapping into the original investment amount, this excess is the liquidating dividend

Question 31

When should an investment in equity securities be reported at cost?

Answer 31

When an investment in equity securities does not have a readily available fair value and for which there is no evidence of loss in value

Question 32

What conditions must be met under International Financial Reporting Standards (IFRS) No. 9 for an investment in debt to be classified as debt instruments measured at amortized cost?

Answer 32

Two conditions must be met:
1. Business model test - where the entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value;

2. Cash flow characteristic test - where the contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest

Question 33

What are the categories of investments under International Financial Reporting Standards (IFRS) No. 9?

Answer 33

Under IFRS No. 9 two categories of investments (and other financial assets) include:

1. Debt investments measured at amortized cost;
2. All other investments, including debt instruments not at amortized cost and all equity investments.

Question 34

Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to report gains or losses from changes in fair value of equity investments in other comprehensive income, rather than through profit and loss (net income)?

Answer 34

If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income, rather than through profit and loss (net income). The election must be made when the investment is first recognized and subsequently cannot be changed.

Question 35

Under what conditions does International Financial Reporting Standards (IFRS) No. 9 permit an investor to elect to measure a debt investment at fair value that would otherwise be measured at amortized cost?

Answer 35

An investor can elect to measure a debt investment that would otherwise be measured at amortized cost at fair value when the use of fair value would eliminate or significantly reduce a measurement or recognition inconsistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases.