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Financial Accounting and Reporting > Marketable Securities > Flashcards

Marketable Securities Flashcards

1
Q

Trading Securities (HFT-Held for Trading)

A

Investments in equity instruments in an attempt to make profits by buying and selling within a short period of time. Classified as current assets normally because they are invested for a short period of time. The intent is to sell them in the near future. They are considered to be inventory

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2
Q

Types of Trading Securities or Held for Trading (HFT)

A

Stocks, Options, rights, warrants or debt instruments such as bonds.

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3
Q

Available for Sale Marketable Securities (AFS/AVS)

A

investments in marketable equity or debt instruments that do not fit the definition of HTM or trading securities. May be classified as current or noncurrent assets, depending on the expected date of sale. If the holding period is indefinite they should be classified as non-current assets.

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4
Q

Types of Marketable Securities

A
  • Trading securities
  • Available for Sale Securities
  • Held to maturity securities
  • Categorized based on managements intentions
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5
Q

Held to Maturity

A

investments in bonds and other debt instruments which the investor has the ABILITY and INTENT to hold until the due date for repayment. Classified as noncurrent assets (UNLESS MATURITY DATE IS LESS THAN ONE YEAR FROM THE BALANCE SHEET DATE)

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6
Q

Trading Securities (HFT - Held for Trading) are accounted for how?

A
  • Initially recorded @ Cost
  • Purchased for the purpose as generating income (by reselling them @ a profit) & are accounted for on the Income Statement
  • Reporting in the OPERATING SECTION of the CASH FLOW STATEMENT if they are classified as a CURRENT ASSET
  • Reported as INVESTING ACTIVITY IF classified as a NON-CURRENT ASSET
  • Adjusted to Market price (FMV) on a continuous basis on the B/S (ASC 320)
  • Temporary UNREALIZED gains/losses are recorded in the income statement as part income from continuing operations in the “non-operating” section
  • REALIZED gains/losses (temporary that is) appear on the I/S along with Interest and Dividend Income
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7
Q

Purchase of Trading Securities Journal Entry

A

Debit - Investment in trading securities

Credit - Cash

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8
Q

Trading Securities Market Increase - Journal Entry

A

Debit - Marketing Adjustment-Trading securities for the amount of the increase (Current Book value minus Current Market Value this increases the carrying value (BV) on the balance sheet)

Credit - Unrealized Gain (on I/S)

Note: it is an unrealized gain b/c you have not sold the security

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9
Q

Trading Securities Market Decrease - Journal Entry

A

Debit - Unrealized loss for the difference in the Book Value and the current FMV

Credit - Market Adjustment - Trading Securities (on the B/S this decreases the carrying value (BV) on the B/S balance sheet)

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10
Q

Available for Sale securities (AFS/AVS)

A
  • Debt or equity securities that don’t fall into the other 2 categories.
  • Recorded on the B/S as a part of OCI (other comprehensive income) and reported directly in stockholders’ equity immediately below retained earnings in a section called “accumulated other other comprehensive income”
  • Fluctuations are not reported in net income until the securities are sold
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11
Q

Available for Sale Securities are reported how?

A
  • as a current or noncurrent asset (if holding period is indefinite, assume noncurrent)
  • can be either debt or equity
  • initially recorded at cost but then adjusted to FMV in the succeeding years
  • UNREALIZED gains/losses are reported on the B/S as part of Comprehensive Income in the Stockholders equity section
  • REALIZED gains/losses are always on the I/S as well as interest income& dividend income
  • Acquisition & disposal of AFS investments in an INVESTING ACTIVITY ON THE STATEMENT OF CASH FLOWS
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12
Q

AVS Purchase - Journal Entry

A

Debit - Investment in AFS Security

Credit - Cash

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13
Q

AVS Increase in FMV-Journal Entry

A

Debit - Market Adjustment (AFS Security located on the B/S)

Credit - Unrealized gain (on the B/S as a part of Other Comprehensive income in the stockholders equity section)

The market adjustment account increases the carrying value of the AFS in the asset section.

The unrealized gain is also on the B/S as part of OCI in the equity section.

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14
Q

AVS decrease in FMV-Journal Entry

A

Debit - Unrealized Loss (B/S for the difference in the recorded amount and the FMV (it is part of OCI) Note: on the net amount of whats in OCI will be shown on the B/S that is why it is called “accumulated other comprehensive income because only the accumulated amount is reported on the B/S)

Credit - Market adjustment - AVS Security (also a balance sheet account in the asset section and reduces the amount of the security on the B/S)

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15
Q

GAAP I/S (on-tide-n-oc)

A 
Operating Income
Non-operating Income-(Trading   Securities go here
Taxes
=Income from Continuing Ops
Discontinued Operations
Extraordinary /Gains&Losses 
=Net Income

Other Comprehensive Income (AFS Securities go here)
=Comprehensive Income

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16
Q

Selling of AFS Securities

A
  • Allowance account is ignored unless it is the last security
  • REALIZED gain/loss is the difference btwn the COST and the PROCEEDS RECEIVED
  • IF IT IS THE LAST INVESTMENT THEN THE ALLOWANCE ACCOUNT AND THE UNREALIZED GAIN OR LOSS MUST BE BOTH ELIMINATED
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17
Q

How are impairment losses on AFS securities accounted for?

A

-The security is written down to FMV
-Loss is treated as a realized loss on the I/S and the remaining balance is considered to be the new cost
Journal Entry -

Debit - Loss
Credit - Investment in AFS

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18
Q

What is the process to determine if the decline in AFS is other than temporary

A

-If the FV is less than its Cost, the investment is considered to be impaired
-Indications that impairment is other than temporary include:
** Series of Operating losses,
inability of an investee to maintain an earnings capacity that is sufficient to justify the carrying value.
if the investor intends to sell the investment before it recovers in value, an impairment is considered nontemporary & recognized in the period in which the decision is made to sell the investment
**If the investor does not intend to sell the investment, the loss is recognized in the period in which the loss that is considered nontemporary occurs
**********
Debt Securities
-If entity intends to sell the security; non temporary loss is considered to have occurred
-If the entity does NOT intend to sell the security, the nontemporary loss will be recognized if it is MORE LIKELY THAN NOT that the entity will be required to sell the security before the value is recovered or it the present value of the amount expected to be recovered is less than the carrying value.

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19
Q

At what amount will the impairment loss be recorded for AFS equity securities

A

the difference btwn the FV @ B/S date & COST of the investment

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20
Q

At what amount will the impairment loss be recorded for AFS debt securities

A
  • if the investor expects to sell, or to be required to sell the security before recovery, the difference btwn the FV @ the B/S date and the amortized cost
  • If the investor does not expect to sell, or be required to sell the security before recovery, a portion of the loss attributable to other factors, will be recognized in OCI.
21
Q

Securities reclassification is based on what?

A

changes in managements intent

22
Q

What is used to determine the reclassified amount of the the securities that are changing categories?

A

current market price is used to determine the transfer

23
Q

What are the accounting procedures to account for reclassified securities from AFS to Trading or vice versa

A
  • Reclassify @ FMV
  • The difference is treated as a REALIZED gain/loss on the Income statement
  • Eliminate any related valuation allowance accounts.
24
Q

What are the accounting procedures of reclassifying btwn HTM & AFS

A
  • Reclassify @ FMV
  • If HTM to AFS then record in OCI
  • If AFS to HTM then the UNREALIZED holding gain/loss is reported on the B/S as part of Comprehensive Income & amortized over the remaining life of the security.
25
Q

What are held to maturity securities

A

Bonds only the company has both the intent and ability to hold until maturity

26
Q

How are held to maturity securities accounted for in the financial statements

A
  • Initial purchase is Recorded @ cost
  • Difference btwn the cost and maturity value is amortized over the life of the security using the EFFECTIVE RATE METHOD
  • interest income is recognized each period
  • fluctuations is market price are ignored since they intend to hold the securities to maturity
  • noncurrent asset unless maturity date is less than one year from the B/S date
  • Report interest income net of amortization on the I/S
  • considered held to maturity if sale occurs after at least 85% of principle has been collected
27
Q

At what value are HTM securities carried on the B/S

A

@ Amortized cost

28
Q

What section of the Cash Flow Statement are HTM reported in

A

Investing activities

29
Q

Trading Securities (HFT) Overview

A

Balance Sheet Classification

  • classified as a current asset only on the B/S
  • it can be a debt or equity security such as bonds or stocks
  • adjusted to FMV each balance sheet date
      Income Statement
  • unrealized gains/losses are recorded in the nonoperating section of the income statement
  • realized gains/losses are recorded along with interest and dividend income
      Cash Flow Statement
  • Classified as an Operating Activity
30
Q

Available for Sale (AFS) overview

A

Balance Sheet

  • Can be classified as a current or noncurrent asset
  • can be debt or equity
  • adjusted to FMV
  • unrealized gains/losses on the B/S as part of comprehensive incomeIncome Statement
    -Realized gains/losses reported along with interest & dividends

Statement of Cash Flows
-Investing Activity

31
Q

Held to Maturity Overview

A

Balance Sheet

  • Classified normally as a noncurrent asset
  • Debt security only
  • Amount on the B/S is at amortized costIncome Statement
  • Realized gain/loss
  • Interest IncomeCash Flow Statement
    -Investing Activity
32
Q

when is a contract considered a financial instrument

A
  1. it represents a potential financial liability for one party by imposing an obligation to one of the following:
    * * deliver cash or another financial instrument to another entity
      • exchange other financial instruments w/the other entity on potentially unfavorable terms
  2. it represents a potential financial asset for the other party by conveying a right to one of the following:
    * *receive cash or another financial instrument from the other entity
    * *exchange other financial instruments w/the other entity on potentially favorable terms
33
Q

what are financial instruments

A
  • cash
  • a security representing an ownership interest in another entity or a
  • contract with components listed in the definition of a financial instrument contract.
34
Q

FV election for an investment accounted for under the equity method on the B/S is accounted for how?

A
  • reported at FV on each balance sheet date
  • increases and decreases recognized as unrealized gains or losses on the I/S
  • Dividends received will be recognized as income
35
Q

FV election for AFS (available for sale) securities are accounted for how?

A
  • reported at FV on each balance sheet date (which is already required)
  • Unrealized gains/losses are reported as a component of net income INSTEAD of Comprehensive income.
  • NOTE: This makes it accounted for just like trade securities so FV is rarely tested because Roger says that they want us to know the difference.
36
Q

FV election for Trade Securities are accounted for how?

A

they are accounted for the exact same as they are normally accounted for.

37
Q

FV election for Held to Maturity securities

A
  • accounted for @ amortized cost
  • recognize income under the effective interest method
  • carrying value is adjusted to FV on each balance sheet date w/the increase or decrease recognized as a component of net income
38
Q

If the FV option is elected can it be revoked?

A

No it is irrevocable until a subsequent election date

39
Q

For the FV option election; what disclosures are required?

A
  • managements reasons for electing the FV option for each item for which the election was made
  • If elected for some but not all of the items that are similar; the reasons for a partial election & how the similar items affect line items on the statement of financial position (balance sheet??)
  • the difference btwn FV amounts & principal balances of receivables or payables w/contractual principal amounts
  • disclosures required when applying the equity method for investments that would have been accounted for under the equity method if the FV election had not been made
40
Q

What additional disclosures are required for the FV election as it relates to the presentation of the income statement

A
  • amounts of each gain or loss recognized in earnings as a result of changes in FV
  • an indication as to where interest and dividends are reported on the income statement and how they are measured
  • for receivables held as assets, the gains or losses resulting frm changes in the instruments credit risk, including how it is measured
  • for liabilities affected by changes in the instruments credit risk during the period the gains/losses resulting frm changes in the instruments credit risk, reasons for the change & how the gains or losses are measured
41
Q

Definition of Financial Asset under IFRS

A
  • cash
  • an equity instrument of another entity
  • a contractual right
  • **to receive cash or another financial asset from another entity or
  • **to exchange financial assets or financial liabilities w/another entity on potentially favorable terms
  • a contract that will be settled in the entity’s own equity instrument
  • generally measured @ fair value through profit or loss (FVTPL)
  • Increase/Decreases in fair value are reported as gains or losses on the I/S or called “Statement of Operations”
42
Q

Definition of Financial liability under IFRS

A
  • contractual obligation
  • *to deliver cash or another financial asset to another entity
  • to exchange financial assets or financial liabilities w/another entity on potentially unfavorable terms
  • a contract that will be settled in the entity’s own equity instrument
43
Q

When are financial assets and liabilities recognized under IFRS

A

not until an entity becomes a party to the contract that results in the financial asset or financial liability

44
Q

Under IFRS when are Financial Assets measured at amortized cost

A
  1. the entities business model is to hold the asset to collect scheduled cash flows
  2. the terms of the instrument call for cash flows that are exclusively payments of principal and interest on specified dates

Additional requirements
**evaluation of the instrument for impairments is required at the end of each reporting period

45
Q

What are examples of loss events

A
  • breach of contract (default or delinquency)
  • granting a concession to the borrower for economic or legal reasons related to the debtor’s financial circumstances
  • likelihood of the debtor going into bankruptcy
  • inactivity of the market for the instrument due to the financial difficulty
  • observable data indicating an expected decrease in future cash flows
  • economic conditions contributing to defaults
46
Q

Recovery of an impairment loss under IFRS

A
  • the initial loss goes to the I/S
  • If the previously recorded loss is recovered, it first goes to the income statement to offset the previously recorded impairment loss, the remainder would go to OCI to bring the asset to FV
47
Q

Summary of Financial Investments under IFRS

A
  • Reported @ FVTPL or @ amortized cost if the security consists of principal and interest and is expected to be held for the purpose of collecting the cash flows
  • amortized cost is generally used as a result of a loss event resulting from significant financial difficulty of other party to instrument
  • impairment losses in securities reported at amortized cost may be reversed upon occurrence of a recovery event
  • Financial Assets are normally measured @ FVTPL by electing the FV option
  • Compound (hybrid) financial interests (ex. convertible bonds) are treated as a single contract & accounted for @ amortized cost, as appropriate.
48
Q

marketable securities classified as available for sale on the balance sheet are accounted for how?

A

when marketable securities are accounted for as available for sale they are reported at their fair values on the balance sheet. any unrealized gains or losses are recognized by increasing or reducing the carrying value of the investment. respectively w/the use of a valuation allowance, and recognizing the corresponding amount in other comprehensive income, a component of stockholders equity. as a result unrealized temporary losses, and changes in the valuation allowance, affect other comprehensive income, but not net income. realized gains/losses, however are recognized on the income statement.

49
Q

available for sale realized gains/losses are recorded at what amount?

A

Realized gains and losses are recognized in net income in the period of the sale in an amount equal to the difference btwn the selling price and the ORIGINAL COST!

Financial Accounting and Reporting (12 decks)

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