Flashcards in Introduction - Equity and Debt Investments Deck (17):
What are Equity Securities?
Securities representing ownership interest or right to acquire or dispose of ownership interest.
Ex. Common stock, preferred stock, stock warrants, call options. NOT debt securities, redeemable preferred stock and treasury stock
What are debt securities?
Securities representing the right of buyer/holder (creditor) to receive from the issuer (Debtor) a principal amount at a specified future date and (generally) receive interest as payment for providing use of funds
Ex. bonds, notes, convertible bonds/notes, redeemable preferred stock. NOT futures/forward contracts
What is a recognized gain or loss?
When a gain or loss related to an investment (or other item) is recorded in the financial statements, whether or not the investment has been sold.
What is a realized gain or loss?
Occurs when an investment (or other item) is sold. The difference between the cash or other consideration received and the carrying value of the investment is a realized gain or loss
What 3 things does the accounting and reporting of an investment in equity options depend on?
1.) How much is owned
2.) How long is it held
3.) Whether the equity security is private or public
If an investor has less than 20% ownership in an equity security how is it treated for accounting purposes?
Investor is considered to have NOMINAL influence over operating, investing and financing activity of Investee
-If investee is publicly traded and there is a readily determinable market value, the investment is classified as trading or investment for sale
-if investee is not publicly traded and no determinable market value, then investment is classified as a cost method investment
-Recorded on balance sheet as Investment-noncurrent or current depending on management's intent
What are the guidelines for determining no significant influence in an investment
1.)in Debt securities;
2.)in Non-voting stock;
3.)Temporary in nature;
4.)Less than 20% ownership of voting stock
Identify the three possible levels of influence over an investee for accounting purposes.
1.) Not significant;
2.) Significant influence, but not control; and
What is the basis for general guidelines for determining the level of influence over an investee?
The nature and extent of ownership
If investor owns between 20% and 50% in an equity security how is it treated for accounting purposes?
Investor is considered to have SIGNIFICANT INFLUENCE over the investee. It is accounted for using the equity method.
a.)If investee is public and has a readily determinable market value, investor can select Fair Value measurement.
b.) Usually reported as noncurrent asset on BS because investments of this magnitude is relatively difficult to do.
If investor uses Fair Value method for their investment how is it accounted for?
Investment is marked-to-market value with the unrealized gains and losses recorded in earnings. FV option is irrevocable
If investor owns over 50% of of an investee how is it treated for accounting purposes?
Investor considered to have CONTROL over investee. Creates a parent/subsidiary relationship.
a.) Recorded using the equity method
b.) In some cases the parent can choose to use the cost method. Can be used by parent sometimes because the parent's stand alone financials are typically not issued on a standalone basis.
What does the accounting and reporting of an investment in debt securities depend on?
1.) How long it is held
2.) Whether the debt security is private or public.
What is the first criterion for a debt security to be classified as Held to Maturity (HTM)?
An investor must have the positive ability and intent to hold the security to maturity.
a.) Ability to hold may be evident in prior investments in debt securities
b.) Intent to hold may be evident my demonstrating that the investor does not need cash associated with this investment.
If debt security is publicly traded how is it accounted for?
Investor has option to value at amortized cost or FV
a.) If investor intends to HTM, the security must be valued at amortized cost and classified as a noncurrent investment until it matures
b.)if the FV option is selected then records security at FV and classified as as trading or available-for-sale and presented as current or noncurrent depending on managements intent
If a debt security is privately issued how is it accounted for?
Usually at amortized cost
a.) If investor wants to HTM, must be valued at amortized cost, classified as noncurrent until it matures
b.) If classified as trading or available for sale then should be recorded at FV