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Flashcards in Investments Deck (42)

What is an equity security?

Securities representing ownership interest or right to acquire or dispose of ownership interest.


What is a debt security?

Securities representing the right of buyer/holder (Creditor) to receive from the issuer (Debtor) a principal amount at a specified future date and (generally) to receive interest as payment for providing use of funds.


What is recognition?

A recognized gain/loss occurs when a gain or loss related to an investment (or other item) is recorded (recognized) in the financial statements, whether or not the investment has been sold

it means that we have recognized the item on the financial statements.


What is realization?

A realized gain/loss occurs when an investment (or other item) is sold (or otherwise disposed of). The difference between the cash or other consideration received and the carrying value of the investment is a realized gain or loss

it means that there is a culmination of the earnings process and cash or other consideration is given or received.


What affects how we account for equity securities?

1. How much is owned;
2. How long it is held;
3. Whether the equity security is private or public.


What is required for a security to be classified as held to maturity?

The positive ability and intent to hold the security to maturity.


Can both debt and Equity securities be classified as held to maturity?

No, only debt


How are held to maturity securities recorded?

Initially at cost (purchase price + Directly related costs)

Carried and reportaed at amortized cost


What is required to be classified as a Trading investment?

can be debt or equity

Investor buys and holds for the purpose of selling in the "near term," generally with the objective of generating profits on short-term price changes.


How are trading securities recorded?

Initially recorded at cost

carried at Fair Value

FV adjustments go into income from continuing operations


What is required to be classified as an available for sale investment?

Applies to investments in both Debt and Equity securities.
Includes all investments in Debt and (qualified) Equity securities not classified as Held-to-Maturity or Trading Investments.


How are AFS securities recorded?

initially recorded at cost

caried at fair value. record adjustments to fair value in OCI


When can the cost method be used for investments?

The cost method of accounting for an equity investment is permitted if the investor cannot exert significant influence over the investee and there is no readily determinable fair value of the investment. In most cases, the cost method would be used because the investee is a privately held company.
The cost method requires that the initial investment be recorded at historical cost and is not subsequently adjusted unless there is a liquidating dividend or a permanent decline in value.


What are the investment classifications in IFRS?

Held to maturity (debt only) and Fair Value


When can an investment be transferred between classes in IFRS?

The transfer between categories for investments in debt can be made only when the investor's business model objective for debt investments changes so that the (previous) category no longer applies

Equity investments cannot change classes


What is the equity method?

The equity method requires the investor to periodically adjust the carrying value of the investment to (1) reflect changes in the investee's shareholders' equity (e.g., net income/loss dividends, etc.) and (2) recognize the effects of any difference between the cost of the investment assignable to the fair value of investee's amortizable assets and the book value of those assets


When is the equity method required for an investment?

A. Investments in voting equity securities; not non-voting equity or debt securities.
B. With sufficient ownership to give significant influence or control over the operating and financial policies of the investee.
C. If prior ownership with no significant influence is followed by additional purchase of equity shares resulting in significant influence, then:
1. Switch from fair value to equity method; obtaining significant influence and therefore switching to equity method accounting is accounted for retroactively;
2. Adjust investment and income (prior period adjustment) to what they would have been if equity method had been used from initial purchase.


When using the equity method, how do you first record an investment?

A. Cost includes:
1. Purchase price of the equity securities (e.g., price per share);
2. Other directly related costs incurred in the acquisition (e.g., brokerage commission, transfer fee, etc.).

C. At the time of the initial investment, the investor must also:
1. Determine book value (BV) of assets/liabilities of investee at date of investment;
2. Determine fair value (FV) of assets/liabilities of investee at date of investment;
3. Allocate any difference between cost of investment and book value of net assets of the investee to:
a. FV of identifiable assets/liabilities, then any excess balance to
b. Goodwill (or to gain if Cost < FV).


When using the equity method, are dividends income?



When using the equity method, which contiued operation items affect the value in the investment account?

Share of income/ losses
Deduct share or accrued dividends for PS
Share of extraordinary items
Share of prior period adjustment
deduct share of dividends
Investor makes entry for "depreciation" or "amortization" on its share of fair value in excess of book value as it relates to identifiable depreciable or amortizable assets

If investment account reaches zero, stop using the equity method.


When using the equity method, which OCI items affect the value in the investment account?

share of Unrealized gains/losses on available-for-sale securities;
Foreign currency items;
Pension and post retirement benefit items not recognized in period cost;


How do you determine good will?

Goodwill = price of investment - % (FV of net assets)


Can you apply fair value to an equity investee?

Under US GAAP yes, under IFRS only certain investors can (venture capital orgs, mutual funds and unit trusts)


What is a joint venture?

An association of two or more entities that exercise joint control over an undertaking for profit generally set up for a limited purpose, a limited time, or both.

The association created by a joint venture may be established by agreement or contract alone, or may take the form of a legal entity

generally no single party has unilateral control


When forming a joint venture, how is it carried on the books?

An investor records its contribution of assets to a joint venture as an investment at the carrying value of the assets on its books at the time of contribution.


For a joint venture, explain subsequent accounting for a corporate joint venture?

How an investor accounts for and reports its investment in the common stock of a corporate joint venture will be determined first by whether the joint venture entity is a variable interest entity (VIE) or not

If the joint venture is determined to be a variable interest entity and the investor determines that it is the primary beneficiary, the investor will consolidate the joint venture

If the joint venture is not a variable interest entity (or the investor is not the primary beneficiary, if it is a VIE), the investor accounts for and reports its investment in the corporate joint venture using the equity method of accounting


For a joint venture, explain subsequent accounting for a partnership joint venture?

An investor/partner in a joint venture in the form of a partnership would account for its investment as would any partner, with adjustments (equity method-like) for any intercompany items.
a. Any intercompany profits/losses included in the assets resulting from transactions between the investor/partner and the partnership would be eliminated.
b. The investment account of the investor would be increased (decreased) for the investor's share of joint venture profits (losses), after eliminating intercompany items, if any.


What are the three types of joiny ventures recognized by IFRS?

Jointly controlled entity -- wherein the joint venture activity is carried out through a separate entity (corporation/company or partnership);
Jointly controlled operation -- wherein each party to the joint venture uses its own assets for a specific project; no separate entity is formed;
Jointly controlled assets -- wherein a project is carried out with assets that are jointly owned, but no separate entity is formed.


For joint ventures, do you ever recognize a gain or loss when contributing noncash assets?

Only under IFRS, you recognize a gain equal to your share of the ventue.


How are stock dividends accounted for by the investor?

Investor receives additional shares of investee stock as dividend.
Investor adjusts only per share (not total) cost (carrying value) of investment.


How are stock splits accounted for by the investor?

Investor receives additional shares of investee stock in conjunction with investee decrease in par or stated value per share. In a reverse stock split the investor exchanges shares held for few shares of the investee in conjunction with investee increasing par or stated value per share.
In either a stock split or a reverse stock split, the investor only adjusts per share (not total) cost (carrying value) of investment.


How are stock rights accounted for by the investor?

Investor receives privilege (right) to purchase additional shares of investee at specific (option) price within a specific time; usually evidenced by a certificate called a stock warrant.
1. If option price < market price, the stock right has a value.
2. The value of the right is determined by allocating cost (carrying value) of investment between the shares of stock and stock rights based on relative fair market value.


How do you determine the cost of stock rights when the market value is known?

[MV 1 right / (MV of stock without right + MV of 1 right)] * Ccarry value of investment = total cost of rights

Total cost /number of rights = per share cost of rights


How do you determine the cost of stock rights when the market value is not known?

Market Value (MV) of stock quoted without value of right (ex-right):
(MV one Share of Stock w/o Right - Options Price w/Right) / Number of Rights to Buy One Share = Theoretical MV per right
Market Value (MV) of stock quoted with right (rights - on):
(MV one Share of Stock w/Right - Option Price w/Right) / (Number of Rights to Buy One Share Plus (+) 1) = Theoretical MV per right


Are stock rights debt or equity securities?

Equity - must be classified as trading or AFS


Who has a separate category of investments called " investment property"?



What items are classified as investment property?

Investment property is property that consists of land, a building or part of a building, or both land and building, held by an owner, or lessee under a finance (capital) lease, for the purpose of earning rent, for capital appreciation, or for both rental income and capital appreciation.


How are items under investment property measured?

Either at cost or FV


How are items of investment property first recorded?

measured at cost, including direct cost of acquisition


How are items of investment property measured at subsequent timeperiods??

FV - Fair value is determined as of each balance sheet date, and the asset adjusted to the new fair value;
Gains or losses resulting from changes in fair value are reported in net profit or net loss (net income) of the period in which fair value changes;

cost - Under the cost method, investment property continues to be carried and reported at cost. However, fair value is required to be disclosed;
If the property is depreciable, depreciation expense and accumulated depreciation are recognized;


Can items be transferred in/out of investment property?

A transfer to or from the investment property classification would be made only when there is a change in use of the property as evidenced by the following kinds of events:

Transfers to or from investment property would be accounted for as follows:
1. Transfers from investment property measured at fair value to owner-occupied property or inventory (e.g., land for sale) - fair value at the date of change is the amount at which the new category is recorded (i.e., its "cost").
2. Transfers from owner-occupied property to investment property measured at fair value - difference between carrying amount of the property and its fair value should be treated as a revaluation under IAS No. 16.

3. Transfers from property inventory to investment property are measured at fair value with any difference between the prior carrying amount and fair value recognized in profit or loss (net income).
4. Transfers to or from investment property measured at cost do not change the carrying amount of the property.


Are gains/losses recognized when investment property is disposed?

A gain or loss on disposal is the difference between proceeds received on disposal, if any, and the carrying amount written off.
Any gain or loss on disposal will be recognized as income or expense in the income statement.