Investments Flashcards
Equity Securities
Represent ownership interest/right to acquire or dispose of ownership interest
Includes: Common Stock, Preferred Stock (NOT REDEEMABLE), Stock Warrants, Call Options/Rights, Put Options
Excludes: Debt Securities (even convertible debt), redeemable preferred stock, treasury stock
Debt Securities
Represent right of buyer/holder to receive from issuer principal amt at specified future date and receive interest as pmt for providing use of funds(usually)
Includes: Bonds, Notes, Convertible Bonds/notes, Redeemable Preferred Stock
Excludes: Common/Preferred Stock, Stock Warrants/options/rights, futures/forward contracts
Recognized VS Realized
Recognized: Accting term, recognized item on FS- doesn’t matter if sold or not
Realized: Economic term, means culmination of earnings process and cash/ other consideration is given/received
Percentage of Equity Ownership/Level of influence
See table on pg 282 book 1
Debt Ownership/Investment Classifications
See table on pg 284 & 288 (for next 9 slides) book 1
Held-to-Maturity Classifications
- Only Debt
- Applies when investor has 1. Positive intent to hold to maturities 2. Ability to hold securities to maturity
- If sold before maturity and 1. sale is near enough to maturity date so interest rate risk is substantially eliminated 2. sale occurs after investor has collected 85% of principle then security can be classified as held-to-maturity
Held-to-maturity Reporting
- Investment recorded at cost (includes purchase price/directly related costs incurred–brokerage fee/transfer fee)
- Carry/Report at amortized cost-recognize period interest income DR Cash CR Interest Income
- Has FV option
- Current/Non Current on balance sheet
- Investing Activity on St of Cash Flows
Trading Investments Classifications
- Debt/Equity
- Adj to FV at Balance Sheet Date
- Criteria: 1. applies to investments in Debt and Equity 2. Investor buys and holds for purpose of selling “near term” generally to generate profits short-term price changes
Trading Investment Reporting & Sale of Trading Investment
- Investment recorded at cost (includes purchase price/ directly related cost incurred–brokerage fee/transfer fee)
- Carry/Report at FV (DEBT: recognize periodic interest income) (EQUITY: recognize dividend income) table on pg 290
- Sale: 1. If debt recognize interest income & amortization of premium/discount to date of sale & 2. determine carrying value of investment to be sold (FV) 3. Recognize realized gain or loss at date of sale if diff b/w sales price and CV
Available for sale Investment Classification
-Debt/Equity not included in trading or held to maturity
Available for sale Investment Reporting
- Investment recorded at cost (includes purchase price/directly related costs incurred–brokerage fee/transfer fee)
- Carry/Report at FV (DEBT: recognize periodic interest income & periodic amortization of premium/discount)(Equity: recognize dividends received as dividend income)
- Unrealized Holding Gain/Loss report as item of comprehensive income included in Accumulated other comprehensive income in shareholders’ equity section of balance sheet (net of tax)
- Current/Non current
- Investing activity in St of Cash Flows
Adjusting AFS Investments to FV
If FV>CV recognize unrealized holding gain. gain is recorded in other comprehensive income
If FV<CV recognize unrealized holding loss. loss recognized in other comprehensive income
Assess AFS investments for impairment
-IF FV of investment is less than amortized cost then investment is impaired, determine if impairment is other than temporary
-If impaired and other than temporary then impairment loss = to diff b/w investment’s amortized cost and FV is recognized in current income as realized loss
»_space;>FV becomes new cost basis of investment
»_space;> Subsequent recoveries in FV not recognized
Sale of AFS Investments
If Debt: 1. recognize interest income and amortization of premium/discount 2. determine CV of investment (FV) 3. recognize realized gain/loss at date sale as diff b/w sales price & CV 4. Unrealized holding gain/loss in Accum Other Comprehensive income at date of sale is recognized in income
Cost Method Investment
1.Equity Investments when investor no sig influence and no readily determinable fair value (privately held company)
2.Investment recording at historical cost and on adjustments needed UNLESS:
»FMV permanent decline (like investee goes into bankruptcy) then permanent write down is required
» Liquidating Dividend: occurs when dividends declared are in excess of earnings-return OF capital instead of return ON capital
