Flashcards in Investments Deck (72)
FASB ASC 320-10-05-2 governs the accounting for all investments in debt securities and investments in equity securities that have readily determinable Fair Values except for what 4 items?
1. investments in equity securities accounted for under the equity method
2. investments in consolidated subsidiaries
3. not-for-profit organizations (however, it does apply to cooperatives and mutual enterprises, including credit unions and mutual insurance companies)
4. enterprises with specialized accounting practices relating to investments in debt and equity securities (i.e. brokers and dealers in securities)
Investments in equity securities that do not have readily determinable fair values, such as investments in closely held corporations are to be report at?
cost. Even though the FV of these securities may not be readily determinable, if there is evidence of an other-than-temporary decline in the value of the investments, the investment should be written down to a reasonable estimate of its FV
What are debt securities?
Debt securities include all securities representing a creditor relationship with an enterprise (i.e. Treasury securities, US Government agency securities, municipal securities, corporate bonds, convertible debt and commercial paper). It also includes preferred stock that, by its terms, either must be redeemed by the issuing enterprise or is redeemable at the option of the investor
What are equity securities?
Equity securities include all securities representing an ownership interest in an enterprise (i.e. common, preferred or other capital stock or the right to acquire (call options) or dispose (put options) an ownership interest in an enterprise at fixed or determinable prices). They do not include preferred stock that, by its terms, either must be redeemed by the issuing enterprise or is redeemable at the option of the investor
All investments in debt securities will be classified on the balance sheet in one of the following 3 categories. What are they?
1. held-to-maturity securities
2. trading securities
3. available-for-sale securities
Investments in equity securities that have a readily determinable fair value will be classified how?
either trading securities or available-for-sale securities
What are trading securities?
Trading securities include debt securities and readily marketable equity securities that are bought and held principally for the purpose of selling them in the near term. They generally reflect active and frequent buying and selling.
How are trading securities recognized on the balance sheet?
at fair value.
Unrealized holding gains and losses for trading securities are included in earnings.
What does the valuation allowance account represent?
it represents the difference between cost and fair value. A debt balance means that the FV is larger than cost, a credit balance means that the FV is less than cost.
What is the net unrealized holding gain or loss account?
It is a net income account that is a temporary account that reflects the change in the net unrealized gain or loss during the current period.
What is a financial instrument?
It is cash, evidence of an ownership interest in an enterprise, or a contract that both:
1) imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange financial instruments on potentially unfavorable terms with the second entity and
2) conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity
Some financial instruments are currently recognized as assets and the amount recognized reflects what?
the risk of accounting loss to the entity
Some financial instruments that are recognized as assets may expose the entity to a risk of accounting loss that exceeds the amount of currently recognize in the balance sheet. How is this shown?
off-balance sheet risk
Some financial instruments are currently recognized as liabilities, and the amount to settle the obligation cannot exceed what?
the amount recognized on the balance sheet
Some financial instruments that are recognized as liabilities may expose the entity to a risk of accounting loss that exceeds the amount of currently recognize in the balance sheet. How is this shown?
off-balance sheet risk
What 5 disclosures must be made regarding fair value?
1. FV of financial instruments for which it is practicable to estimate that value (either in the body of the FS or in the notes)
2. FV must be presented together with the related carrying amount, in a form that makes it clear whether the FV and carrying amounts represent assets or liabilities and how the carrying amounts relate to what is reported in the BS
3. the method or methods and significant assumptions used to estimate the FV
4. description of any changes in the methods and significant assumptions used to estimate FV of financial instruments during the period
5. the level of the FV hierarchy within which the FV measurements were categorized must be stated (level 1,2 or 3)
What is the best evidence of the FV of financial instruments?
quoted market prices, if available.
If quoted market prices are not available, management's best estimate of FV may be based on the quoted market price of a financial instrument with similar characteristics or on appropriate valuation techniques
What does "practicable" mean in reference to FV?
It means that an estimate of FV can be made without incurring excessive costs. It is a dynamic concept. What is practicable for one entity might not be for another.
If it is not practicable to estimate the FV of a financial instrument or class of financial instruments, what 2 things must be disclosed?
1. information pertinent to estimating FV of that instrument or class of instruments, such as the carrying amount, effective interest rate and maturity
2. the reasons why it is not practicable to estimate FV
What are the disclosure requirements for the FV for trade receivables and payables?
There are none if their carrying amount approximated their FV
What are the 4 required disclosures regarding credit risk?
1. information about the (shared) activity, region, or economic characteristics that identifies the concentration
2. the maximum amount of loss due to credit risk that, based on the gross FV of the financial instrument, the entity would incur if parties to the financial instruments that make up the concentration failed completely to perform according to the terms of the contracts and collateral or other security, if any, for the amount due proved to be no value to the entity
3. the entity's policy of requiring collateral or other security support financial instruments subject to credit risk, information about the entity's access to that collateral or other security, and the nature and a brief description of the collateral or the other security supporting those financial instruments
4. the entity's policy of entering into master netting arrangements to mitigate the credit risk of financial instruments, information about the arrangements for which the entity is a party, and a brief description of the terms of those arrangements, including the extent to which they would reduce the entity's maximum amount of loss due to credit risk
Must an entity disclose quantitative information about the market risks of financial instruments?
An entity is encouraged but not required
What are available-for-sale securities?
Investments in debt securities and readily marketable equity securities that are not classified as held-to-maturity securities or as trading securities
How are available-for-sale securities recognized?
On the balance sheet at FV. However, any related unrealized holding gains/losses are excluded from net income and reported as other comprehensive income
Transfers between categories shall be accounted for at FV. Transfers from trading securities to either available-for-sale or held-to-maturity securities are accounted for how?
the unrealized holding gain or loss will already have been recognized in earnings and shall not be reversed
Transfers between categories shall be accounted for at FV. Transfers into trading securities from either available-for-sale or held-to-maturity securities are accounted for how?
the unrealized holding gain or loss shall be recognized in earnings immediately
Transfers between categories shall be accounted for at FV. Transfers into the available-for-sale category from the held-to-maturity category are accounted for how?
the unrealized holding gain or loss shall be recognized as other comprehensive income
Transfers between categories shall be accounted for at FV. Transfers into the held-to-maturity category from the available-for-sale category are accounted for how?
the unrealized holding gain or loss at the time of transfer shall continue to be reported as accumulated other comprehensive income in SH's equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount
Individual securities classified as either available-for-sale or held-to-maturity shall be evaluated to determine whether a decline in FB below the amortized cost basis is other than temporary. If so, what should be done?
the cost basis of the individual security should be written down to FV and the amount of the write-down included in earnings. For a debt security, the amount recognized in earnings depends on whether the entity intends to sell the security or more likely than not will be required to sell it prior to recovery of its amortized cost basis less any current-period credit loss.