Section 4 - Marketable Securities Flashcards
What is Marketable Securities?
Investment in securities (debt or equity) that are publicly traded AND investment is not large enough to provide significant influence over investee.
Classified as:
1) Trading securities (HFT - Held for Trade)
2) Available-For-Sale (AFS/AVS)
3) Held-To-Maturity (HTM)
What is Trading Securities (HFT)?
- purchased for the purpose of selling in near future
- current asset on balance sheet if operating and noncurrent if investing
- include both debt and equity securities (bonds and stocks)
- initially recorded at cost, but carried at FMV
- UNREALIZED GAINS and LOSSES (temporary) reported on INCOME STATEMENT
- realized gains and losses are always on I/S along with interest and dividend income
- OPERATING ACTIVITY on Statement of Cash Flows
What are Trading Securities J/Es?
Purchase
Investment in trading securities XX
Cash XX
Gain
Market adjustment - Trading Securities (B/S) XX
Unrealized Gain (I/S) XX
Loss
Unrealized loss (I/S) (XX)
Market adjustment - Trading Securities (B/S) XX
What are Available For Sale Securities (AFS/AVS)?
- current or noncurrent (if holding period is indefinite, noncurrent)
- include both debt and equity securities (bonds and stocks)
- initially recorded at cost, but carried at FMV
- UNREALIZED GAINS and LOSSES appear on BALANCE SHEET as part of COMPREHENSIVE INCOME in the stockholders’ equity section. **Cumulative amount is “accumulated other comprehensive income”
- Realized gains and losses are always in I/S as well as interest and dividend income
- INVESTING ACTIVITY on Statement of Cash Flows
What are Available For Sale Securities J/Es?
Purchase
Investment in AFS securities XX
Cash XX
Gain
Market adjustment - Trading Securities (B/S) XX
Unrealized Gain (B/S) XX
Loss
Unrealized loss (B/S) (XX)
Market adjustment - Trading Securities (B/S) XX
How do you record sale of “Available For Sale” securities?
- difference between cost and proceeds treated as REALIZED GAIN/LOSS
- IGNORE allowance account and adjust to new target balance
- last investment, then allowance and unrealized gain/loss must be eliminated
When is “Available For Sale” securities - Impairment Loss “Other Than Temporary”?
- impaired when there is a decline in value that is considered “other than temporary”
- AMOUNT is difference b/w investment’s original cost and declined value from which it is not expected to recover
- the amount will be reclassified out of “other comprehensive income” and recognize as a LOSS in calculating NET INCOME
- once written down, recoveries will NOT BE RECOGNIZED
- *written down to FMV
- *loss is treated as a REALIZED LOSS on I/S, remaining balance is new cost
JE
Loss XXX
Investment in AFS XXX
How do you reclassifiy b/w Trading and AFS?
- reclassify at FMV
- difference is treated as a REALIZED GAIN/LOSS on the income statement
- eliminate any related valuation allowance accounts
How do you reclassifiy b/w “Held to Maturity” and AFS?
- reclassify at FMV
- HTM -> AFS, record in OCI
- AFS -> HTM, unrealized holding gain/loss reported on B/S as part of Comprehensive Income and amortized over the remaining life of the security
What is Held To Maturity (HTM)?
Bonds the company has the INTENT and ABILITY to hold until maturity
- noncurrent, unless maturity is less than one year from B/S date
- Bonds only
- carry at AMORTIZED COST (face net of unamortized discount or premium)
- unrealized gains/losses - NOT APPLICABLE
- realized gains/losses - shouldn’t happen but could
- report interest income net of amortization on I/S
- INVESTING ACTIVITY on Statement of Cash Flows
- considered held to maturity if sale occurs after at least 85% of principle has been collected
Under AFS Fair Value Option, where is unrealized gains and losses reported?
Unrealized gains and losses reported as component of NET INCOME on I/S (instead of OCI)
What are Marketable Securities under IFRS reported at?
-marketable securities reported at Fair Value Through Profit or Loss (FVTPL) or amortized cost if security consists of principal and interest
Under IFRS, what are recorded at amortized cost?
-generally, only as a result of a loss event resulting from significant financial difficulty of other party to instrument is reported at amortized cost
Under IFRS, can impairment losses reported at amortized cost be reversed?
Yes!
Impairment losses reported at amortized cost may be reversed upon occurrence of a recovery event
