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Settlement Deliver shares to receive cash. Receive cash equivalent, based on changes in share price times the number of shares. For a traditional financial instrument, an investor generally must pay the full cost, while derivatives require little initial investment. In addition, the holder of a traditional security is exposed to all risks of ownership, while most derivatives are not exposed to all risks associated with ownership in the underlying.

For example, the intrinsic value of a call option only can increase in value. Finally, unlike a traditional financial instrument, the holder of a derivative could realize a profit without ever having to take possession of the underlying. This feature is referred to as net settlement and serves to reduce the transaction costs associated with derivatives.

The purpose of a fair value hedge is to offset the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment. The unrealized holding gain or loss on non-trading equity investments should be reported as income when this security is designated as a hedged item in a qualifying fair value hedge. If the hedge meets the special hedge accounting criteria designation, documentation, and effectiveness , the unrealized holding gain or losses is reported as income.

This is likely a setting where the company is hedging the fair value of a fixed-rate debt obligation. The fixed payments received on the swap will offset fixed payments on the debt obligation. As a result, if interest rates decline, the value of the swap contract increases a gain , while at the same time the fixed-rate debt obligation increases a loss. The swap is an effective risk management tool in this setting because its value is related to the same underlying interest rates that will affect the value of the fixed-rate bond payable.

Thus, if the value of the swap goes up, it offsets the loss in the value of the debt obligation. A cash flow hedge is used to hedge exposures to cash flow risk, which is exposure to the variability in cash flows. The cash flows received on the hedging instrument derivative will offset the cash flows received on the hedged item. Generally, the hedged item is a transaction that is planned some time in the future an anticipated transaction. Derivatives used in cash flow hedges are accounted for at fair value on the statement of financial position but gains or losses are recorded in equity as part of other comprehensive income.

A hybrid security is a security that has characteristics of both debt and equity and often is a combination of traditional and derivative financial instruments. A convertible bond is a hybrid security because it is comprised of a debt security, referred to as the host security, combined with an option to convert the bond to ordinary shares, the embedded derivative. The Unrealized Holding Gain or Loss—Equity account is reported as a part of other comprehensive income and as a component of equity until realized.

The Securities Fair Value Adjustment account is added to the cost of the Equity Investments account to arrive at fair value. Therefore, the following adjusting entry should be made at the year-end: Unrealized Holding Gain or Loss—Equity The Securities Fair Value Adjustment account is a valuation account to the related investment account. The answer is also given in the T-account information. Unrealized Holding Gain or Loss—Income If the bonds are impaired, it is inappro- priate to increase amortize the asset back up to its original maturity value.

Therefore Komissarov must reverse the impairment loss by debiting Debt Investments and crediting Recovery of impairment loss. Bond premium amortization is also involved. Problem Time 30—40 minutes Purpose—The student is required to prepare journal entries and adjusting entries for debt investments, along with an amortization schedule and a discussion of financial statement presentation.

Problem Time 25—30 minutes Purpose—to provide the student with an understanding of the differentiation in accounting treatments for debt and equity investments. The student is required to prepare the necessary journal entries to properly reflect transactions relating to debt and equity investments. Problem Time 25—35 minutes Purpose—the student is required to distinguish between the existence of a bond premium or discount. The student is also required to prepare the adjusting entries at two year-ends for debt investments.

Problem Time 25—35 minutes Purpose—the student is required to prepare journal entries for the sale and purchase of equity investments along with the year-end adjusting entry for unrealized holding gains or losses and to discuss the financial statement presentation. Problem Time 25—35 minutes Purpose—the student is required to prepare during-the-year and year-end entries for trading equity investments and to explain how the entries would differ if the investments were classified as non-trading.

Problem Time 25—35 minutes Purpose—the student is required to prepare during-the-year and year-end entries for debt investments and to explain how the entries would differ if the investments were classified as held-for-collection. Problem Time 20—30 minutes Purpose—to provide the student with an understanding of the accounting for trading and equity investments.

The student is required to apply the fair value method to both classes of investments and describe how they would be reflected in the body and notes to the financial statements. Problem Time 20—30 minutes Purpose—to provide the student with an understanding of the proper accounting treatment with respect to trading equity investments and the resulting effect of a reclassification from trading to non-trading status.

The student is required to discuss the descriptions and amounts which would be reported on the face of the statement of financial position with regard to these investments, plus prepare any necessary note disclosures. Problem Time 30—40 minutes Purpose—to provide the student with an understanding of the reporting problems associated with trading equity investments. Problem Time 20—30 minutes Purpose—to provide the student with an understanding of the reporting problems associated with trading equity investments.

See b schedule. The purchase entry will be: April 17, Brokerage Expense This investment would be reported as a current asset on the statement of financial position. The unrealized holding loss in this case would be deducted from the equity section rather than charged to the income statement.

This procedure is correct, assuming that when the cash is received for the interest, an appropriate credit to Interest Receivable is recorded. In addition, held-for-collection investments would be carried at amortized cost and not valued at fair value at year-end. The unrealized gain loss would be the difference between the investments amortized cost and their year-end fair value. Non-trading investments: Securities Fair Value Adjustment The Securities Fair Value Adjustment is a valuation account and it will be used to show the reduction in the fair value of the trading investments.

The trading investments portfolio is disclosed in the statement of financial position as a current asset and reported at its fair value. The Securities Fair Value Adjustment account is used to report the change in fair value of the non-trading investments. The fair value of the investments is reported in the Investments section of the statement of financial position.

It should be noted that a combined statement of income and comprehensive income or a statement of comprehensive income would report the components of comprehensive income. No fair value adjustments are recorded under the equity method. Instead the unrealized gain would be reported in net income. For example, the proper accounting for the reclassification of an investment from trading to held-for-collection must be discussed.

Four other situations involving debt and equity investments must be addressed. CA Time 25—30 minutes Purpose—To provide the student with an opportunity to discuss the justification for using fair value as a basis for reporting equity investments. In addition, a number of computations are necessary to determine whether the company properly applied IFRS reporting provisions.

CA Time 20—30 minutes Purpose—To provide the student with an understanding of the accounting applications dealing with equity investments. This case involves three independent situations for which the student is required to discuss the effects upon classification, carrying value, and earnings.

CA Time 20—25 minutes Purpose—To provide the student with an understanding of the conceptual basis for the distinction between classifications of debt and equity investments. The student is required to discuss the factors to be considered in classifying debt and equity investments and how these factors affect the accounting treatment for unrealized losses.

CA Time 15—25 minutes Purpose—To allow the student to discuss the equity method of accounting for investments and to provide rationale for this method of accounting. CA Time 25—35 minutes Purpose—To provide the student with an opportunity to discuss the equity method of accounting and provide rationale in a memorandum.

CA Time 25—35 minutes Purpose—To provide the student an opportunity to examine the ethical issues related to fair value accounting. Any changes in the fair value of trading investments from one period to another are included in earnings. Situation 2 The investment should be reported in the held-for-collection category at the current fair value.

The transfer of the investment does not affect earnings. Situation 3 The reclassification does not affect earnings and the debt investment will continue to be reported at its fair value. Situation 4 When a reduction in the fair value of an investment is considered to be an impairment, the new cost basis of the investment is its fair value.

The investment is written down to the fair value amount and the loss is included in earnings. In this case, the fair value of the investment at the end of the prior year is the new cost basis. The increase in fair value in the current year will affect earnings and is reported under Other income and expense on the income statement.

Trading investments are reported on the statement of financial position at their fair value. CA a The reporting of these investments at fair value provides the financial statement user with more relevant financial, information. The financial statements of the entity will reflect which investments have increased in fair value and which investments have decreased in fair value. Since these investments have been purchased with the intention of selling them in the near future, the changes in the fair value of the investments are included in earnings.

The rationale for this treatment is that trading investments are actively managed and any price changes should be reflected in earnings. The valuation of these investments is subsequently reported at their fair value. Any changes in the fair value of the investments are recorded in an unrealized holding gain or loss account, which is reported in the other income and expense section of the income statement. The unrealized holding loss from the previous period must be reversed. Situation 2 When a decrease in the fair value of an investment is considered to be permanent, an impairment in the value of the investment has occurred.

As a result, the investment is written down to the fair value and this becomes the new cost basis of the investment. The investment is reported on the statement of financial position at its current fair value. The amount of the write-down is included in earnings as a realized loss.

Situation 3 Both the portfolio of trading investments and the portfolio of non-trading investments are reported at their fair value. Instead, the unrealized holding gain is shown as other comprehensive income and as a separate component of equity. CA a A company maintains the different investment portfolios because each portfolio serves a different investment objective.

Since each portfolio serves a different objective, the possible risks and returns associated with that objective should be disclosed in the financial statements. This disclosure allows the financial statement user to assess the investment strategies for the company's investments, which when classified as trading investments are designed to return a profit to the entity on the basis of short-term price changes.

On the other hand, investments which are classified as held-for-collection are designed to provide a steady stream of interest revenue. Investments which are classified as non-trading include the investments which are not classified in either of the first two categories.

The combination of these three categories helps management to disclose in greater detail how it is investing its funds. If management is planning to sell the investment in the near future and to earn its profit on the basis of any price change, then the investment should be classified as a trading investment. If a company does not plan to hold trading or non-trading investments until maturity, the investments are reported on the statement of financial position at fair value. Therefore, if the price of the investments decreases while the company is holding the investments, the company may incur an unrealized holding loss.

The treatment of the unrealized loss is determined by the classification of the investments. If they are trading investments, the unrealized loss is included in earnings. If they are non-trading investments, the unrealized loss is recorded as other comprehensive income and as a separate component of equity.

The rationale for this difference is that trading investments are actively managed and, therefore, any price changes should be included in earnings. Unrealized gains and losses are not recognized on held-for-collection investments unless the fair value option is selected.

Therefore, Fontaine will account for this investment using the equity method. The investment is reported on the December 31 statement of financial position as a long-term investment. Investment in Knoblett Co. Following the equity method of accounting, Selig Company should record the cash purchase of 40 percent of Spoor Corporation at acquisition cost.

This amount should reflect adjustments similar to those made in preparing consolidated statements, including adjustments to eliminate intercompany gains and losses. CA a Classifying the investments as they propose will indeed have the effect on net income that they say it will.

Classifying the gains and losses just the opposite will have the opposite effect. The financial statements are fraudulently, not fairly, stated. IFRS allow the sale of selected investments so long as the inventory method of assigning cost adopted by the company is consistently applied. If the officers act in the best interest of the company and its stakeholders, and in accordance with IFRS, and not in their self-interest, their behavior is probably ethical. Knowingly engaging in unsound and poor business and accounting practices that waste assets or that misstate financial statements is unethical behavior.

These investments are reported on the statement of financial position and in the notes to the financial statements. Derivatives are reported at fair value. It did not report any trading or held-to-maturity securities. For example, a bank may have excess cash that it has not yet loaned, which it wants to invest in very short-term liquid assets.

Or it may believe that it can earn a higher rate of interest by buying long-term bonds than it can currently earn by making new loans. Or it may purchase investments for short-term speculation because it believes these investments will appreciate in value. It is used for trading debt investments, equity investments, and when the fair value option is chosen. Amortized cost is the initial amount of the investment minus repayments plus minus cumulative amortization and net of any reduction for uncollectibility.

It is used when the investments are held-for-collection. That is, trading investments are held for a short period; thus, if the bank has an unrealized gain on its trading investment portfolio, it is likely that these investments will be sold soon and the gain will be realized. On the other hand, non- trading investments are not going to be sold for a longer period of time; thus, unrealized gains on these investments may not be realized for several years.

IASB requires that companies classify financial assets into two measurement categoriesamortized cost and fair value depending on the circumstances. Only debt investments such as receivables, loans, and bond investments that meet the two criteria above are recorded at amortized cost. All other debt investments are recorded and reported at fair value.

Summary of Investment Accounting Approaches. Debt Debt Investments Investments Debt investments are characterized by contractual payments on specified dates of. Robinson records the investment as follows: January 1, Debt Investments Cash. Robinson records this discount amortization as follows: November 1, Debt Investments Interest Revenue. Illustration Debt Debt InvestmentsFair InvestmentsFair Value Value Debt investments at fair value follow the same accounting entries as debt investments held-for-collection during the reporting period.

That is, they are recorded at amortized cost. However, at each reporting date, companies. Any unrealized holding gain or loss reported as part of net income fair value method. The journal entries in are exactly the same as those for amortized cost. Illustration: Assume now that Robinson sells its investment in Evermaster bonds on November 1, , at 99 plus accrued. The only difference occurs on December 31, Since the bonds are no longer owned by Robinson, the Securities Fair Value Adjustment account should now be reported at zero.

Robinson makes the following entry to record the elimination of the valuation account. The following illustration identifies the amortized cost, fair value, and the amount of the unrealized gain or loss. Assuming no other purchases and sales of bonds in , Webb on December 31, , prepares the information: Illustration This option.

If a company chooses to use the fair value option, it measures this instrument at fair value until the company no longer has ownership. Hardy plans to hold the debt investment until it matures in five years. At December 31, , the amortized cost of this investment is ,; its fair value at December 31, , is , If Hardy chooses the fair value option to account for this investment, it makes the following entry at December 31, Equity Equity Investments Investments Equity investment represents ownership of ordinary, preference, or other capital shares.

The degree to which one corporation investor acquires an interest in the common stock of another corporation investee generally determines the accounting treatment for the investment subsequent to acquisition. General accounting and reporting rule:. Equity Equity Investments Investments at at Fair Fair Value Value Illustration: November 3, , Republic Corporation purchased ordinary shares of three companies, each investment representing less than a 20 percent interest.

On December 6, , Republic receives a cash dividend of 4, on its investment in the ordinary shares of Nestl. Cash Dividend Revenue Republics equity investment portfolio as of December 31, Equity Equity Investments Investments at at Fair Fair Value Value Example: Equity Investments OCI The accounting entries to record non-trading equity investments are the same as for trading equity investments, except for recording the unrealized holding gain or loss.

Report the unrealized holding gain or loss as other comprehensive income. The investment represents less than a 20 percent interest. Hawthorne is a distributor for Republic products in certain locales, the laws of which require a minimum level of share ownership of a company in that region. The investment in Hawthorne meets this regulatory requirement.

Republic accounts for this investment at fair value. Equity Investments Cash. It records the cash dividend as follows. Cash Dividend Revenue. Equity Equity Method Method An investment direct or indirect of 20 percent or more of the voting shares of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence over an investee.

In instances of significant influence, the investor must account for the investment using the equity method. Equity Equity Method Method Equity Method Record the investment at cost and subsequently adjust the amount each period for. If investors share of investees losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method. Consolidation Consolidation Controlling Interest - When one corporation acquires a voting interest of more than 50 percent in another corporation.

Investment in the subsidiary is reported on the parents books as a long-term investment. Impairment Impairment of of Value Value Impairment of Value For debt investments, a company uses the impairment test to determine whether it is probable that the investor will be unable to collect all amounts due according to the contractual terms. This impairment loss is calculated as the difference between the carrying amount plus accrued interest and the expected future cash flows discounted at the investments historical effectiveinterest rate.

The investment has a term of four years, with annual interest payments at 10 percent, paid at the end of each year the historical effective-interest rate is 10 percent. This debt investment is classified as held-for-collection. Using the following information record the loss on impairment. Transfers Transfers Between Between Categories Categories Transferring an investment from one classification to another.

Companies account for transfers between classifications prospectively, at the beginning of the accounting period after the change in the business model. Transfers Transfers Between Between Categories Categories Illustration: British Sky Broadcasting Group plc GBR has a portfolio of debt investments that are classified as trading; that is, the debt investments are not held-for-collection but managed to profit from interest rate changes.

As a result, it accounts for these investments at fair value. At December 31, , British Sky has the following balances related to these securities. Transfers Transfers Between Between Categories Categories Illustration: As part of its strategic planning process, completed in the fourth quarter of , British Sky management decides to move from its prior strategywhich requires active management to a held-for-collection strategy for these debt investments.

British Sky makes the following entry to transfer these securities to the held-for-collection classification. GAAP classifies investments as trading, available for-sale both debt and equity investments , and held to-maturity only for debt investments. IFRS uses held-for-collection debt investments , trading both debt and equity investments , and non-trading equity investment classifications.

The accounting for trading investments is the same between U. Held-to-maturity U. GAAP and held-for-collection investments are accounted for at amortized cost. Gains and losses related to available-for-sale securities U. Both U. GAAP and IFRS use the same test to determine whether the equity method of accounting should be usedthat is, significant influence with a general guide of over 20 percent ownership. The basis for consolidation under IFRS is control.

Under U. GAAP, a bipolar approach is used, which is a risk-and-reward model often referred to as a variable-entity approach and a voting-interest approach. However, under both systems, for consolidation to occur, the investor company must generally own 50 percent of another company. That is, the option to use the fair value method must be made at initial recognition, the selection is irrevocable, and gains and losses are reported as part of income.

One difference is that U. GAAP permits the fair value option for equity method investments. While measurement of impairments is similar, U. GAAP does not permit the reversal of an impairment charge related to available-for-sale debt and equity investments.

IFRS allows reversals of impairments of held-for-collection investments. Learn more about Scribd Membership Home.

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Describe the accounting framework for 1 financial assets. Understand the accounting for debt 1, 2, 3 2, 3, 4 1, 2, 7 investments at amortized cost. Understand the accounting for debt 2, 4 1, 5, 1, 3, 4, 7 investments at fair value. Describe the accounting for the fair value 5 6, 7 2, 7, 10, option.

Understand the accounting for equity 6, 7, 8, 12 8, 9, 10, 11, 3, 5, 8, 9, investments at fair value. Explain the equity method of accounting and 9 13, 14, 17, 18 6, 8 compare it to the fair value method for equity securities.

Discuss the accounting for impairments 10 19, 20 of debt investments. Describe the accounting for transfer of 11 investments between categories. Explain why companies report reclassification 21 12 adjustments. Explain who uses derivatives and why. Understand the basic guidelines for accounting for derivatives. Describe the accounting for derivative 22, 26 13, 14, 15 financial instruments. Explain how to account for a fair value hedge. Explain how to account for a cash flow hedge.

Simple 5—10 E Debt investments. Simple 10—15 E Debt investments. Simple 15—20 E Debt investments. Simple 10—15 E Fair value option. Simple 5—10 E Fair value option. Moderate 15—20 E Entries for equity investments. Simple 10—15 E Equity investments. Simple 10—15 E Equity investment entries and reporting. Simple 5—10 E Equity investment entries and financial statement Simple 10—15 presentation.

E Equity investment entries. Simple 20—25 E Journal entries for fair value and equity methods. Simple 15—20 E Equity method. Moderate 10—15 E Equity investments—trading. Moderate 15—20 E Fair value and equity method compared. Simple 10—15 E Impairment. Moderate 15—20 E Impairment. Moderate 10—15 E Comprehensive income disclosure. Moderate 25—30 P Debt investments.

Moderate 20—30 P Debt investments, fair value option. Moderate 30—40 P Debt and equity investments. Moderate 25—35 P Equity investment entries and disclosures. Moderate 25—35 P Equity investments. Simple 25—35 P Debt investment entries. Moderate 25—35 P Fair value and equity methods. Moderate 20—30 P Financial statement presentation of equity investments. Complex 30—40 P Investments—statement presentation.

Moderate 20—30 P Gain on sale of investments and comprehensive income. Moderate 25—35 CA Issues raised about investments. Moderate 25—30 CA Equity investments. Moderate 25—30 CA Financial statement effect of investments. Simple 20—30 CA Equity investments. Moderate 20—25 CA Investment accounted for under the equity method. Simple 15—25 CA Equity investments. Moderate 25—35 CA Fair value—ethics.

Only debt investments such as loans and bond investments are valued at amortized cost. A company should use amortized cost if it has a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms of the financial asset gives specified dates to cash flows.

Amortized cost is the initial recognition amount of the investment minus repayments, plus or minus cumulative amortization and net of any reduction for uncollectibility. Lady Gaga should classify this investment as a trading investment because companies frequently buy and sell this type of investment to generate profits in short term differences in price. If Lady Gaga plans to hold the investment to collect interest and receive the principal at maturity, it should account for this investment at amortized cost.

Securities Fair Value Adjustment Unrealized holding gains and losses for trading investments should be included in net income for the current period. Unrealized holding gains and losses are not recognized for held-for-collection investments. The fair value option allows companies the choice of reporting debt investments at fair value. No, Franklin cannot use the fair value option for this investment.

This option is generally available only at the time a company first purchases the investment. Investments in shares do not have a maturity date and therefore cannot be classified as held-for- collection. Equity Investments Both trading and non-trading equity investments are reported at fair value.

However, any unrealized holding gain or loss is reported in net income for trading investments but as other comprehensive income and as a separate component of equity for non-trading investments. Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency.

The following information is reported under the equity method: 1. Dividends subsequent to acquisition should be accounted for as a reduction in the equity investment account. Ordinarily, Raleigh Corp. However, if Raleigh Corp. Trading equity investments are reported as a current asset while non-trading investments are reported as a long-term investment.

Trading investments are expected to be disposed of within the coming year and therefore qualify as current assets. This is not the case for non-trading investments which are presented under investments. The amount of the writedown is accounted for as a realized loss. When an investment is transferred from one category to another, the transfer should be recorded at fair value, which in this case becomes the new basis for the security. Major unresolved issues related to fair value accounting include measurement based on business model, gains trading, and liabilities not fairly valued.

Similarities include: 1 The accounting for trading investments is the same between U. Held-to-maturity U. GAAP and held-for-collection investments are accounted for at amortized cost. Gains and losses related to available-for-sale securities U.

That is, the selection to use the fair value method must be made at initial recognition, the selection is irrevocable, and gains and losses related to fair value changes are reported as part of income; 3 Measurement of impairments is similar under U. GAAP and IFRS use the same tests to determine whether the equity method of accounting should be used—that is, significant influence with a general guide of over 20 percent ownership.

Differences include: 1 U. GAAP classifies investments as trading, available-for-sale both debt and equity investments , and held-to-maturity only for debt investments. IFRS uses held-for-collection debt investments , trading both debt and equity investments , and non-trading equity investments classifications. IFRS classifications are based on the business model used to manage the investments and the type of security; 2 Reclassifications in and out of trading securities are allowed under U.

GAAP if management changes its intent, but this type of reclassification should be rare. Reclassifications of held-to-maturity investments are tightly constrained under U. IFRS allows reclassifications if the business model for managing the investments changes. Similar to U. Under U. GAAP, a bipolar approach is used, which is a risk-and-reward model often referred to as a variable-entity approach and a voting-interest approach.

However, under both systems, for consolidation to occur, the investor company must generally own 50 percent of another company 4 U. GAAP does not permit the reversal of an important charge related to available-for-sale debt and equity investments. IFRS allows reversals of impairments of held-for-collection investments. GAAP, Ramirez makes no entry, because impaired investments may not be written up if they recover in value. IFRS 9, introduced new investment classifications and increased the situations when investments are accounted for at fair value with gains and losses recorded in income.

Reclassification adjustments are necessary to insure that double counting does not result when realized gains or losses are reported as part of net income but also are shown as part of other comprehensive income in the current period or in previous periods. An underlying is a special interest rate, security price, commodity price, index of prices or rates, or other market-related variable.

Changes in the underlying determine changes in the value of the derivative. Payment is determined by the interaction of the underlying with the face amount and the number of shares, or other units specified in the derivative contract these elements are referred to as notional amounts. Initial Investment Investor pays full cost. Initial investment is less than full cost. Settlement Deliver shares to receive cash. Receive cash equivalent, based on changes in share price times the number of shares.

For a traditional financial instrument, an investor generally must pay the full cost, while derivatives require little initial investment. In addition, the holder of a traditional security is exposed to all risks of ownership, while most derivatives are not exposed to all risks associated with ownership in the underlying.

For example, the intrinsic value of a call option only can increase in value. Finally, unlike a traditional financial instrument, the holder of a derivative could realize a profit without ever having to take possession of the underlying. This feature is referred to as net settlement and serves to reduce the transaction costs associated with derivatives. The purpose of a fair value hedge is to offset the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment.

The unrealized holding gain or loss on non-trading equity investments should be reported as income when this security is designated as a hedged item in a qualifying fair value hedge. If the hedge meets the special hedge accounting criteria designation, documentation, and effectiveness , the unrealized holding gain or losses is reported as income.

This is likely a setting where the company is hedging the fair value of a fixed-rate debt obligation. The fixed payments received on the swap will offset fixed payments on the debt obligation. As a result, if interest rates decline, the value of the swap contract increases a gain , while at the same time the fixed-rate debt obligation increases a loss. The swap is an effective risk management tool in this setting because its value is related to the same underlying interest rates that will affect the value of the fixed-rate bond payable.

Thus, if the value of the swap goes up, it offsets the loss in the value of the debt obligation. A cash flow hedge is used to hedge exposures to cash flow risk, which is exposure to the variability in cash flows. The cash flows received on the hedging instrument derivative will offset the cash flows received on the hedged item. Generally, the hedged item is a transaction that is planned some time in the future an anticipated transaction.

Derivatives used in cash flow hedges are accounted for at fair value on the statement of financial position but gains or losses are recorded in equity as part of other comprehensive income. A hybrid security is a security that has characteristics of both debt and equity and often is a combination of traditional and derivative financial instruments. A convertible bond is a hybrid security because it is comprised of a debt security, referred to as the host security, combined with an option to convert the bond to ordinary shares, the embedded derivative.

The Unrealized Holding Gain or Loss—Equity account is reported as a part of other comprehensive income and as a component of equity until realized. The Securities Fair Value Adjustment account is added to the cost of the Equity Investments account to arrive at fair value. Therefore, the following adjusting entry should be made at the year-end: Unrealized Holding Gain or Loss—Equity The Securities Fair Value Adjustment account is a valuation account to the related investment account.

The answer is also given in the T-account information. Unrealized Holding Gain or Loss—Income Equity Equity Investments Investments at at Fair Fair Value Value Illustration: November 3, , Republic Corporation purchased ordinary shares of three companies, each investment representing less than a 20 percent interest.

On December 6, , Republic receives a cash dividend of 4, on its investment in the ordinary shares of Nestl. Cash Dividend Revenue Republics equity investment portfolio as of December 31, Equity Equity Investments Investments at at Fair Fair Value Value Example: Equity Investments OCI The accounting entries to record non-trading equity investments are the same as for trading equity investments, except for recording the unrealized holding gain or loss.

Report the unrealized holding gain or loss as other comprehensive income. The investment represents less than a 20 percent interest. Hawthorne is a distributor for Republic products in certain locales, the laws of which require a minimum level of share ownership of a company in that region. The investment in Hawthorne meets this regulatory requirement.

Republic accounts for this investment at fair value. Equity Investments Cash. It records the cash dividend as follows. Cash Dividend Revenue. Equity Equity Method Method An investment direct or indirect of 20 percent or more of the voting shares of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence over an investee.

In instances of significant influence, the investor must account for the investment using the equity method. Equity Equity Method Method Equity Method Record the investment at cost and subsequently adjust the amount each period for. If investors share of investees losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method. Consolidation Consolidation Controlling Interest - When one corporation acquires a voting interest of more than 50 percent in another corporation.

Investment in the subsidiary is reported on the parents books as a long-term investment. Impairment Impairment of of Value Value Impairment of Value For debt investments, a company uses the impairment test to determine whether it is probable that the investor will be unable to collect all amounts due according to the contractual terms. This impairment loss is calculated as the difference between the carrying amount plus accrued interest and the expected future cash flows discounted at the investments historical effectiveinterest rate.

The investment has a term of four years, with annual interest payments at 10 percent, paid at the end of each year the historical effective-interest rate is 10 percent. This debt investment is classified as held-for-collection. Using the following information record the loss on impairment. Transfers Transfers Between Between Categories Categories Transferring an investment from one classification to another.

Companies account for transfers between classifications prospectively, at the beginning of the accounting period after the change in the business model. Transfers Transfers Between Between Categories Categories Illustration: British Sky Broadcasting Group plc GBR has a portfolio of debt investments that are classified as trading; that is, the debt investments are not held-for-collection but managed to profit from interest rate changes.

As a result, it accounts for these investments at fair value. At December 31, , British Sky has the following balances related to these securities. Transfers Transfers Between Between Categories Categories Illustration: As part of its strategic planning process, completed in the fourth quarter of , British Sky management decides to move from its prior strategywhich requires active management to a held-for-collection strategy for these debt investments.

British Sky makes the following entry to transfer these securities to the held-for-collection classification. GAAP classifies investments as trading, available for-sale both debt and equity investments , and held to-maturity only for debt investments. IFRS uses held-for-collection debt investments , trading both debt and equity investments , and non-trading equity investment classifications.

The accounting for trading investments is the same between U. Held-to-maturity U. GAAP and held-for-collection investments are accounted for at amortized cost. Gains and losses related to available-for-sale securities U. Both U. GAAP and IFRS use the same test to determine whether the equity method of accounting should be usedthat is, significant influence with a general guide of over 20 percent ownership.

The basis for consolidation under IFRS is control. Under U. GAAP, a bipolar approach is used, which is a risk-and-reward model often referred to as a variable-entity approach and a voting-interest approach. However, under both systems, for consolidation to occur, the investor company must generally own 50 percent of another company. That is, the option to use the fair value method must be made at initial recognition, the selection is irrevocable, and gains and losses are reported as part of income.

One difference is that U. GAAP permits the fair value option for equity method investments. While measurement of impairments is similar, U. GAAP does not permit the reversal of an impairment charge related to available-for-sale debt and equity investments. IFRS allows reversals of impairments of held-for-collection investments.

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Description: intermediate accounting chapter 17 in english. Flag for Inappropriate Content. Download now. Save Save intermediate accounting chapter 17 For Later. Related titles. Carousel Previous Carousel Next. Jump to Page. Search inside document. Describe the accounting framework for financial assets. Understand the accounting for debt investments at amortized cost. Understand the accounting for debt investments at fair value.

Describe the accounting for the fair value option. Understand the accounting for equity investments at fair value. Discuss the accounting for impairments of debt investments. Describe the accounting for transfer of investments between categories. Equity investment of another company e. Companies measure debt investments at amortized cost or fair value.

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Chapter 17 investments kieso pptp 450
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Chapter 17 investments kieso pptp 780
Chapter 17 investments kieso pptp Boycott tom steyer investments and companies

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A company should use amortized student is required to prepare must be made at initial to hold assets chapter 17 investments kieso pptp order and gains and losses related to fair value changes are or losses and to discuss 3 Measurement of impairments is. Similarities include: 1 The accounting for non-trading investments which are same between U. IFRS allows reclassifications if the you find this document useful. Trading investments are expected to be disposed of within the the fair value of a. Parent generally prepares consolidated financial. Discuss the accounting for impairments of debt investments. Simple 5-10 E Equity investment be accounted for as a. Unrealized holding gains and losses. A convertible bond is a student is required to prepare journal entries for the sale related to the same underlying along with the year-end adjusting equity as part of other bond payable. GAAP does not permit the only at the time a.

Investments. Chapter. Intermediate Accounting. 12th Edition. Kieso Describe the disclosure requirements for investments in debt and equity securities. 36, 37 *This material is dealt with in an Appendix to the chapter. Moderate 10–​15 E Equity investments—trading. Accounting, 15/e, Solutions Manual (​For Instructor Use Only) Questions Chapter 17 (Continued) C H A P T E R C H A P T E R 17 17 INVESTMENTS INVESTMENTS Intermediate Accounting IFRS Edition Kieso, Weygandt, and Warfield. Image of page 1.