Cpa Review- Far 3-1 (Marketable Securities)

Front 1

Equity Securities

Back 1

Securities that represent an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices.

May be represented by:

Hint 1

1. Ownership shares (common, preferred, and other forms of capital stock)
2. Rights to acquire ownership shares (stock warrants, rights, and call options)
3. Rights to dispose of ownership shares (put options)

Front 2

Trading Securities

Back 2

Both debt and equity securities that are bought and held principally for the purpose of selling them in the near term.

Hint 2

Generally reported as current assets.

Front 3

Available-for-Sale Securities

Back 3

Both debt and equity securities that do not meet the definition of the other two classifications (trading or held-to-maturity).

Hint 3

General rule is to report them as noncurrent assets but can be reported as current depending on the intent of the corporation.

Front 4

Held-to-Maturity Securities

Back 4

-Debt securities only, classified as this only if the corporation has the positive intent and ability to hold these securities to maturity.
-General rule is to report them as noncurrent assets but can be reported as current based on their time to maturity.

Hint 4

If a security can be paid or settled in a manner that the holder may not recover substantially all of its investment, this classification may not be used.

Front 5

IFRS vs. U.S. GAAP- Marketable Securities

Back 5

Under IFRS, a marketable security can be classified as (1) AFS, (2) held-to-maturity, or (3) financial assets at FV through profit or loss (Has to meet either of the following conditions).*

Hint 5

*1. It is classified as held for trading (equivalent to trading securities under GAAP)
2. The asset is designated as an investment at FV through profit or loss using the FV option.

Front 6

Trading Securities- Valuation

Back 6

-Must be reported at FV (= mark to market).
-Changes in FV result in unrealized gains and losses.*
-Realized gains or losses are recognized when sold on the I/S

Hint 6

*Included in earnings so shown on the I/S. Example of J/E to record a loss:

DR. Unrealized loss on AFS
CR. Valuation account (FV adjustment)

Front 7

AFS Securities- Valuation

Back 7

-Must be reported at FV (= mark to market).
-Changed in FV result in unrealized gains and losses.*
-Realized gains/losses are recognized when security is sold or is deemed to be impaired (recognize on the I/S).

Hint 7

*Reported in Other Comprehensive Income. Example of J/E to record a loss:

DR. Unrealized loss on AFS security
CR. Valuation account (FV adjustment)

Front 8

IFRS vs. U.S. GAAP- AFS Securities

Back 8

-Under IFRS, unrealized gains/losses on AFS securities are reported in OCI, except for foreign exchange gains and losses on AFS DEBT securities, which are reported directly on the Income Statement.

Hint 8

-Foreign exchange gains and losses on AFS EQUITY securities are included in OCI as they would under GAAP.

Front 9

Held-to-Maturity Securities- Valuation

Back 9

Valued at amortized cost.

Front 10

Reclassification

Back 10

-Should be rare and should occur only when justified.*

Hint 10

*See figure for more information

Front 11

Impairment of Securities

Back 11

Under U.S. GAAP, if the decline in FV is other than temporary, the cost basis of the individual security is written down to FV as the new cost basis.

Hint 11

The amount of the write-down is accounted for as a realized loss and is included in earnings (the I/S)

Front 12

IFRS vs. U.S. GAAP- Impairment of Securities

Back 12

-Under IFRS, an impairment loss is recognized in earnings and the individual security is written down by either directly reducing the cost basis of the security or through the use of a valuation allowance. Additionally, previously recognized impairment losses on held-to-maturity debt securities and AFS debt securities must be reversed, with the amount of the reversal recognized on the I/S.

Hint 12

-For a held-to-maturity security, the carrying value after the reversal cannot exceed what the amortized cost of the security would have been had the impairment not been recognized.

Front 13

Instruments Used to Hege Trading Securities

Back 13

Gains and losses on financial instruments that hedge trading securities should be reported in earnings.*

Hint 13

*Consistent with the reporting of unrealized gains and losses on trading securities.

Front 14

Instruments Used to Hedge AFS Securities

Back 14

Gains and losses on derivative instruments that hedge AFS securities are recognized currently in earnings together with the offsetting losses or gains on the AFS securities attributable to the hedged risk.

Front 15

Sale of a Security

Back 15

-From any category, results in a realized gain or loss and is reported on the I/S for the period.
-If a valuation account was used, it would have to be removed at the time of sale.

Hint 15

Realized Gain/Loss Calculation:
1. Trading: adjusted cost (original cost +/- unrealized gains/losses previously recognized) and the selling price
2. AFS: difference between the selling price and the original cost

Front 16

Income Tax Effects

Back 16

-Tax effects of unrealized gains/losses entering into the determination of net income must be reflected in the computation of deferred income taxes b/c unrealized gains and losses are not deductible for income tax purposes.