Intermediate accounting

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Intermediate Accounting 17-1 Prepared by Coby Harmon University of California, Santa Barbara 17 Investments Intermediate Accounting 14th Edition 17-2 Kieso, Weygandt, and Warfield Learning Learning Objectives Objectives Identify the three categories of debt securities and describe the accounting and reporting treatment for each category Understand the procedures for discount and premium amortization on bond investments Identify the categories of equity securities and describe the accounting and reporting treatment for each category Explain the equity method of accounting and compare it to the fair value method for equity securities Describe the accounting for the fair value option Discuss the accounting for impairments of debt and equity investments Explain why companies report reclassification adjustments Describe the accounting for transfer of investment securities between categories 17-3 Investments Investments Investments in Debt Securities Investments in Equity Securities Other Reporting Issues Held-to-maturity securities Holdings of less than 20% Fair value option Available-for-sale securities Holdings between 20% and 50% Trading securities Holdings of more than 50% Impairment of value Reclassification adjustments Transfers between categories Fair value controversy Summary 17-4 Investment Investment Accounting Accounting Approaches Approaches Different motivations for investing:  To earn a high rate of return  To secure certain operating or financing arrangements with another company 17-5 Investment Investment Accounting Accounting Approaches Approaches Companies account for investments based on  the type of security (debt or equity) and  their intent with respect to the investment Illustration 17-1 17-6 Investments Investments in in Debt Debt Securities Securities Debt securities (creditor relationship): Type  17-7 U.S government securities  Municipal securities  Corporate bonds  Convertible debt  Commercial paper Accounting Category  Held-to-maturity  Trading  Available-for-sale LO Identify the three categories of debt securities and describe the accounting and reporting treatment for each category Investments Investments in in Debt Debt Securities Securities Accounting for Debt Securities by Category Illustration 17-2 17-8 LO Identify the three categories of debt securities and describe the accounting and reporting treatment for each category Held-to-Maturity Held-to-Maturity Securities Securities Classify a debt security as held-to-maturity only if it has both (1) the positive intent and (2) the ability to hold securities to maturity Accounted for at amortized cost, not fair value Amortize premium or discount using the effective-interest method unless the straight-line method yields a similar result 17-9 LO Understand the procedures for discount and premium amortization on bond investments Held-to-Maturity Held-to-Maturity Securities Securities Illustration: Robinson Company purchased $100,000 of percent bonds of Evermaster Corporation on January 1, 2011, at a discount, paying $92,278 The bonds mature January 1, 2016 and yield 10%; interest is payable each July and January Robinson records the investment as follows: January 1, 2011 Debt investments Cash 17-10 92,278 92,278 LO Understand the procedures for discount and premium amortization on bond investments APPENDIX 17C FAIR VALUE MEASUREMENTS AND DISCLOSURES FASB believes that fair value information is relevant for making effective business decisions Others express concern about fair value measurements for two reasons: the lack of reliability related to the fair value measurement in certain cases, and the ability to manipulate fair value measurements 17-107 APPENDIX 17C FAIR VALUE MEASUREMENTS AND DISCLOSURES Disclosure of Fair Value Information: Financial Instruments—No Fair Value Option Both the cost and the fair value of all financial instruments are to be reported in the notes to the financial statements FASB also decided that companies should disclose information that enables users to determine the extent of usage of fair value and the inputs used to implement fair value measurement 17-108 APPENDIX 17C FAIR VALUE MEASUREMENTS AND DISCLOSURES Disclosure of Fair Value Information: Financial Instruments—No Fair Value Option Two reasons for additional disclosure beyond the simple itemization of fair values are: Differing levels of reliability exist in the measurement of fair value information Changes in the fair value of financial instruments are reported differently in the financial statements, depending upon the type of financial instrument involved and whether the fair value option is employed 17-109 APPENDIX 17C FAIR VALUE MEASUREMENTS AND DISCLOSURES Levels of reliability fair value hierarchy  Level is the most reliable measurement because fair value is based on quoted prices in active markets for identical assets or liabilities  Level is less reliable; it is not based on quoted market prices for identical assets and liabilities but instead may be based on similar assets or liabilities  Level is least reliable; it uses unobservable inputs that reflect the company’s assumption as to the value of the financial instrument 17-110 APPENDIX 17C FAIR VALUE MEASUREMENTS AND DISCLOSURES Example of Fair Value Hierarchy Illustration 17C-1 17-111 APPENDIX 17C Reconciliation of Level Inputs Illustration 17C-2 17-112 FAIR VALUE MEASUREMENTS AND DISCLOSURES APPENDIX 17C FAIR VALUE MEASUREMENTS AND DISCLOSURES Disclosure of Fair Value Information: Financial Instruments—Fair Value Option Illustration 17C-3 Disclosure of Fair Value Option 17-113 APPENDIX 17C FAIR VALUE MEASUREMENTS AND DISCLOSURES Disclosure of Fair Values: Impaired Assets or Illustration 17C-4 Liabilities Disclosure of Fair Value with Impairment 17-114 RELEVANT FACTS 17-115  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 GAAP and IFRS Held-to-maturity (GAAP) and held-for-collection investments are accounted for at amortized cost Gains and losses related to available-for-sale securities (GAAP) and non-trading equity investments (IFRS) are reported in other comprehensive income  Both GAAP and IFRS use the same test to determine whether the equity method of accounting should be used RELEVANT FACTS 17-116  The basis for consolidation under IFRS is control Under 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  GAAP and IFRS are similar in the accounting for the fair value option 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 GAAP permits the fair value option for equity method investments RELEVANT FACTS  17-117 While measurement of impairments is similar, 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 IFRS SELF-TEST QUESTION All of the following are key similarities between GAAP and IFRS with respect to accounting for investments except: a IFRS and GAAP have a held-to-maturity investment classification b IFRS and GAAP apply the equity method to significant influence equity investments c IFRS and GAAP have a fair value option for financial instruments d the accounting for impairment of investments is similar, although IFRS allows recovery of impairment losses 17-118 IFRS SELF-TEST QUESTION Which of the following statements is correct? a GAAP has a held-for-collection investment classification b GAAP permits recovery of impairment losses c Under IFRS, non-trading equity investments are accounted for at amortized cost d IFRS and GAAP both have a trading investment classification 17-119 IFRS SELF-TEST QUESTION IFRS requires companies to measure their financial assets at fair value based on: a the company’s business model for managing its financial assets b whether the financial asset is a debt investment c whether the financial asset is an equity investment d All of the choices are IFRS requirements 17-120 Copyright Copyright Copyright © 2012 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 17-121 [...]... 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 17-35 LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category Investments Investments in in Equity Equity Securities Securities Ownership Percentages... Control usually exists Investment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation) LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category
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