Chapter 17-1 CHAPTER 17 INVESTMENTS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 17-2 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 Chapter 17-3 Investments Investments Investments in Debt Securities Investments in Equity Securities Other Reporting Issues Held-to-maturity securities Holdings of less than 20% Impairment of value Available-for-sale securities Holdings between 20% and 50% Trading securities Holdings of more than 50% Fair value option Reclassification adjustments Transfers between categories Fair value controversy Summary Chapter 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 Chapter 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 Chapter 17-6 Investments Investments in in Debt Debt Securities Securities Debt securities (creditor relationship): Type Accounting Category U.S government securities Held-to-maturity Municipal securities Trading Corporate bonds Available-for-sale Convertible debt Commercial paper Chapter 17-7 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 Chapter 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 effectiveinterest method unless the straight-line method yields a similar result Chapter 17-9 LO Understand the procedures for discount and premium amortization on bond investments Held-to-Maturity Held-to-Maturity Securities Securities Illustration: KC Company purchased $100,000 of percent bonds of Evermaster Corporation on January 1, 2009, at a discount, paying $92,278 The bonds mature January 1, 2014 and yield 10%; interest is payable each July and January KC records the investment as follows: January 1, 2009 Held-to-Maturity Securities 92,278 Cash 92,278 Chapter 17-10 LO Understand the procedures for discount and premium amortization on bond investments Qualifying Hedge Criteria Criteria that hedging transactions must meet before requiring the special accounting for hedges Documentation, risk management, and designation Effectiveness of the hedging relationship Effect on reported earnings of changes in fair values or cash flows Chapter 17-103 LO 14 Identify special reporting issues related to derivative financial instruments that cause unique accounting problems Summary of Derivative Accounting under GAAP Illustration 17A-8 Chapter 17-104 LO 14 Identify special reporting issues related to derivative financial instruments that cause unique accounting problems What About GAAP? Two models for consolidation: Voting-interest model—If a company owns more than 50 percent of another company, then consolidate in most cases Risk-and-reward model—If a company is involved substantially in the economics of another company, then consolidate Chapter 17-105 LO 15 Describe the accounting for the variable-interest entitles Consolidation of Variable-Interest Entities A variable-interest entity (VIE) is an entity that has one of the following characteristics: Insufficient equity investment at risk Stockholders lack decision-making rights Stockholders not absorb the losses or receive the benefits of a normal stockholder Chapter 17-106 LO 15 Describe the accounting for the variable-interest entitles Illustration 17B-1 VIE Consolidation Model Chapter 17-107 LO 15 Describe the accounting for the variable-interest entitles What Is Happening in Practice? One study of 509 companies with total market values over $500 million found that just 17 percent of the companies reviewed have a material impact Chapter 17-108 LO 15 Describe the accounting for the variable-interest entitles 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 Chapter 17-109 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 Chapter 17-110 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 Chapter 17-111 involved and whether the fair value option is employed 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 Chapter 17-112 Example of Fair Value Hierarchy Illustration 17C-1 Chapter 17-113 Reconciliation of Level Inputs Chapter 17-114 Illustration 17C-2 Disclosure of Fair Value Information: Financial Instruments—Fair Value Option Illustration 17C-3 Disclosure of Fair Value Option Chapter 17-115 Disclosure of Fair Values: Impaired Assets or Liabilities Illustration 17C-4 Disclosure of Fair Value with Impairment Chapter 17-116 Copyright Copyright Copyright © 2009 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 Chapter 17-117 .. .CHAPTER 17 INVESTMENTS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 17- 2 Learning Learning Objectives Objectives Identify... Debt Securities Securities Accounting for Debt Securities by Category Illustration 17- 2 Chapter 17- 8 LO Identify the three categories of debt securities and describe the accounting and reporting... secure certain operating or financing arrangements with another company Chapter 17- 5 Investment Investment Accounting Accounting Approaches Approaches Companies account for investments based