chapter 9 learning objectives l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 9--Learning Objectives PowerPoint Presentation
Download Presentation
Chapter 9--Learning Objectives

Loading in 2 Seconds...

play fullscreen
1 / 52

Chapter 9--Learning Objectives - PowerPoint PPT Presentation


  • 276 Views
  • Uploaded on

Chapter 9--Learning Objectives. 1. Explain the recognition and measurement issues associated with investments. The primary accounting standards for investments are:. FASB SFAS No. 115 For all debt securities For equity investments of less than 20 percent APB Opinion No. 18

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 9--Learning Objectives' - Leo


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 9 learning objectives
Chapter 9--Learning Objectives

1. Explain the recognition and measurement issues associated with investments

the primary accounting standards for investments are
The primary accounting standards for investments are:

FASB SFAS No. 115

For all debt securities

For equity investments of less than 20 percent

APB Opinion No. 18

For equity investments of more than 20 percent

major provisions of sfas no 115
Major provisions of SFAS No. 115

Investments accounted for at fair value or amortized cost

Investments classified as:

1. Trading securities

2. Available-for-sale

3. Held-to-maturity

passive investments and significant influence
Passive investments and significant influence

A passive investment is one in which the investor has no ability to exercise significant influence over the investee

Significant influence is presumed to exist with ownership of 20 percent to 50 percent of the voting stock of the investee

investment classifications
Investment classifications

Trading securities

Debt and equity securities bought and held principally for the purpose of sale in the near term

Available-for-sale securities

Debt and equity securities neither trading nor held-to-maturity

Held-to-maturity securities

Debt securities that the entity has the positive intent and ability to hold to maturity

accounting requirements for trading securities investments less than 20 percent
Accounting requirements forTrading securities(investments less than 20 percent)

Changes in market value recognized as gain or loss in current period income

Securities reported at market value

accounting requirements for available for sale securities investments less than 20 percent
Accounting requirements forAvailable-for-sale securities(investments less than 20 percent)

Changes in market value recognized as separate component of shareholders’ equity until realized

Securities reported at market value

accounting requirements for held to maturity securities debt securities only
Accounting requirements forHeld-to-maturity securities(debt securities only)

Changes in market value not recognized

Securities reported at amortized cost

major provisions of apb opinion no 18
Major provisions of APB Opinion No. 18

Applies to ownership of equity securities greater than 20 percent

For ownership of 20 to 50 percent, use the equity method

For ownership of greater than 50 percent, use consolidated financial statements

the equity method equity investments of 20 to 50
The equity method(equity investments of 20 to 50 %)

Investments recorded at cost

Investment increased for proportionate share of net income

Investment decreased for:

1. Dividends received

2. Extra depreciation

3. Amortization of goodwill

consolidate financial statements equity investments of more than 50 percent
Consolidate financial statements(equity investments of more than50 percent)

This material is

beyond the scope

of our course

(so much GAAP, so little time)

chapter 9 learning objectives12
Chapter 9--Learning Objectives

2. Record and report transactions for debt-security investments and equity-security investments of less than 20%

held to maturity debt securities
Held to maturity debt securities

Record acquisitions at cost

Investment in Debt Securities XXX

Cash XXX

Record interest as income

Cash XXX

Interest Income XXX

held to maturity debt securities14
Held to maturity debt securities

If purchased at premium, include in cost

Investment in Debt Securities XXX

Cash XXX

Amortize by reducing investment value

Cash XXX

Interest Revenue XXX

Investment in Debt Securities XXX

held to maturity debt securities15
Held to maturity debt securities

If purchased at discount, record at cost

Investment in Debt Securities XXX

Cash XXX

Amortize by increasing investment value

Cash XXX

Investment in Debt Securities XXX

Interest Revenue XXX

held to maturity debt securities16
Held to maturity debt securities

Ignore market value changes for held to maturity debt securities !

sale of held to maturity debt securities before maturity
Sale of held to maturity debt securities before maturity

Accrue interest as required

Determine amortized cost

Compare with selling price

Recognize gain or loss based on difference between amortized cost (book value) and selling price

available for sale debt securities
Available for sale debt securities

Procedures for purchase, interest, and premium or discount amortization are same as for held to maturity debt securities

Exception: Market value changes are adjusted for

available for sale debt securities19
Available for sale debt securities

If market value is above amortized cost

Adjustment to Market XXX

Unrealized Holding Gain XXX

“Adjustment to Market” is shown on the balance sheet along with the investment account

“Unrealized Gain” is shown as a separate account in the equity section

available for sale debt securities20
Available for sale debt securities

If market value is below amortized cost

Unrealized Holding Loss XXX

Adjustment to Market XXX

“Adjustment to Market” is shown on the balance sheet along with the investment account as a reduction of value

“Unrealized Loss” is shown as a separate negative account in the equity section

debt securities trading
Debt Securities--Trading
  • Recorded at cost
  • Amortization ignored
  • Changes in fair value recorded in current income
accounting for equity trading securities
Accounting for equity trading securities

Record acquisitions at cost

Investment in Trading Securities XXX

Cash XXX

Record dividends and interest as income

Cash XXX

Dividend Income XXX

accounting for equity trading securities23
Accounting for equity trading securities

If market value on reporting date is lower than original cost

Loss on Holding Equity Securities XXX

Invest. in Trading Securities XXX

If market value is higher than cost

Invest. in Trading Securities XXX

Gain on Holding Equity Sec. XXX

available for sale equity securities
Available for sale equity securities

Record acquisitions at cost

Investment in AFS Securities XXX

Cash XXX

Record dividends and interest as income

Cash XXX

Dividend Income XXX

available for sale equity securities25
Available for sale equity securities

If market value on reporting date is lower than original cost

Unrealized Loss on AFS Sec. XXX

Investment in AFS Securities XXX

The “Unrealized Loss” account is shown as a separate component of stockholders’ equity (a reduction in this case)

It is NOT shown on the income statement

available for sale equity securities26
Available for sale equity securities

If market value on reporting date is higher than original cost

Investment in AFS Securities XXX

Unrealized Gain on AFS Sec. XXX

The “Unrealized Gain” account is shown as a separate component of stockholders’ equity (an increase in this case)

It is NOT shown on the income statement

transfers between categories
Transfers between categories

Base classification on management intent

Transfer between categories based on fair market value at time of transfer

Recognize any unrealized holding gain or loss at time of transfer

Include in income for securities transferred into or from trading category

Show as separate stockholders’ equity item for securities transferred into available for sale category from held-to-maturity

impairment of securities
Impairment of Securities
  • Permanent loss.Security written down to fair value
  • Loss included in earnings as realized
chapter 9 learning objectives29
Chapter 9--Learning Objectives

3. Record and report equity-security investment transactions of greater than 20%

the equity method
The equity method

Used for situations in which more than 20 percent of the voting stock is owned

If more than 50 percent is owned, consolidated financial statements are prepared

Thus, the equity method applies to situations of 20 to 50 percent

equity method procedures
Equity method procedures

Record purchase of investment at cost

Investment in Other Company XXX

Cash XXX

equity method procedures32
Equity method procedures

Increase investment value on reported earnings

Investment in Other Company XXX

Investment Income XXX

Decrease investment value on reported losses

Investment Income (Loss) XXX

Investment in Other Company XXX

equity method procedures33
Equity method procedures

Decrease investment value on dividends

Cash XXX

Investment in Other Company XXX

equity method procedures34
Equity method procedures

Amortize differences between the book value and the fair market value of investee depreciable assets over the asset lives

Amortization of goodwill reduces investment income and investment value

Investor’s share of any extraordinary items or changes in accounting principle are shown as such (must be material)

investments and cash flows
Investments and cash flows

Cash flows from purchases, sales and maturities of trading securities are operating activities on the cash flow statement

Cash flows from purchases, sales and maturities of available for sale and held to maturity securities are investing activities on the cash flow statement

chapter 9 learning objectives36
Chapter 9--Learning Objectives

4. Record and report transactions for funds and life insurance investments

sinking funds
Sinking funds

Funds set aside for retirement of debts

accounting for funds
Accounting for funds

Recording contributions to fund

Sinking Fund Cash XXX

Cash XXX

Recording purchase of fund investments

Sinking Fund Investments XXX

Sinking Fund Cash XXX

accounting for funds39
Accounting for funds

Receipt of investment income

Sinking Fund Cash XXX

Sinking Fund Revenue XXX

Payment of expenses

Sinking Fund Expense XXX

Sinking Fund Cash XXX

accounting for funds40
Accounting for funds

Sale of investments

Sinking Fund Cash XXX

Sinking Fund Investments XXX

Gain on Sale of Inv. XXX

accounting for funds41
Accounting for funds

Bond maturity and closing of fund

Bonds Payable XXX

Cash XXX

Sinking Fund Cash XXX

cash surrender value of life insurance
Cash surrender value of life insurance

Businesses frequently purchase life insurance policies on key personnel

Term life insurance is accounted for simply as an expense

Whole-life policies have cash surrender values and loan values

The increase in cash value is accounted for as an investment

life insurance entries for policies with cash surrender value
Life insurance entriesfor policies with cash surrender value

Payment of premium

Life Insurance Expense XXX

Cash Surrender Value of LI XXX

Cash XXX

life insurance entries for policies with cash surrender value44
Life insurance entriesfor policies with cash surrender value

Death of key person, receipt of benefit

Cash XXX

Cash Surrender Value of LI XXX

Gain on Life Insurance XXX

chapter 9 learning objectives45
Chapter 9--Learning Objectives

5. Analyze the impact of the different accounting methods for investments on profitability and liquidity measures

the differences between the methods of accounting for investments can affect income
The differences between the methods of accounting for investmentscan affect income

Changes in market value are

included in income for trading securities

but not for others

Investee reported profits are included

in income under the equity method

but not under the cost method

the differences between the methods of accounting for investments can affect liquidity
The differences between the methods of accounting for investmentscan affect liquidity

Trading securities and some available

for sale securities are treated as

current assets

But other investments are not classified

as current assets

chapter 9 learning objectives48
Chapter 9--Learning Objectives

6. Understand the concept and complexities associated with derivative financial instruments

what are derivatives
What are derivatives ?

Financial instruments that provide the holder with the right or obligation to participate in the price changes of an underlying asset

Underlying assets may involve interest rates, price indexes, or other market indicators

Example

derivative financial instruments
Derivative Financial Instruments
  • Manage financial risk due to changes in
    • Fair values
    • Cash flows
    • Foreign currency exchange rates
derivatives as hedges
Derivatives as Hedges
  • Fair value hedges
  • Cash flow hedges
  • Foreign currency hedges
accounting for gains losses
Accounting for gains & losses
  • Report gains & losses in income for
    • Hedges with no designation
    • Fair value hedges
  • Report gains & losses in other comprehensive income for
    • Effective cash flow hedges
    • Foreign currency hedges