intermediate accounting chapter 12 ppt

8/9/2019 intermediate accounting chapter 12 ppt

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12-1

Chapter 12

Investments


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12-2

Nature of Investments

Bonds andnotes

(Debtsecurities)

Bonds andnotes

(Debtsecurities)

Common andpreferred stock

(Equitysecurities)

Common andpreferred stock

(Equitysecurities)

Investments can be accounted for in avariety of ways, depending on the natureof the investment reationship!


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12-3

Reporting Categories for Investments


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12-4

Investor Lacks Significant Influence


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12-5

Securities to Be Held to Maturity

Securities are investments in bonds or other debt securitythat have a specifed maturity date. The bonds or other debtare initially recorded at cost. The investor may have thepositive intent and ability to hold the securities to maturityand can there!ore be classifed as held-to-maturity "#T$%.

They are reported on the balance sheet at amorti&ed cost.

Amortized cost (Face amount less unamortized

discount, or plus unamortized premium).

'alanceSheet


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12-(


On January 1, 2013, Matrix nc. purc!ased as an in"estment#1,000,000, o$ 10%, 10&year 'onds, interest paid semi&annually. !e maret rate $or similar 'onds is 12%. *et+s loo

at t!e calculation o$ t!e present "alue o$ t!e 'ond issue.

*resent

+mount

*,actor ,alue

Interest

5/0///

11.4(

2

5304

(

*rincipal

10///0///

/.311/

3110/5

*resent value o!

bonds

503/

1

"# of ordinary annuity of $%, n & ', i & *

"# of $%, n & ', i & *


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12-


Partial ond Amortization a'le

January 1, 2013n"estment in 'onds 1,000,000

-iscount on 'ond in"estment 11,/as! ,301

June 30, 2013as! (stated rate 4 $ace amount) 0,000-iscount on 'ond in"estment 3,11

n"estment re"enue 3,11


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12-


#11,/ & #3,11 5 #111,1 unamortized discount

!is in"estment 6ould appear on t!eJune 30, 2013, 'alance s!eet as $ollo6s7

+nreaied hoding gains and osses are notrecognied for -./ investments!


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12-

Securities to Be Held to MaturityOn -ecem'er 31, 2013, a$ter interest is recei"ed 'y Matrix, all t!e 'onds

are sold $or #00,000 cas!.

-ecem'er 31, 2013as! 0,000-iscount on 'ond in"estment 3,30

n"estment re"enue 3,30

-ecem'er 31, 2013as! 00,000-iscount on 'ond in"estment 10,28/

n"estment in 'onds 1,000,000

9ain on sale o$ in"estment ,28/


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12-1/

Trading Securities

Investments in debt or e6uity securities ac6uiredprincipally !or the purpose o! sellin7 them in the nearterm.+d8ustments to !air value are recorded

1.in a valuation account called !air value ad8ustment0 or

as a direct ad8ustment to the investment account.2.as a net unreali&ed holdin7 7ain9loss on the incomestatement.

:nrealized9ain :nrealized *oss

Income

Statement


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12-11

Trading Securities

$atri: Inc. purchased securities classifed as Tradin7$atri: Inc. purchased securities classifed as Tradin7Securities "TS% on ;ecember 220 2/13. The !air valueSecurities "TS% on ;ecember 220 2/13. The !air value

amounts !or these securities on ;ecember 310 2/130amounts !or these securities on ;ecember 310 2/130

are sho


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12-12

Trading Securities

-ecem'er 22, 2013

n"estment in Minin; nc. stoc 2,000n"estment in oys and !in;s stoc 22,00

as! /,00

-ecem'er 31, 2013? 3,00

Fair "alue ad@ustment 3,00

0eported on the baance sheet asa ad1unct account to the investment!

.he 2et +nreaied -oding 3oss is

reported on the Income 4tatement!


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12-13

Trading SecuritiesOn January 3, 201, Matrix sold all tradin; securities $or#/,000 cas!. *et+s record t!e entry $or t!e sale and t!e

ad@ustment to t!e $air "alue ad@ustment account.

January 3, 201as! /,000

n"estment in Minin;, nc. stoc = >? 2,000n"estment in oys and !in;s stoc = >? 22,009ain on sale o$ in"estment 00

-ecem'er 31, 201Fair "alue ad@ustment 3,00

? 3,00


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12-14

Financial Statement Presentation

Tradin7 securities are presented on the fnancialstatement as !ollo


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12-15


resented 'elo6 are t!e partial $inancial statements s!o6in;t!e accountin; $or ? o6ned 'y Matrix7


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12-1(

Securities Available-for-Salen"estments in de't or eBuity securities t!at are not $or acti"e tradin; and

not to 'e !eld to maturity are classi$ied as a"aila'le&$or&sale (AF?).Ad@ustments to $air "alue are recorded

1.in a "aluation account called $air "alue ad@ustment, or as a directad@ustment to t!e in"estment account.

2.as a net unrealized !oldin; ;ain>loss in ot!er compre!ensi"e income(O), 6!ic! accumulates in accumulated ot!er compre!ensi"e income(AO).

:nrealized9ain :nrealized *oss

Bther @omprehensiveIncome "B@I%


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12-1

Other Comprehensive Income (OCI)

C!en 6e add other comprehensive incometo netincome6e re$er to t!e result as Dcompre!ensi"e income.E

C!en 6e add other comprehensive incometo netincome6e re$er to t!e result as Dcompre!ensi"e income.E


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12-1

Accumulated Other ComprehensiveIncome

:nrealized !oldin; ;ains and losses on a"aila'le&$or&sale securities are accumulated in t!e

s!are!olders+ eBuity section o$ t!e 'alance s!eet.

?peci$ically, t!e account is included in accumulatedother comprehensive income (AOCI).

Shareholders? C6uity@ommon stocD*aid-in capital in e:cess o! par+ccumulated other comprehensiveincomeEetained earnin7s

Total shareholders? e6uity


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12-1

Securities Available for Sale Example

+ssume the same in!ormation !or our T9Se:ample !or $atri: Inc.0 e:cept that the

investments are classifed as available-!or-sale securities rather than tradin7 securities.

-ecem'er 31, 2013


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12-2/


AF? securities are presented on t!e $inancial statement as$ollo6s7

%!Income 4tatement and 4tatement of Comprehensive Income5Realized;ains and losses are s!o6n in net income in t!e period in

6!ic! securities are sold. Unrealized;ains and losses are s!o6n inO in t!e periods in 6!ic! c!an;es in $air "alue occur, andreclassi$ied out o$ O in t!e periods in 6!ic! securities are sold.'!Baance 4heet5 n"estments in AF? securities are reported at $air"alue. Unrealized;ains and losses a$$ect AO in s!are!olders+

eBuity, and are reclassi$ied out o$ AO in t!e periods in 6!ic!securities are sold.6!Cash 7ow 4tatement5 as! $lo6s $rom 'uyin; and sellin; AF?securities typically are classi$ied as in"estin; acti"ities.

12


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12-21

U. S. GAAP vs. IFRS

F.S. G++* also allo


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12-22

U. S. GAAP vs. IFRS

F.S. G++* permitsclassifcation as #T$0 +S0and TS.

Ho si7nifcant tests arere6uired to classi!y a debt

investment. There is no comparable

,T* or ,TB@Iclassifcation.

IFRS No. eliminates the !"# andAF? classi$ications, replaced 'y ne6

classi$ications t!at are more restricti"e. !is !as t!e ;eneral e$$ect o$ pus!in; morein"estments into 'ein; accounted $or at DFair alue !rou;! ro$it G *ossE(F*), and t!us !a"in; unrealized ;ains and losses included in net income.

Investments in debt securitiesare classifed as either+morti&ed @ost or ,T*.

To be classifed as a debtinvestment0 t


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12-23

Transfers Between Reporting CategoriesAny unrealized !oldin; ;ain or loss at reclassi$ication s!ould 'e accounted $or in a

manner consistent 6it! t!e classi$ication into 6!ic! t!e security is 'ein;trans$erred. ?ecurities are trans$erred at $air maret "alue on t!e date o$ trans$er.

12


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12-24

Impairment of Investments

Occasionally, anOccasionally, anin"estment+s "alue 6illin"estment+s "alue 6ill

decline $or reasonsdecline $or reasons

t!at are ot!er&t!an&t!at are ot!er&t!an&

temporary (O).temporary (O).

or #T$ and +S investments0 a companyreco7ni&es an BTT impairment loss in earnin7s.

;eterminin7 an other than temporary decline !ordebt securities can be 6uite comple:. or both

e6uity and debt investments0 a!ter an BTTimpairment is reco7ni&ed0 the ordinary treatment o!

unreali&ed 7ains and losses is resumed.

12


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12-25

U. S. GAAP vs. IFRS

F.S. G++* has noprohibition a7ainsttrans!ers bet


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12-2(

Financial Statement Presentationand Disclosure

AggregateFair Vale

/aturities ofdebt securities

Change in netnreali!ed

holding gains

and losses

"ross reali!ed# nreali!ed

holding gains #losses

Amorti!ed cost$asis $% ma&orsecrit% t%pe

Inpts to fairvale

estimates

12


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12-2

Investor Has Significant Influence

12-


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12-2

Investor Has Significant Influence

'(tent of Investor In)ence *eporting +ethod

acD o! si7nifcant inAuence"usually J 2/K e6uity

o


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122

What Is Significant Influence?

$ an in"estor o6ns 20% o$ t!e "otin; stoc o$ an in"estee, it ispresumed t!at t!e in"estor !as si;ni$icant in$luence o"er t!e $inancialand operatin; policies o$ t!e in"estee. !e presumption can 'eo"ercome i$1.t!e in"estee c!allen;es t!e in"estor+s a'ility to exercise si;ni$icant

in$luence t!rou;! liti;ation or ot!er met!ods.

2.t!e in"estor surrenders si;ni$icant s!are!older ri;!ts in a si;neda;reement.

3.t!e in"estor is una'le to acBuire su$$icient in$ormation a'out t!ein"estee to apply t!e eBuity met!od.

.t!e in"estor tries and $ails to o'tain representation on t!e 'oard o$directors o$ t!e in"estee.

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123/

A Single Entity Concept

:nder t!e eBuity met!od . . .1.!e in"estor reco;nizes in"estment income eBual to itspercenta;e s!are ('ased on stoc o6ners!ip) o$ t!e netincome earned 'y t!e in"estee rat!er t!an t!e portion o$ t!atnet income recei"ed as cas! di"idends.2.nitially, t!e in"estment is recorded at cost. !e carryin;amount o$ t!is in"estment su'seBuently is7

a) ncreased 'y t!e in"estor+s percenta;e s!are o$ t!ein"estee+s net income (or decreased 'y its s!are o$ a

loss).') -ecreased 'y di"idends paid.


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12-


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32

Equity MethodJanuary 1, 2013

n"estment in Apex nc. stoc 1,30,000as! 1,30,000

2013

n"estment in Apex nc. stoc 88,00n"estment re"enue 88,00

2013as! /8,00

n"estment in Apex nc. stoc /8,00

12-


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33

Equity Method

Investment in :pe; Inc!

Investment %,6


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34

Equity MethodOn January 1, 2013, Cilmer nc. purc!ased 2% o$ t!e

common stoc o$ Apex nc. $or #10,000. At t!e date o$acBuisition, t!e 'oo "alue o$ t!e net assets o$ Apex 6as#00,000, and t!e $air "alue o$ t!ese assets is #/00,000.-urin; 2013, Apex paid cas! di"idends o$ #0,000, and

reported earnin;s o$ #100,000.

12-


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Equity Method!e excess o$ t!e $air "alue o$ net assets o"er 'oo "alue o$

t!ose net assets is 8% attri'uta'le to deprecia'le assets6it! a remainin; li$e o$ 20 years and is 2% attri'uta'le to

land. Cilmer uses t!e strai;!t&line depreciation.

12-


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3(

Equity MethodJanuary 1, 2013

n"estment in Apex stoc 10,000as! 10,000

2013as! 10,000

n"estment in Apex stoc 10,000

n"estment in Apex stoc 2,000n"estment re"enue 2,000

-ecem'er 31, 2013n"estment re"enue 1,8n"estment in Apex stoc 1,8

12-


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3

Changing From the Equity Method toAnother Method

+t the trans!erdate0 the carryin7

valueo! theinvestment underthe e6uity methodis re7arded as cost.

C!en t!e in"estor+s le"el o$ in$luence c!an;es, itmay 'e necessary to c!an;e $rom t!e eBuity

met!od to anot!er met!od.

12-


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3

Changing from Another Method to theEquity Method

Mhen the investor?s o


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3

Changing from Another Method to theEquity Method

The ori7inal cost0 the unreali&ed holdin77ain or loss0 and the valuation account

are closed.

+ retroactivechan7e is recorded toreco7ni&e the investor?s share o! theinvestee?s earnin7s since the ori7inal

investment.

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4/

Fair Value Option

9AA allo6s companies to use a D$air "alue optionE $or IM, AF?,and eBuity met!od in"estments.

.he investment is carried at fair vaue!

+nreaied gains and osses are incuded in income!

For IM and AF? in"estments, t!is amounts to classi$yin; t!ein"estments as tradin;.

For eBuity met!od in"estments, t!e in"estment is still classi$ied ont!e 'alance s!eet 6it! eBuity met!od in"estments, 'ut t!e portion at

$air "alue must 'e clearly indicated.

!e $air "alue option is determined $or eac! indi"idual in"estment,and is irre"oca'le.

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41

Financial Instruments andInvestment Derivatives

7inancia Instruments57inancia Instruments5

%!%!Cash!Cash!

'!'!Evidence of anEvidence of an

ownership interestownership interestin anin an

entity!entity!

6!6!Contracts meetingContracts meeting

certain conditions!certain conditions!

Investment Derivatives5Investment Derivatives5

%!%! #aue is derived from#aue is derived from

other securities!other securities!

'!'! Derivatives are oftenDerivatives are often

used to 8hedge9 (offset)used to 8hedge9 (offset)

risks created by otherrisks created by other

investments orinvestments or

transactionstransactions

12-42


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42

Appendix 12A Other Investmentst is o$ten con"enient $or companies to set aside money to'e used $or speci$ic purposes. n t!e s!ort&term, $unds may'e set aside $or

1.etty cas! $unds.

2.ayroll accounts.

n t!e lon;&run, $unds are o$ten set aside to7

1.ay lon;&term de't 6!en it comes due.

2.AcBuire treasury stoc.

?pecial purpose $unds set aside $or t!e lon;&term areclassi$ied as in"estments.

12-43


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Appendix 12A Other Investments

t is a common practice $or companies to purc!aseli$e insurance policies on ey o$$icers. !ecompany pays t!e premium and is t!e 'ene$iciary

o$ t!e policy. $ t!e o$$icer dies, t!e company

recei"es t!e proceeds $rom t!e policy. ?ome typeso$ policies 'uild a portion o$ eac! premium as cas!surrender "alue. !e cas! surrender "alue o$ suc!

a policy is classi$ied as an in"estment on t!e

'alance s!eet o$ t!e company.

12-44


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44

Appendix 12B Impairment ofInvestments

$ t!e $air "alue o$ an in"estment declines to a le"el 'elo6cost, and t!at decline is not "ie6ed as temporary, companiestypically !a"e to reco;nize an ot!er&t!an&temporary (DOE)impairment loss in earnin;s.

Ce use a t!ree&step process to determine 6!et!er an Oimpairment loss must 'e reco;nized7 (1) determine i$ t!ein"estment is impaired, (2) determine 6!et!er anyimpairment is O, and (3) determine 6!ere to report t!eO impairment.

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12-4(


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4(


12-4

f


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4


Fnited Inter7roup0 Inc.0 buys and sells both debt and e6uity securities o!

other companies as investments. Fnited?s fscal year-end is ;ecember31. The !ollo


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4


-ecem'er 31, 201Ot!er&t!an&temporary impairment loss = >? 1,000

n"estment in endac 1,000

Fair "alue ad@ustment 10,000


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4


Fnited Inter7roup0 Inc.0 buys and sells both debt and e6uitysecurities o! other companies as investments0 and classifes theseinvestments as +S. Fnited?s fscal year-end is ;ecember 31.The !ollo


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-ecem'er 31, 201O impairment loss = >? 0,000

-iscount on 'ond in"estment 0,000

ase 1

ase 2

-ecem'er 31, 201O impairment loss = >? 30,000

-iscount on 'ond in"estment 30,000

O impairment loss & O 20,000Fair "alue ad@ustment =


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U. S. GAAP vs. IFRS

F.S. G++* reco7ni&es inB@I any non-credit losseson debt investments.

:nder IAS No. $% companies reco;nize O impairments i$ t!ere exists

o'@ecti"e e"idence o$ impairment. O'@ecti"e e"idence must relate to one ormore e"ents occurrin; a$ter initial reco;nition o$ t!e asset t!at a$$ect t!e$uture cas! $lo6s t!at are ;oin; to 'e ;enerated 'y t!e asset.

@alculation o! the amount o!impairment di>ers dependin7 onthe classifcation o! aninvestment.

Fnder IES0 an BTT impairment!or a debt investment is liDely tobe lar7er i! it is classifed as +Sthan i! it is classifed as #T$0because it includes the entiredecline in !air value i! classifedas +S but only the credit loss i!

classifed as #T$.

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Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

o6eroint Aut!ors7?usan oomer 9al'reat!, !.-., A!arles C. ald6ell, -..A., MA

Jon A. ooer, !.-., A, Aynt!ia J. Hooney, !.-., A

Investments:A Chapter Supplement

Supplement to Chapter 12

12-53

GAAP P d


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GAAP vs. ProposedAccounting Standard Update

12-54


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Accounting for Equity Investments

;eterminin7 ho< to account !or e6uity investments in stocDunder the proposed +SF is easy. I! the investor does nothave si7nifcant inAuence over the investee0 the e6uityinvestment is accounted !or as ,-HI. I! the investor hassi7nifcant inAuence over the investee0 but lacDs control0 the

e6uity method is used. I! the investor has control0 theinvestment is consolidated.Fnder current "AA=0

the investor accounts!or the e6uityinvestment as atradin7 or as an +S

security.

Fnder the AS>an e6uityinvestment alwaysistreated as ,-HI"e6uivalent to bein7accounted !or as a

tradin7 security%.

12-55


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Accounting for Debt Investments

;eterminin7 ho< to account !or debt investments under theproposed +SF is more complicated than accountin7 !ore6uity investments. Fnder the proposed +SF


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Accounting for Debt Investments

!aracteristics o$ a omplex -e'tnstrument

-e't t!at lacs one or more o$ t!e c!aracteristics o$simple de't is considered comple&. :nder t!eproposed A?:, de't t!at is complex al6ays is

classi$ied as $air "alue in net income.

12-5


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Business Purpose of a Debt Instrument

or simple debt0


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or simple debt0


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or simple debt0


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Summary of Classification Criteria

The proposed +SF does not allo< trans!ers o!debt !rom one cate7ory to another. +!ter thedebt is initially classifed0 reclassifcations are not

permitted.

12-(1

ImpairmentsWhentheInvestorDoes


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Impairments When the Investor DoesNot Exercise Significant Influence

'ecause e6uity investments are reported at ,-HI0 noimpairment 7uidance is necessary. The same is true!or debt investments recorded at ,-HI. ;eclines in!air value al


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Debt Impairment (continued)

@b1ective5 +se e;pected vaue (pro'a'ility&6ei;!ted

a"era;e) o$ losses o$ principal and interest on a discounted'asis.

.ime horion o$ estimated losses7

ucet 17 o"er near term (say, 1&2 years).

ucets 2 and 37 o"er remainin; li$e o$ in"estment.


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Equity Method

The criteria !or applyin7 the e6uity method are thesame in the +SF as in current G++*. I! a company isholdin7 an investment !or sale that normally erence bet


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End of Chapter 12

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intermediate accounting chapter 12 ppt