中级财务会计(双语)第七章

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1、Chapter 12 InvestmentsQUESTIONS FOR REVIEW OF KEY TOPICSQuestion 12-1Investment securities are classified as heldtomaturity,“ trading,“ or 6fcavailable-for-sale securities.Question 12-2Increases and decreases in the market value between the time a debt security is acquired and the day it matures to

2、a prearranged maturity value are ignored for a security classified as “held-to-maturity. These changes arent important if sale before maturity isnt an alternative, which is the case if an investor has the “positive intent and ability to hold the security to maturity.Question 12-3GAAP distinguishes b

3、etween three levels of inputs to fair value determination, with level 1 being readily observable fair values (for example, from a securities exchange), level 2 inputs are other observable amounts (for example, quoted values for similar items, or important inputs like interest rates), and level 3 inp

4、uts are unobservable, like the companys own assumptions. GAAP requires disclosure of the amount of fair values based on each of these three classes of inputs.Question 12-4For investments to be held for an unspecified period of time, fair value information is more relevant than for investments to be

5、held to maturity. Changes in fair values are less relevant if the investment is to be held to maturity because sale at that fair value is not an option. The investor receives the same contracted interest payments for the period held to maturity and the stated principal at maturity, regardless of mov

6、ements in market values. However, when the investment is of unspecified length, changes in fair values indicate managements success in deciding when to acquire the investment and when to sell it, as well as the propriety of investing in fixed-rate or variable-rate securities and long-term or short-t

7、erm securities.Question 12-5The way unrealized holding gains and losses are reported in the financial statements depends on whether the investments are classified as securities available-for-sale or as trading securities. Securities available-for-sale are reported at fair value, and resulting holdin

8、g gains and losses are not included in the determination of income for the period. Rather, they are reported as a separate component of shareholders , equity, as part of other comprehensive income (OCI). (Available-for-sale securities for which the investor has chosen the fair value option are recla

9、ssified as trading securities.)Question 12-6Comprehensive income is a more expansive view of the change in shareholders equity than traditional net income. It encompasses all changes in equity from non-owner transactions. The non-income part of comprehensive income is called “Other comprehensive inc

10、ome.Other comprehensive income includes net unrealized holding gains (losses) on AFS investments, and also the non-credit-loss component of other-than-temporary impairments of HTM investments.Question 12-7Unrealized holding gains or losses on trading securities are reported in the income statement a

11、s if they actually had been realized. Trading securities are actively managed in a trading account with the express intent of profiting from short-term market price changes. So, any gains and losses that result from holding securities during market price changes are suitable measures of success or l

12、ack of success in achieving that goal.On the other hand, unrealized holding gains or losses on securities available-for-sale are not reported in the income statement. By definition, these securities are not acquired for the purpose of profiting from short-term market price changes, so gains and loss

13、es from holding these securities while prices change are less relevant performance measures to be included in earnings.Question 12-8When acquired, debt and equity securities are assigned to one of the three reporting classifications -held-to-maturity, trading, or available-for-sale. The appropriaten

14、ess of the classification is reassessed at each reporting date. A reclassification should be accounted for as though the security had been sold and immediately reacquired at its fair value. Any unrealized holding gain or loss should be accounted for in a manner consistent with the classification int

15、o which the security is being transferred. Specifically, when a security is transfened:1. Into the trading category, any unrealized holding gain or loss should be recognized in earnings of the reclassification period.2. Into the available-for-sale category, any unrealized holding gain or loss should

16、 be recorded in Other Comprehensive Income, which will then increase Accumulated Other Comprehensive Income in shareholders equity.3. Into the held-to-maturity category, any unrealized holding gain or loss should be amortized over the remaining time to maturity. This would be the case for Western Di

17、e-Castings investment in the LGB Heating Equipment bonds.Question 12-9Yes. Although a company is not required to report individual amounts for the three categories of investments - held-to-maturity, available-for-sale, or trading - on the face of the balance sheet, that information should be present

18、ed in the disclosure notes. The following also should be disclosed for each year presented: aggregate fair value, gross realized and unrealized holding gains, gross realized and unrealized holding losses, the change in net unrealized holding gains and losses, and amortized cost basis by major securi

19、ty type. Information about the level of the fair value hierarchy upon which fair values are based should be provided, and more disclosure is necessary with respect to amounts based on level 3 of the fair value hierarchy. In addition, information about maturities should be reported for debt securitie

20、s, by disclosing the fair value and cost for at least 4 maturity groupings: (a) within I year, (b) after I year through 5 years, (c) after 5 years through 10 years, and (d) after 10 years.Question 12-10According to U.S. GAAP, the fair value of an equity security is considered readily determinable on

21、ly if its selling price is currently available on particular securities exchanges or over-the-counter markets. If the fair value of an equity security is not readily determinable, U.S. GAAP uses the cost method. Under IFRS, equity investments typically are measured at fair value, even if they are no

22、t listed on an exchange or over-the-counter market. Under IAS No. 39, the cost method only is used if fair value cannot be measured reliably, which occurs when the range of reasonable fair value estimates is significant and the probability of various estimates within the range cannot be reasonably e

23、stimated. Under IFRS No. 9, the cost method is prohibited, although cost can sometimes be used as an estimate of fair value. Therefore, in general, use of the cost method is less prevalent under IFRS than under U.S. GAAP.Question 12-11When a company elects the fair value option for held-to-maturity

24、or available-for-sale investments, it simply reclassifies those investments as trading securities and accounts for them in that fashion.Question 12-12U.S. GAAP allows companies complete discretion in electing the fair value option when an investment is made. The only constraint is that the election

25、is irrevocable. IFRS only allows companies to elect the fair value option in specific circumstances, e.g., when electing the fair value option for an asset or liability allows a company to avoid the accounting mismatch“ that occurs when some parts of a fair value risk-hedging arrangement are account

26、ed for at fair value and others are not.Question 12-13The equity method is used when an investor cant control but can significantly influence the investee. For example, if effective control is absent, the investor still might be able to exercise significant influence over the operating and financial

27、 policies of the investee if the investor owns a large percentage of the outstanding shares relative to other shareholders. By voting those shares as a block, the investor often can sway decisions in the direction desired. We presume, in the absence of evidence to the contrary, that the investor exe

28、rcises significant influence over the investee when it owns between 20% and 50% of the investees voting shares.Question 12-14The equity method, like consolidation, views the investor and investee as a special type of single entity. By the equity method, though, the investor doesnt include separate f

29、inancial statement items of the investee on an item-by-item basis as in consolidation. Rather, by the equity method, the investor reports its equity interest in the investee as a single investment account. That single investment account is periodically adjusted to reflect the effects of consolidatio

30、n, without actually consolidating financial statements.Question 12-15The investor should account for dividends from the investee as a reduction in the investment account. Since investment revenue is recognized as the investee earns it, it would be inappropriate to again recognize revenue when earnin

31、gs are distributed as dividends. Rather, the dividend distribution is considered to be a reduction of the investee s net assets, indicating that the investors ownership interest in those net assets declines proportionately.Question 12-16The equity method attempts to approximate the effects of accoun

32、ting for the purchase of the investee as a consolidation. Consolidated financial statements report acquired net assets at their fair values as of the date the investor acquired the investee. The accounting in the consolidated financial statements subsequent to the acquisition date is based on those

33、fair values. So, if Finest had consolidated its acquisition of Penner, Penners depreciable assets would have been put on Finests balance sheet in their respective asset accounts at their fair value on the date of acquisition and then depreciated over 10 years. Under the equity method, Finests invest

34、ment in Penner is shown in a single investment account. Therefore, for the equity method to approximate consolidation, it would reduce both investment revenue (as if depreciation expense were being recognized) and the investment (as if the book value of the asset were being reduced) by the negative

35、income effect of the extra depreciation the higher fair value would cause. This would equal 40% x $12 million 10 years = $480,000 each year for ten years.Question 12-17The investment account was decreased by $40,000 (40% x $100,000). Cash increased by the same amount. There is no effect on the incom

36、e statement.Question 12-18When it becomes necessary to change from the equity method to another method, no adjustment is made to the carrying amount of the investment. The equity method is simply discontinued and the new method is applied from then on. The investment account balance when the equity

37、method is discontinued would serve as the new cost” basis for writing the investment up or down to fair value in the next set of financial statements.Question 12-19IFRS require that accounting policies of investees be adjusted to correspond to those of the investor when applying the equity method. U

38、.S. GAAP has no such requirement. Also, IFRS allow investors to account for a joint venture using either the equity method or proportionate consolidation, whereby the investor combines its proportionate share of the investees accounts with its own accounts on an item-by-item basis. U.S. GAAP general

39、ly requires that the equity method be used to account for joint ventures.Question 12-20When a company elects the fair value option for a significant-influence investment, that investment is not reclassified as a trading security. Rather, the investment still appears in the balance sheet as a signifi

40、cant-influence investment, but the amount that is accounted for at fair value is indicated in the balance sheet either parenthetically on a single line that includes the total amount of significant-influence investment or on a separate line. As with trading securities, unrealized gains and losses ar

41、e included in earnings in the period in which they occur.Question 12-21A financial instrument is: (a) cash, (b) evidence of an ownership interest in an entity, (c) a contract that (1) imposes on one entity an obligation to deliver cash or another financial instrument and (2) conveys to a second enti

42、ty a right to receive cash or another financial instrument, or (d) a contract that (1) imposes on one entity an obligation to exchange financial instruments on potentially unfavorable terms and (2) conveys to a second entity a right to exchange other financial instruments on potentially favorable te

43、rms. Accounts payable, bank loans, and investments in securities are examples.Question 12-22These instruments “derive“ their values or contractually required cash flows from some other security or index.Question 12-23Since this money wont be used within the upcoming operating cycle, it is a noncurre

44、nt asset. It should be reported as part of Investments .Question 12-24Part of each premium payment the company makes is not used by the insurance company to pay for life insurance coverage, but rather is “invested“ on behalf of the insured company in a fixed-income investment. As a result, the perio

45、dic insurance premium should not be expensed in its entirety; an appropriate portion should be recorded instead as a noncurrent asset - cash surrender value.Question 12-25If the investor intends to sell the investment, or thinks it will be more likely than not that it will be required to sell the in

46、vestment prior to recovering the impairment, the investor is required to recognize the entire impairment loss in the income statement as an OTT impairment, writing down the investment to fair value in the balance sheet.Otherwise, the investor considers whether credit losses exist. If there are no cr

47、edit losses, no impairment loss is recognized. On the other hand, if there are some credit losses, then the investment is written down to fair value in the balance sheet. However, only the credit loss component is recognized in net income. Any non-credit losses are recognized in OCI. In the income s

48、tatement, the entire impairment loss is shown, and then the amount of non-credit loss is subtracted, leaving only the credit loss reducing net income.Question 12-26If the OTT impairment relates to an equity investment, the entire amount of impairment is recognized in net income. Any previously recor

49、ded unrealized losses are reclassified out of AOCI.If the OTT impairment relates to a debt investment, the accounting is more complicated. First, if the investor intends to sell the investment, or thinks it will be more likely than not that it will be required to sell the investment prior to recover

50、ing the impairment, it is required to recognize the entire impairment loss in the income statement as an OTT impairment, writing down the investment to fair value in the balance sheet.Otherwise, the investor considers whether credit losses exist. If there are no credit losses, no impairment loss is

51、recognized. On the other hand, if there are some credit losses, then the investment is written down to fair value in the balance sheet. However, only the credit loss component is recognized in net income. Any non-credit losses are recognized in OCI. In the income statement, the entire impairment los

52、s is shown, and then the amount of non-credit loss is subtracted, leaving only the credit loss reducing net income.Answers to Questions (concluded)Question 12-27Given that the decline in shares relates to a new law banning a primary approach used by the company, it likely would be treated as an othe

53、r-than-temporary impairment. So, when the investment is written down to its fair value, the amount of the write-down should be treated as if it were a realized loss, meaning the loss is included in income for the period. This could require a reclassification adjustment if any unrealized losses were

54、included previously in OCI, just as if the investment was being sold. Subsequent to the other-than-temporary write-down, the usual treatment of unrealized gains or losses should be resumed. Therefore, later changes in fair value will be reported as a separate component of shareholders, equity, accum

55、ulated other comprehensive income.Question 12-28U.S. GAAP and IFRS differ somewhat. Under IFRS, OTT impairments only are recognized on debt that is classified as HTM to the extent that credit losses exist, so there is no non-credit-loss component of OTT impairments under IFRS. OTT impairments are re

56、cognized on debt classified as AFS in their entirety, with no distinction made between credit losses and non-credit losses. Also, under IFRS, OTT impairments can be recovered in earnings for debt investments, but not for equity investments.BRIEF EXERCISESBrief Exercise 12-1(a) Investment in bonds (f

57、ace amount) 720,000Discount on bond investment (difference)120,000Cash (price of bonds) 600,000(b)Cash (1.5% x $720,000) 10,800Discount on bond investment (difference)1,200Interest revenue (2% x $600,000) 12,000Brief Exercise 12-2Unlike for securities available-for-sale, unrealized holding gains and

58、 losses for trading securities are included in earnings. S&L reports its $2,000 holding loss in 2011 earnings. When the fair value rises by $7,000 in 2012, that amount is reported in 2012 earnings ($5000 as a realized gain, and $2000 as the reversal of the unrealized loss that was recognized in 2011

59、). S&L,s journal entries for these transactions would be:2011December 27 Investment in Coca Cola shares 875,000Cash 875,000December 31Net unrealized holding gains and losses一I/S 2,000Fair value adjustment ($875,000 873,00() 2,000Brief Exercise 12-2 (concluded)2012January 3Cash (selling price) 880,00

60、0Gain on investments (to balance) 5,000Investment in Coca Cola shares (account balance)875,000Assuming no other trading securities, the 2012 adjusting entry to remove the fair value adjustment associated with the sold securities would be:December 31Fair value adjustment (account balance) 2,000Net un

61、realized holding gains and losses一I/S (to balance)2,000Unlike for trading securities, unrealized holding gains and losses for securities available-for-sale are not included in earnings. S&L reports its $2,000 holding loss in 2011 as Other comprehensive income in the statement of comprehensive income

62、. When the fair value rises to $880,000 in 2012, the amount is reported in 2012 earnings is the $5,000 gain realized by the sale of the securities. S&Ls journal entries for these transactions would be:2011December 27Investment in Coca Cola shares 875,000Cash 875,000December 31Net unrealized holding

63、gains and losses-OCI 2,000Fair value adjustment ($875,000 - 873,000) 2,0002012January 3Cash (selling price) 880,000Gain on investments (to balance) 5,000Investment in Coca Cola shares (cost) 875,000Assuming no other transactions involving securities available-for-sale, the 2012 adjusting entry to re

64、move the fair value adjustment associated with the sold securities would be:December 31Fair value adjustment (account balance) 2,000Net unrealized holding gains and losses-OCI2,000Securities available-for-sale are reported at fair value, and resulting holding gains and losses are not included in the

65、 determination of net income for the period. Rather, they are reported as “other comprehensive income in the statement of comprehensive income. The accumulated balance of net holding gains and losses is reported as a separate component of shareholders equity, as part of accumulated other comprehensive income. The adjusting entry needed to increase the fair value adjustment from $110,000 to $170,000 is:Fair value adjustment ($670,000 - 610,000) 60,000Net unrealized holding gains and losses-OCL6