中级财务会计第七章-.ppt

12-1Chapter 07Investments1 112-2Nature of InvestmentsBonds and notes(Debt securities)Common and preferred stock(Equity securities)Investments can be accounted for in a variety of ways,depending on the nature of the investment relationship.12-3Reporting Categories for Investments12-4Investor Lacks Significant Influence12-5Securities to Be Held to MaturityInvestments in bonds or other debt security that have a specified maturity date.The bonds or other debt are initially recorded at cost.The investor may have the“positive intent and ability”to hold the securities to maturity and classified as held-to-maturity(HTM).They are reported on the balance sheet at“amortized cost.”Amortized cost(Face amount less unamortized discount,or plus unamortized premium).BalanceSheet12-6Securities to Be Held to MaturityOn January 1,2011,Matrix,Inc.purchased as an investment$1,000,000,of 10%,10-year bonds,interest paid semi-annually.The market rate for similar bonds is 12%.Lets look at calculation of the present value of the bond issue.PresentAmountPVFactorValueInterest$50,000 11.46992=$573,496Principal1,000,000 0.31180=311,805Presentvalueofbonds$885,301PV of ordinary annuity of$1,n=20,i=6%PV of$1,n=20,i=6%12-7Securities to Be Held to MaturityPartial Bond Amortization TableJanuary 1,2011Investment in bonds1,000,000Discount on bond investment 114,699Cash 885,301June 30,2011Cash(stated rate face amount)50,000Discount on bond investment 3,118Investment revenue 53,11812-8Securities to Be Held to Maturity$114,699-$3,118=$111,581 unamortized discountThis investment would appear on the June 30,2011,as follows:Unrealized holding gains and losses are not recognized for HTM investments.12-9Securities to Be Held to MaturityOn December 31,2011,after interest is received by Matrix,all the bonds are sold for$900,000 cash.December 31,2011Cash50,000Discount on bond investment 3,305Investment revenue 53,305December 31,2011Cash 900,000Discount on bond investment108,276Investment in bonds 1,000,000Gain on sale of investment 8,27612-10Trading SecuritiesInvestments in debt or equity securities acquired principally for the purpose of selling them in the near term.Adjustments to fair value are recorded:1.in a valuation account called Fair Value Adjustment,or as a direct adjustment to the investment account.2.as a net unrealized holding gain/loss on the Income Statement.Unrealized Gain Unrealized Loss Income Statement12-11Trading Securities Matrix,Inc.purchased securities classified as Trading Matrix,Inc.purchased securities classified as Trading Securities(TS)on December 22,2011.The fair value Securities(TS)on December 22,2011.The fair value amounts for these securities on December 31,2011,are amounts for these securities on December 31,2011,are shown below.Prepare the journal entries for Matrix,Inc.to shown below.Prepare the journal entries for Matrix,Inc.to showing the purchase of the securities,and adjust the showing the purchase of the securities,and adjust the securities to fair value at 12/31/11.securities to fair value at 12/31/11.12-12Trading SecuritiesDecember 22,2011Investment in Mining,Inc.stock 42,000Investment in Toys and Things stock 22,500Cash 64,500December 31,2011Net unrealized holding gains and losses I/S 3,500Fair value adjustment 3,500Reported on the balance sheet asa adjunct account to the investment.The Net Unrealized Holding Loss is reported on the Income Statement.12-13Trading SecuritiesOn January 3,2012,Matrix sold all trading securities for$65,000 cash.Lets record the entry for the sale and the adjustment to the fair value adjustment account.January 3,2012Cash65,000Investment in Mining,Inc.stock T/S42,000Investment in Toys and Things stock T/S22,500Gain on sale of investment 500December 31,2012Fair value adjustment 3,500Net unrealized holding gains or losses I/S 3,50012-14Financial Statement PresentationTrading securities are presented on the financial statement as follows:1.Income Statement and Comprehensive Income Statement:Fair value changes are included on the income statement in the periods in which they occur,regardless of whether they are realized or unrealized.Investments in trading securities do not affect other comprehensive income.2.Balance Sheet:Securities are reported at fair value,typically as current assets,and do not affect accumulated other comprehensive income in shareholders equity.3.Cash Flow Statement:Cash flows from buying and selling trading securities typically are classified as operating activities,because the investor that hold trading securities consider them as part of their normal operations.12-15Financial Statement PresentationPresented below are the partial financial statements showing the accounting for TS owned by United:12-16Securities Available-for-SaleInvestments in debt or equity securities that are not for active trading and not to be held to maturity are classified as available-for-sale(AFS).Adjustments to fair value are recorded:1.in a valuation account called fair value adjustment,or as a direct adjustment to the investment account.2.as a net unrealized holding gain/loss in other comprehensive income(OCI),which accumulates in accumulated other comprehensive income(ACOI).Unrealized Gain Unrealized Loss Other Comprehensive Income(OCI)12-17Other Comprehensive Income(OCI)When we add other comprehensive income to net income we refer to the result as“comprehensive income.”12-18Accumulated Other Comprehensive IncomeUnrealized holding gains and losses on available-for-sale securities are accumulated in the shareholders equity section of the balance sheet.Specifically,the account is included in accumulated other comprehensive income(AOCI).Shareholders EquityCommon StockPaid-in Capital in Excess of parAccumulated other comprehensive incomeRetained earningsTotal Shareholders EquityNet unrealizedholding gains and losses.12-19Securities Available for Sale ExampleAssume the same information for our T/S example for Matrix,Inc.,except that the investments are classified as available-for-sale securities rather than trading securities.December 31,2011Net unrealized holding gains and losses OCIOCI 3,500Fair value adjustment 3,50012-20Financial Statement PresentationAFS securities are presented on the financial statement as follows:1.Income Statement and Comprehensive Income Statement:Realized gains and losses are shown in net income in the period in which securities are sold.Unrealized gains and losses are shown in OCI in the periods in which changes in fair value occur,and reclassified out of OCI in the periods in which securities are sold.2.Balance Sheet:Investments in AFS securities are reported at fair value.Unrealized gains and losses affect AOCI in shareholders equity,and are reclassified out of AOCI in the periods in which securities are sold.3.Cash Flow Statement:Cash flows from buying and selling AFS securities typically are classified as investing activities.12-21Financial Statement PresentationPresented below are the partial income statement showing the accounting for AFS of United:12-22Financial Statement PresentationFinally,we have the partial balance sheet and statement of cash flows for the company.12-23U.S.GAAP vs.IFRSU.S.GAAP also allows transfers out of the trading security category.Reclassifications under U.S.GAAP are rare.Until recently,IFRS did not allow transfers out of their“fair value through profit and loss”classification.IAS No.39 now allows transfer of debt investments out of the fair value category into AFS or HTM in“rare circumstances”.The current financial crisis qualified as one of those circumstances.12-24U.S.GAAP vs.IFRSU.S.GAAP permits classification as HTM,AFS,and TS.No significant tests are required to classify a debt investment.There is no comparable FVTPL or FVTOCI classification.Investments in debt securities are classified as either“Amortized Cost”or FVTPL.To be classified as a debt investment,two important tests must be met.The current financial crisis qualified as one of those circumstances.Investments in equity securities are classified as either“FVTPL”or“FVTOCI”(“Fair Value through Other Comprehensive Income).IFRS No.9 eliminates the HTM and AFS classifications,replaced by new classifications that are more restrictive.This has the general effect of pushing more investments into being accounted for at“Fair Value Through Profit&Loss”(FVTPL),and thus having unrealized gains and losses included in net income.12-25Transfers Between Reporting CategoriesAny unrealized holding gain or loss at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.Securities are transferred at fair market value on the date of transfer.12-26Impairment of InvestmentsOccasionally,an investments value will decline for reasons that are“other than temporary(OTT).”Impairment in ValueFor HTM and AFS investments,a company recognizes an OTT impairment loss in earnings.Determining an“other than temporary”decline for debt securities can be quite complex.For both equity and debt investments,after an OTT impairment is recognized,the ordinary treatment of unrealized gains and losses is resumed.12-27U.S.GAAP vs.IFRSU.S.GAAP has no prohibition against transfers between categories as long as they can be reasonably justified.In recent changes,IAS No.39 allows transfers of debt investments out of the FVTPL category into AFS or HTM in“rare circumstances,”The 2008,financial crisis qualifies as one of those“rare circumstances”.Until recently,IFRS did not allow transfers out of the“fair value through P&L”(FVTPL)classification(which is roughly equivalent to the trading securities classification in U.S.GAAP).12-28Financial Statement Presentationand DisclosureAggregate Fair ValueMaturities of debt securitiesChange in net unrealized holding gains and lossesGross realized&unrealized holding gains&lossesAmortized cost basis by major security typeInputs to fair value estimates12-29Investor Has Significant Influence 12-30Investor Has Significant InfluenceExtent of Investor InfluenceReporting MethodLackofsignificantinfluence(usually50%equityownership)Consolidation12-31What Is Significant Influence?If an investor owns 20%of the voting stock of an investee,it is presumed that the investor has significant influence over the financial and operating policies of the investee.The presumption can be overcome if:1.the investee challenges the investors ability to exercise significant influence through litigation or other methods.2.the investor surrenders significant shareholder rights in a signed agreement.3.the investor is unable to acquire sufficient information about the investee to apply the equity method.4.the investor tries and fails to obtain representation on the board of directors of the investee.12-32A Single Entity ConceptUnder the equity method .1.The investor recognizes investment income equal to its percentage share(based on stock ownership)of the net income earned by the investee rather than the portion of that net income received as cash dividends.2.Initially,the investment is recorded at cost.The carrying amount of this investment subsequently is:a)Increased by the investors percentage share of the investees net income(or decreased by its share of a loss).b)Decreased by dividends paid.12-33Equity Method On January 1,2011,Wilmer,Inc.acquired 45%of On January 1,2011,Wilmer,Inc.acquired 45%of the equity securities of Apex,Inc.for$1,350,000.the equity securities of Apex,Inc.for$1,350,000.On the acquisition date,Apexs net assets had a On the acquisition date,Apexs net assets had a fair value of$3,000,000.During 2011,Apex paid fair value of$3,000,000.During 2011,Apex paid cash dividends of$150,000 and reported net cash dividends of$150,000 and reported net income of$1,750,000.income of$1,750,000.What amount will Wilmer,Inc.report on the balance sheet as Investment in Apex,Inc.on December 31,2011?12-34Equity MethodJanuary 1,2011Investment in Apex,Inc.stock1,350,000Cash 1,350,0002011Investment in Apex,Inc.stock 787,500Investment revenue 787,5002011Cash 67,500Investment in Apex,Inc.stock 67,50012-35Equity MethodInvestment in Apex,Inc.Investment 1,350,000 67,500 45%Dividends45%Earnings 787,500Reported amount 2,070,000If the investee had a loss,the investment account would have been reduced.12-36Equity MethodOn January 1,2011,Wilmer,Inc.purchased 25%of the common stock of Apex,Inc.for$180,000.At the date of acquisition,the book value of the net assets of Apex was$400,000,and the fair value of these assets is$600,000.During 2011,Apex paid cash dividends of$40,000,and reported earnings of$100,000.12-37Equity MethodThe excess of the fair value of net assets over book value of those net assets is 75%is attributable to depreciable assets with a remaining life of 20 years and 25%is attributable to land.Wilmer uses the straight-line depreciation.12-38Equity MethodJanuary 1,2011Investment in Apex stock180,000Cash 180,0002011Cash 10,000Investment in Apex stock 10,000Investment in Apex stock 25,000Investment revenue 25,000December 31,2011Investment revenue 1,875Investment in Apex stock 1,87512-39Changing From the Equity Method to Another Method At the transfer date,the carrying value of the investment under the equity method is regarded as cost.When the investors level of influence changes,it may be necessary to change from the equity method to another method.12-40Changing From Another Method to the Equity MethodWhen the investors ownership level increases to the point where they can exert significant influence,the investor should change to the equity method.At the transfer date,the recorded value is the initial cost of the investment adjusted for the investors equity in the undistributed earnings of the investee since the original investment.12-41Changing From Another Method to the Equity MethodThe original cost,the unrealized holding gain or loss,and the valuation account are closed.A retroactive change is recorded to recognize the investors share of the investees earnings since the original investment.12-42Fair Value OptionGAAP allows companies to use a“fair value option”for HTM,AFS GAAP allows companies to use a“fair value option”for HTM,AFS and equity method investments.and equity method investments.The investment is carried at fair value.The investment is carried at fair value.Unrealized gains and losses are included in income.Unrealized gains and losses are included in income.For HTM and AFS investments,this amounts to classifying the For HTM and AFS investments,this amounts to classifying the investments as trading.investments as trading.For equity-method investments,the investment is still classified on For equity-method investments,the investment is still classified on the balance sheet with equity method investments,but the portion at the balance sheet with equity method investments,but the portion at fair value must be clearly indicated.fair value must be clearly indicated.The fair value option is determined for each individual investment,The fair v