After completing this chapter you should be able to: 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,...
Chapter 17-1 CHAPTER 17 INVESTMENTS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 17-2 Learning Objectives Learning 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 Accounting Approaches Investment Accounting 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 Accounting Approaches Investment Accounting Approaches Companies account for investments based on the type of security (debt or equity) and their intent with respect to the investment Illustration 171 Chapter 17-6 Investments in Debt Securities Investments in Debt Securities Debt securities (creditor relationship): Type Accounting Category U.S. government securities Heldtomaturity Municipal securities Trading Corporate bonds Availableforsale Convertible debt Commercial paper Chapter 17-7 LO 1 Identify the three categories of debt securities and describe the accounting and reporting treatment for each category Investments in Debt Securities Investments in Debt Securities Accounting for Debt Securities by Category Illustration 172 Chapter 17-8 LO 1 Identify the three categories of debt securities and describe the accounting and reporting treatment for each category HeldtoMaturity Securities HeldtoMaturity Securities Classify a debt security as heldtomaturity 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 straightline method yields a similar result Chapter 17-9 LO 2 Understand the procedures for discount and premium amortization on bond investments HeldtoMaturity Securities HeldtoMaturity Securities Illustration: KC Company purchased $100,000 of 8 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 1 and January 1. KC records the investment as follows: January 1, 2009 HeldtoMaturity Securities Cash Chapter 17-10 92,278 92,278 LO 2 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 instruments that cause unique accounting problems financial Summary of Derivative Accounting under GAAP Illustration 17A8 Chapter 17-104 LO 14 Identify special reporting issues related to derivative instruments that cause unique accounting problems financial What About GAAP? Two models for consolidation: Votinginterest model—If a company owns more than 50 percent of another company, then consolidate in most cases Riskandreward 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 variableinterest entitles Consolidation of VariableInterest Entities A variableinterest entity (VIE) is an entity that has one of the following characteristics: Insufficient equity investment at risk. Stockholders lack decisionmaking rights. Stockholders do not absorb the losses or receive the benefits of a normal stockholder Chapter 17-106 LO 15 Describe the accounting for the variableinterest entitles Illustration 17B1 VIE Consolidation Model Chapter 17-107 LO 15 Describe the accounting for the variableinterest 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 variableinterest 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 involved and whether the fair value option is employed Chapter 17-111 Levels of reliability fair value hierarchy. Level 1 is the most reliable measurement because fair value is based on quoted prices in active markets for identical assets or liabilities. Level 2 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 3 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 17C1 Chapter 17-113 Reconciliation of Level 3 Inputs Chapter 17-114 Illustration 17C2 Disclosure of Fair Value Information: Financial Instruments—Fair Value Option Illustration 17C3 Disclosure of Fair Value Option Chapter 17-115 Disclosure of Fair Values: Impaired Assets or Liabilities Disclosure of Fair Value with Impairment Chapter 17-116 Illustration 17C4 Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. 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Describe the? ?accounting? ?for transfer of investment securities between categories Chapter 1 7-3 Investments Investments Investments in Debt Securities Investments in Equity Securities Other Reporting Issues Held-to-maturity securities Holdings.. .CHAPTER 17 INVESTMENTS Intermediate? ?Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 1 7-2 Learning Objectives Learning Objectives Identify the three categories of debt securities and describe the? ?accounting? ?and reporting treatment for ... LO 3 Identify the categories of equity securities and describe the? ?accounting? ?and reporting treatment for each category Investments? ?in Equity Securities Investments? ?in Equity Securities Accounting? ?and Reporting for Equity Securities by Category Chapter 1 7-3 7