Accounting Chapter 17 Similarly Amounts Recognized Accrued Receivables Shall Not

ACCOUNTING, ANALYSIS, AND PRINCIPLES

Accounting

(a) 1. Instar’s investment in Dorsel Corp. bonds should be classified as

held-to-maturity because they have a specific maturity date and

Instar has the intent and ability to hold them until the maturity date.

They should be recorded at amortized cost.

2. Instar’s investment of idle cash in equity securities should be at

(b)

(1) No entry needed

(2) Fair Value Adjustment …………………………………..

120,000

securities, ($920,000 – $800,000)]

(3) Fair Value Adjustment ……………………………………

350,000

Unrealized Holding Gain or Loss—Income …..

350,000

ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)

(4)

Equity Investments (Slobbaer) …………………………….

75,000

Investment Income ……………………………………..

75,000

Equity Investments (Slobbaer) …………………….

25,000

Analysis

The total effect on net income is $120,000 + $350,000 + $75,000 = $545,000.

Note that the equity method dividends received reduce the balance sheet

value of the investment and are not recorded as revenue or income.

Principles

The rationale for reporting held-to-maturity securities at amortized cost is

that if management intends to hold the securities to maturity, fair values

are not relevant for evaluating the cash flows associated with these

securities.

CODIFICATION EXERCISES

CE17.1

Master Glossary

(a) Trading securities are securities that are bought and held principally for the purpose of selling

them in the near term and therefore held for only a short period of time. Trading generally reflects

active and frequent buying and selling, and trading securities are generally used with the

objective of generating profits on short-term differences in price.

CE17.2

According to FASB ASC 235-10-S99-1 (Notes to Financial Statements—SEC Materials):

(n) Accounting policies for certain derivative instruments. Disclosures regarding accounting policies

shall include descriptions of the accounting policies used for derivative financial instruments and

derivative commodity instruments and the methods of applying those policies that materially

affect the determination of financial position, cash flows, or results of operation. This description

shall include, to the extent material, each of the following items:

(1) A discussion of each method used to account for derivative financial instruments and

CE17.2 (Continued)

(6) The method used to account for derivatives when the designated item matures, is sold, is

extinguished, or is terminated. In addition, the method used to account for derivatives

Instructions to paragraph 4-08(n).

1. For purposes of this paragraph (n), derivative financial instruments and derivative

commodity instruments (collectively referred to as “derivatives”) are defined as follows:

(i) Derivative financial instruments have the same meaning as defined by generally

accepted accounting principles (see Financial Accounting Standards Board

2. For purposes of paragraphs (n)(2), (n)(3), (n)(4), and (n)(7), the required disclosures

should address separately derivatives entered into for trading purposes and derivatives

entered into for purposes other than trading.

1994)).

3. For purposes of paragraph (n)(6), anticipated transactions means transactions (other

than transactions involving existing assets or liabilities or transactions necessitated by

4. Registrants should provide disclosures required under paragraph (n) in filings with the

Commission that include financial statements of fiscal periods ending after June 15, 1997.

CE17.3

According to FASB ASC 323-10–35-20 (Investments—Equity Method and Joint Ventures—Subsequent

Measurement):

CE17.4

According to FASB ASC 815–10–45-4 (Derivatives and Hedging—Other Presentation Matters—Balance

Sheet Netting);

CODIFICATION RESEARCH CASE

(a) According to FASB ASC 320-10:

15-5 The guidance in the Investments—Debt and Equity Securities

Topic establishes standards of financial accounting and report-

ing for both of the following:

An equity security has a readily determinable fair value if it meets any

of the following conditions:

a. The fair value of an equity security is readily determinable if sales

prices or bid-and-asked quotations are currently available on a

b. The fair value of an equity security traded only in a foreign market

is readily determinable if that foreign market is of a breadth and

scope comparable to one of the U.S. markets referred to above.

CODIFICATION RESEARCH CASE (Continued)

(b) See FASB ASC 320-10–25

25–14 Sales of debt securities that meet either of the following

1. The sale of a security occurs near enough to its maturity

date (or call date if exercise of the call is probable) that

2. The sale of a security occurs after the entity has already

collected a substantial portion (at least 85 percent) of the

principal outstanding at acquisition due either to prepayments

CODIFICATION RESEARCH CASE (Continued)

(c) See FASB ASC 320-10–50

50–10 For any sales of or transfers from securities classified as held–

1. The net carrying amount of the sold or transferred security

2. The net gain or loss in accumulated other comprehensive

IFRS CONCEPTS AND APPLICATION

IFRS17.1

The accounting for investment securities is discussed in IAS 27 (“Consoli–

IFRS17.2

GAAP classifies debt investments as trading, available-for-sale, and held-to–

maturity (debt investments). IFRS uses held-for–collection (debt investments),

and trading (both debt and equity investments), and non-trading equity

investment classifications.

The basis for consolidation under IFRS is control. Under GAAP, a bipolar

approach is used, which is a risk-and-reward model and a voting interest

approach. However, under both systems, for consolidation to occur, the

investor company must generally own 50 percent of another company.

GAAP and IFRS are similar in the accounting for the fair value option. That is,

the option to use the fair value method must be made at initial recognition, the

IFRS17.3

The two criteria for determining the valuation of financial assets are the

IFRS17.4

Only debt investments such as loans and bond investments are valued at

amortized cost. A company should use amortized cost if it has a business

IFRS17.5

Lady Gaga should classify this investment as a trading investment because

IFRS17.6

If Lady Gaga plans to hold the investment to collect interest and receive the

IFRS17.7

Unrealized holding gains and losses for trading investments should be

IFRS17.8

(a) Under U.S. GAAP, Ramirez makes no entry, because impaired invest–

ments may not be written up if they recover in value.

IFRS17.9

(a) Debt Investments ……………………………………………. 65,118

Cash ……………………………………………………….. 65,118

IFRS17.10

(a) Equity Investments …………………………………………. 13,200

Cash ……………………………………………………….. 13,200