Beruflich Dokumente
Kultur Dokumente
17-1
17 Investments
Learning Objectives
1. 2. 3. 4. 5. 6. 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.
7.
8.
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Investments
Impairment of value
Reclassification adjustments Transfers between categories Fair value controversy Summary
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the type of security (debt or equity) and their intent with respect to the investment.
Illustration 17-1
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Accounting Category
Convertible debt
Commercial paper
LO 1 Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.
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LO 1 Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.
Held-to-Maturity Securities
Classify a debt security as held-to-maturity only if it has both (1) the positive intent and (2) the ability to hold securities to maturity.
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Held-to-Maturity Securities
Illustration: Robinson Company purchased $100,000 of 8
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Held-to-Maturity Securities
Schedule of Interest Revenue and Bond Discount Amortization Effective-Interest Method
Illustration 17-3
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LO 2
Held-to-Maturity Securities
Illustration: Robinson Company records the receipt of the
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Held-to-Maturity Securities
Illustration: Robinson is on a calendar-year basis, it accrues
Interest Receivable
Debt Investments Interest Revenue
4,000
645 4,645
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Held-to-Maturity Securities
Reporting of Held-to-Maturity Securities
Illustration 17-4
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Held-to-Maturity Securities
Illustration: Assume that Robinson Company sells its
November 1, 2015
Debt Investments Interest Revenue 635 635
LO 2 Understand the procedures for discount and premium amortization on bond investments.
Held-to-Maturity Securities
Computation of gain on sale of bonds
Illustration 17-5
Cash
102,417
2,667
99,683 67
LO 2
Available-for-Sale Securities
Debt Securities
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Debt Securities
Illustration (Single Security): Graff Corporation purchases $100,000, 10 percent, five-year bonds on January 1, 2011, with interest payable on July 1 and January 1. The bonds sell for $108,111, which results in a bond premium of $8,111 and an effective interest rate of 8 percent. Graff records the purchase of the bonds on January 1, 2011, as follows. Debt Investments Cash 108,111 108,111
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Schedule of Interest Revenue and Bond Premium Amortization Effective-Interest Method
Debt Securities
Illustration 17-6
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LO 2
Available-for-Sale Securities
Debt Securities
Illustration (Single Security): The entry to record interest revenue on July 1, 2011, is as follows. Cash Debt Investments 5,000 676
Interest Revenue
4,324
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Debt Securities
Illustration (Single Security): At December 31, 2011, Graff makes the following entry to recognize interest revenue. Interest Receivable Debt Investments 5,000 703
Interest Revenue
4,297
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Debt Securities
Illustration (Single Security): To apply the fair value method to these debt securities, assume that at year-end the fair value of the bonds is $105,000 and that the carrying amount of the investments is $106,732. Graff makes the following entry.
1,732
1,732
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Debt Securities
Illustration (Portfolio of Securities): Webb Corporation has two debt securities classified as available-for-sale. The following illustration identifies the amortized cost, fair value, and the amount of the unrealized gain or loss.
Illustration 17-7
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Debt Securities
Illustration (Portfolio of Securities): Webb makes an adjusting entry to a valuation allowance on December 31, 2012 to record the decrease in value and to record the loss as follows. Unrealized Holding Gain or LossEquity Fair Value Adjustment (AFS)
Webb reports the unrealized holding loss of $9,537 as other
comprehensive income and a reduction of stockholders equity.
9,537 9,537
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Sale of Available-for-Sale Securities
If company sells bonds before maturity date:
Debt Securities
Any realized gain or loss on sale is reported in the Other expenses and losses section of the income statement.
LO 2 Understand the procedures for discount and premium amortization on bond investments.
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Available-for-Sale Securities
Debt Securities
Illustration (Sale of Available-for-Sale Securities): Webb Corporation sold the Watson bonds (from Illustration 17-7) on July 1, 2013, for $90,000, at which time it had an amortized cost of $94,214.
Illustration 17-8
Cash
Loss on Sale of Investments Debt Investments
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90,000
4,214 94,214
LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Debt Securities
Illustration (Sale of Available-for-Sale Securities): Webb reports this realized loss in the Other expenses and losses section of the income statement. Assuming no other purchases and sales of bonds in 2013, Webb on December 31, 2013, prepares the information:
Illustration 17-9
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Debt Securities
Illustration (Sale of Available-for-Sale Securities): Webb records the following at December 31, 2013.
Illustration 17-9
4,537 4,537
LO 2 Understand the procedures for discount and premium amortization on bond investments.
Available-for-Sale Securities
Financial Statement Presentation
Debt Securities
Illustration 17-10
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Trading Securities
Companies report trading securities at
Debt Securities
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Trading Securities
Debt Securities
Illustration: On December 31, 2012, Western Publishing Corporation determined its trading securities portfolio to be as follows:
Illustration 17-11
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Trading Securities
Debt Securities
3,750 3,750
LO 2 Understand the procedures for discount and premium amortization on bond investments.
Trading Securities
Debt Securities
BE17-4: (Trading Securities) Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31,
investment.
(b) Prepare the journal entry for the interest received. (c)
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
Trading Securities
Debt Securities
BE17-4: Prepare the journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value
adjustment.
(a) Debt investments Cash (b) Cash Interest revenue (c) Unrealized Holding Loss - Income Fair Value Adjustment (Trading)
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LO 2 Understand the procedures for discount and premium amortization on bond investments.
price of the security, plus brokers commissions and fees related to purchase.
The degree to which one corporation (investor) acquires an interest in the common stock of another corporation (investee) generally determines the accounting treatment for the investment subsequent to acquisition.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
Investment valued on parents books using Cost Method or Equity Method (investment eliminated in Consolidation)
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
* Securities are reported at cost. Dividends are recognized when received and gains or losses only recognized on sale of securities.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
Cash
718,550
On December 6, 2012, Republic receives a cash dividend of $4,200 from Campbell Soup Co. Cash Dividend revenue
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4,200 4,200
LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
35,550
35,550
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
Cash
Equity Investments Gain on Sale of Investments
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287,220
259,700 27,520
LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
Illustration 17-16
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LO 3
Illustration:
99,800 99,800
LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
On Oct. 10, 2012, the Horton shares were sold at a price of $54 per share. In addition, 3,000 shares of Patriot common stock were acquired at $54.50 per share on Nov. 2, 2012. The Dec. 31, 2012, fair values were: Monty $106,000, Patriot $132,000, and the Oakwood common $193,000.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
163,500
163,500
LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
December 31, 2012: Unrealized holding loss - Income Fair value adjustment (Trading)
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36,500 36,500
LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
Unrealized Holding Gain or LossEquity account is used instead of Unrealized Holding Gain or LossIncome.
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LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
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LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.
the investors proportionate share of the earnings (losses) and dividends received by the investor.
If investors share of investees losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method.
LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.
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LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.
Cash
Equity Investments
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5,000
($20,000 x 25%)
5,000
LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.
Investor is referred to as the parent. Investee is referred to as the subsidiary. Investment in the subsidiary is reported on the parents books as a long-term investment.
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LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.
Applied on an instrument-by-instrument basis. Fair value option is generally available only at the time a company first purchases the financial asset or incurs a financial liability.
Company must measure this instrument at fair value until the company no longer has ownership.
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25,000
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Impairment of Value
Impairments of debt and equity securities are
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Impairment of Value
Illustration: Strickler Company holds available-for-sale bond securities with a par value and amortized cost of $1 million. The
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Reclassification Adjustments
The reporting of changes in unrealized gains or losses in comprehensive income is straightforward unless a company sells securities during the year. In that case, double counting results when the company reports realized gains or losses as part of net income but also shows the
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Reclassification Adjustments
Illustration: Open Company has the following two available-for-sale securities in its portfolio at the end of 2011 (its first year of operations).
Illustration 17-19
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Reclassification Adjustments
Illustration: If Open Company reports net income in 2011 of $350,000, it presents a statement of comprehensive income as follows.
Illustration 17-20
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Reclassification Adjustments
Illustration: During 2012, Open Company sold the Lehman Inc. common stock for $105,000 and realized a gain on the sale of $25,000 ($105,000 $80,000). At the end of 2012, the fair value of the Woods Co. common stock increased an additional $20,000, to $155,000.
Illustration 17-21
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Reclassification Adjustments
Illustration: In addition, Open realized a gain of $25,000 on the sale of the Lehman common stock. Comprehensive income includes both realized and unrealized components. Therefore, Open recognizes a total holding gain (loss) in 2012 of $20,000, computed as follows.
Illustration 17-22
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Reclassification Adjustments
Illustration: Open reports net income of $720,000 in 2012, which includes the realized gain on sale of the Lehman securities.
Illustration 17-23
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* Assumes that adjusting entries to report changes in fair value for the current period are not yet recorded.
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LO 8
Gains Trading
Liabilities Not Fairly Valued
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APPENDIX
17A
Defining Derivatives
Financial instruments that derive their value from values of
other assets (e.g., stocks, bonds, or commodities). Three different types of derivatives:
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APPENDIX
17A
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APPENDIX
17A
APPENDIX
17A
400 400
Option Premium
APPENDIX
17A
Intrinsic value is the difference between the market price and the preset strike price at any point in time. It represents the amount realized by the option holder, if exercising the option immediately. On January 2, 2012, the intrinsic value is zero because the market price equals the preset strike price.
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APPENDIX
17A
Time value refers to the options value over and above its intrinsic value. Time value reflects the possibility that the option has a fair value greater than zero. How? Because there is some expectation that the price of Laredo shares will increase above the strike price during the option term. As indicated, the time value for the option is $400.
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APPENDIX
17A
On March 31, 2012, the price of Laredo shares increases to $120 per share. The intrinsic value of the call option contract is now $20,000. That is, the company can exercise the call option and purchase 1,000 shares from Baird Investment for $100 per share. It can then sell the shares in the market for $120 per share. This gives the company a gain $20,000 on the option contract of ____________. ($120,000 - $100,000)
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APPENDIX
17A
On March 31, 2012, it records the increase in the intrinsic value of the option as follows.
Call Option 20,000
20,000
300 300
APPENDIX
17A
call option in its balance sheet at fair value of $20,100. unrealized holding gain which increases net income. loss on the time value of the option which decreases net
income.
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APPENDIX
17A
On April 16, 2012, the company settles the option before it expires. To properly record the settlement, it updates the value of the option for the decrease in the intrinsic value of $5,000 ([$20 - $15]) x 1,000) as follows.
Unrealized Holding Gain or LossIncome Call option 5,000 5,000
The decrease in the time value of the option of $40 ($100 - $60) is recorded as follows.
Unrealized Holding Gain or LossIncome Call Option
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40 40
APPENDIX
17A
At the time of the settlement, the call options carrying value is as follows.
15,000 60 15,060
APPENDIX
17A
Because the call option meets the definition of an asset, the company
records it in the balance sheet on March 31, 2012. It also reports the
call option at fair value, with any gains or losses reported in income.
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APPENDIX
17A
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APPENDIX
17A
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APPENDIX
17A
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APPENDIX
17A
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APPENDIX
17A
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APPENDIX
17A
2,500
2,500
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APPENDIX
17A
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APPENDIX
17A
Hayward is exposed to the risk that the price of the Sonoma stock will decline. To hedge this risk, Hayward locks in its gain on the Sonoma investment by purchasing a put option on 100 shares of Sonoma stock. Illustration: Hayward enters into the put option contract on January 2, 2013, and designates the option as a fair value hedge of the Sonoma investment. This put option (which expires in two years) gives Hayward the option to sell Sonoma
APPENDIX
17A
500
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APPENDIX
17A
500
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APPENDIX
17A
Illustration 17A-5
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APPENDIX
17A
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APPENDIX
17A
Illustration: In September 2012 Allied Can Co. anticipates purchasing 1,000 metric tons of aluminum in January 2013. As a result, Allied enters into an aluminum futures contract. In this case, the aluminum futures contract gives Allied the right and the obligation to purchase 1,000 metric tons of aluminum for $1,550 per ton. This contract price is good until the contract expires in January 2013. The underlying for this derivative is the price of aluminum. Allied enters into the futures contract on September 1, 2012. Assume that the price to be paid today for inventory to be delivered in Januarythe spot priceequals the contract price. With the two prices equal, the futures contract has no value. Therefore no entry is necessary.
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APPENDIX
17A
Illustration: At December 31, 2012, the price for January delivery of aluminum increases to $1,575 per metric ton. Allied makes the following entry to record the increase in the value of the futures contract.
Futures Contract
Unrealized Holding Gain or LossEquity
([$1,575 - $1,550] x 1,000 tons)
25,000
25,000
Allied reports the futures contract in the balance sheet as a current asset and the gain as part of other comprehensive income.
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APPENDIX
17A
Illustration: In January 2013, Allied purchases 1,000 metric tons of aluminum for $1,575 and makes the following entry.
1,575,000 1,575,000
At the same time, Allied makes final settlement on the futures contract. It records the following entry. Cash 25,000 25,000
APPENDIX
17A
There are no income effects at this point. Allied accumulates in equity the gain on the futures contract as part of other comprehensive income until the period when it sells the inventory.
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APPENDIX
17A
Illustration: Assume that Allied processes the aluminum into finished goods (cans). The total cost of the cans (including the aluminum purchases in January 2013) is $1,700,000. Allied sells the cans in July 2013 for $2,000,000, and records this sale as follows. Cash Sales Revenue 2,000,000 2,000,000
1,700,000
1,700,000
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APPENDIX
17A
Illustration: Since the effect of the anticipated transaction has now affected earnings, Allied makes the following entry related to the hedging transaction. Unrealized Holding Gain or LossEquity Cost of Goods Sold 25,000 25,000
The gain on the futures contract, which Allied reported as part of other comprehensive income, now reduces cost of goods sold. As a result, the cost of aluminum included in the overall cost of goods sold is $1,550,000.
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APPENDIX
17A
Identify special reporting issues related to derivative financial instruments that cause unique accounting problems.
APPENDIX
17A
cash flows.
LO 14
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Identify special reporting issues related to derivative financial instruments that cause unique accounting problems.
APPENDIX
17A
LO 14
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Identify special reporting issues related to derivative financial instruments that cause unique accounting problems.
APPENDIX
17B
VARIABLE-INTEREST ENTITIES
most cases.
2. Risk-and-reward modelIf a company is involved substantially in the economics of another company,
then consolidate.
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LO 15
APPENDIX
17B
VARIABLE-INTEREST ENTITIES
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APPENDIX
17B
VARIABLE-INTEREST ENTITIES
Illustration 17B-1
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APPENDIX
17B
VARIABLE-INTEREST ENTITIES
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APPENDIX
17C
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APPENDIX
17C
measurement.
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APPENDIX
17C
APPENDIX
17C
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.
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APPENDIX
17C
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APPENDIX
17C
Reconciliation
of Level 3
Inputs
Illustration 17C-2
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APPENDIX
17C
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APPENDIX
17C
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RELEVANT FACTS
GAAP classifies investments as trading, available-for-sale (both debt and equity investments), and held-to-maturity (only for debt investments). IFRS uses held-for-collection (debt investments), trading (both debt and equity investments), and non-trading equity investment classifications. The accounting for trading investments is the same between GAAP and IFRS. Held-to-maturity (GAAP) and held-for-collection investments are accounted for at amortized cost. Gains and losses related to available-for-sale securities (GAAP) and non-trading equity investments (IFRS) are reported in other comprehensive income. Both GAAP and IFRS use the same test to determine whether the equity method of accounting should be used.
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RELEVANT FACTS
The basis for consolidation under IFRS is control. Under GAAP, a bipolar approach is used, which is a risk-and-reward model (often referred to as a variable-entity approach) 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 selection is irrevocable, and gains and losses are reported as part of income. One difference is that GAAP permits the fair value option for equity method investments.
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RELEVANT FACTS
While measurement of impairments is similar, GAAP does not permit the reversal of an impairment charge related to available-for-sale debt and equity investments. IFRS allows reversals of impairments of held-for-collection investments.
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d. the accounting for impairment of investments is similar, although IFRS allows recovery of impairment losses.
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Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved.
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