Upload
alfred-lester
View
220
Download
0
Embed Size (px)
Citation preview
Slide 2
12-2
Nature of InvestmentsNature of Investments
Bonds and notes
(Debt (Debt securities)securities)
Bonds and notes
(Debt (Debt securities)securities)
Common and preferred stock
(Equity (Equity securities)securities)
Common and preferred stock
(Equity (Equity securities)securities)
Investments can be accounted for in a variety of ways, depending on the nature
of the investment relationship.
Slide 3
12-3
Reporting Categories for InvestmentsReporting Categories for InvestmentsControl Characteristics of the Investment Reporting Method Used by the Investor
The investor lacks significant influence over the operating and financial policies of the investee:
Investment in debt securities for which the investor has the "positive intent and ability" to hold to maturity.
Held-to-maturity (HTM) - investment reported at amortized cost.*
Investment held in an active trading account. Trading securities (TS) - investment reported at fair value with unrealized holding gains and losses included in net income.
Other. Securities available-for-sale (AFS) - investment reported at fair value with unrealized holding gains and losses excluded from net income and reported in Other Comprehensive income.*
The investor has significant influence over the operating and financial policies of the investee:
Typically the investor owns between 20% and 50% of the voting stock of the investee.
Equity method - investment cost adjusted for subsequent earnings and dividends of the investee.*
The investor controls the investee:The investor owns more than 50% of the voting stock of the investee.
Consolidation - the financial statements of the investor and investee are combined as if they are a single company.
Reporting Categories for Investments
* If the investor elects the fair value option, this type of investment also can be accounted for using the same approach that's used for trading securities, with the investment reported at fair value and unrealized holding gains and losses included in earnings.
Slide 4
12-4
Securities to Be Held to MaturitySecurities to Be Held to MaturityOn January 1, 2009, 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%. Let’s look at calculation of the present value of the
bond issue.
Present Amount PV Factor Value Interest $ 50,000 × 11.46992 = $573,496 Principal 1,000,000 × 0.31180 = 311,805
Present value of bonds $885,301
PV of ordinary annuity of $1, n = 20, i = 6%
PV of $1, n = 20, i = 6%
Slide 5
12-5
Securities to Be Held to MaturitySecurities to Be Held to Maturity
PeriodInterest Payment
Interest Revenue
Discount Amortization
Unamortized Discount
Carrying Value
114,699 885,301
1 50,000 53,118 (3,118)
111,581
888,419
2
50,000
53,305 (3,305)
108,276
891,724
3
50,000
53,503 (3,503)
104,773
895,227
4
50,000
53,714 (3,714)
101,059
898,941
Partial Bond Amortization Table
Date Description Debit Credit1/1/09 Investment in bonds 1,000,000
Discount on bond investment 114,699 Cash 885,301
6/30/09 Cash 50,000 Discount on bond investment 3,118 Investment revenue 53,118
Slide 6
12-6
Securities to Be Held to MaturitySecurities to Be Held to Maturity
Investment in bonds 1,000,000$ Less: Discount on bond investment 111,581 Book value (amortized cost) 888,419$
$114,699 - $3,118 = $111,581 unamortized discount$114,699 - $3,118 = $111,581 unamortized discount
How would this investment appear on the balance sheet after one period of
discount amortization?
Slide 7
12-7
Securities to Be Held to MaturitySecurities to Be Held to MaturityOn December 31, 2009 after interest is received by
Matrix, all the bonds are sold for $900,000 cash.
Date Description Debit Credit12/31/09 Cash 50,000
Discount on bond invetment 3,305 Investment revenue 53,305
12/31/09 Cash 900,000 Discount on bonds investment 108,276 Investment in bonds 1,000,000 Gain on sale of investment 8,276
PeriodInterest Payment
Interest Revenue
Discount Amortization
Unamortized Discount
Carrying Value
114,699 885,301
1 50,000 53,118 (3,118)
111,581
888,419
2
50,000
53,305 (3,305)
108,276
891,724
3
50,000
53,503 (3,503)
104,773
895,227
4
50,000
53,714 (3,714)
101,059
898,941
Slide 8
12-8
Trading SecuritiesTrading Securities
Adjustments to fair value are recorded:Adjustments to fair value are recorded:
1.1. in a valuation account called in a valuation account called Fair Value Fair Value AdjustmentAdjustment, or as a direct adjustment to the , or as a direct adjustment to the investment account.investment account.
2.2. as a net unrealized holding gain/loss on the as a net unrealized holding gain/loss on the Income StatementIncome Statement..
Unrealized Gain Unrealized Gain
Unrealized Loss Unrealized Loss
Income Statement
Income Statement
Slide 9
12-9
Trading Securities Trading Securities
Matrix, Inc. purchased additional securities classified as Matrix, Inc. purchased additional securities classified as Trading Securities (TS) at the end of 2009. The fair value Trading Securities (TS) at the end of 2009. The fair value amounts for these securities on December 31, 2009, are amounts for these securities on December 31, 2009, are
shown below. Prepare the journal entries for Matrix, Inc. to shown below. Prepare the journal entries for Matrix, Inc. to adjust the securities to fair value at 12/31/09.adjust the securities to fair value at 12/31/09.
No. of Unit Total Fair Gain orType Name Shares Cost Cost Value (Loss)TS Mining, Inc 1,000 42.00$ 42,000$ 41,000$ (1,000)$ TS Ford Motor 1,500 15.00 22,500 20,000 (2,500)
Net Unrealized Holding Loss for TS (3,500)$
Slide 10
12-10
Trading SecuritiesTrading Securities
The Net Unrealized Holding Loss is reported on the Income Statement.
The Net Unrealized Holding Loss is reported on the Income Statement.
Date Description Debit Credit12/31 Net unrealized holding gains and losses-IS 3,500
Fair value adjustment 3,500
Slide 11
12-11
Trading SecuritiesTrading Securities
Unrealized holding gains and losses from trading securities are reported on the income statement.
Slide 12
12-12
Trading SecuritiesTrading SecuritiesOn January 3, 2010, Matrix sold all trading
securities for $65,000 cash.
Date Description Debit Credit1/3/10 Cash 65,000
Investment in Ford Motor – TS 22,500 Investment in Mining, Inc. – TS 42,000 Gain on sale of investment 500
12/31/10 Fair value adjustment 3,500 Net unrealized holding gain or loss – I/S 3,500
Slide 13
12-13
Securities Available-for-SaleSecurities Available-for-Sale
Adjustments to fair value are recorded:Adjustments to fair value are recorded:
1.1. in a valuation account called in a valuation account called Fair Value AdjustmentFair Value Adjustment, , or as a direct adjustment to the investment account.or as a direct adjustment to the investment account.
2.2. as a net unrealized holding gain/loss in Other as a net unrealized holding gain/loss in Other Comprehensive Income (OCI), which accumulates in Comprehensive Income (OCI), which accumulates in Accumulated Other Comprehensive Income (ACOI).Accumulated Other Comprehensive Income (ACOI).
Unrealized Gain Unrealized Gain
Unrealized Loss Unrealized Loss
Other Comprehensive
Income
Other Comprehensive
Income
Slide 14
12-14
Other Comprehensive Income (OCI)Other Comprehensive Income (OCI)
Other comprehensive income:Foreign currency translation gains (losses) $ XX,XXXNet unrealized holding gains (losses) on investments -3,500Minimum pension liability adjustment XXXDeferred gains (losses) from derivatives XXX $ XX,XXXLess: aggregate income tax expense (benefit) X,XXX
Other comprehensive income $XX,XXX
When we add When we add other comprehensive incomeother comprehensive income to to net incomenet income we refer to the result as “comprehensive income.”we refer to the result as “comprehensive income.”
When we add When we add other comprehensive incomeother comprehensive income to to net incomenet income we refer to the result as “comprehensive income.”we refer to the result as “comprehensive income.”
Slide 15
12-15
Accumulated Other Comprehensive IncomeAccumulated Other Comprehensive Income
Unrealized holding gains and losses on Unrealized holding gains and losses on available-for-sale securities are accumulated in available-for-sale securities are accumulated in the shareholders’ equity section of the balance the shareholders’ equity section of the balance sheet. Specifically, the account is included in sheet. Specifically, the account is included in Accumulated Other Comprehensive IncomeAccumulated Other Comprehensive Income..
Unrealized holding gains and losses on Unrealized holding gains and losses on available-for-sale securities are accumulated in available-for-sale securities are accumulated in the shareholders’ equity section of the balance the shareholders’ equity section of the balance sheet. Specifically, the account is included in sheet. Specifically, the account is included in Accumulated Other Comprehensive IncomeAccumulated Other Comprehensive Income..
Shareholders’ EquityCommon StockPaid-in Capital in Excess of parAccumulated other comprehensive incomeRetained earningsTotal Shareholders’ Equity
Net unrealizedholding gains and losses.
Slide 16
12-16
Securities Available for Sale ExampleSecurities Available for Sale Example
Now assume the same facts for our Matrix, Inc. example, except that the investment is for
available-for-sale securities rather than trading securities.
Now assume the same facts for our Matrix, Inc. example, except that the investment is for
available-for-sale securities rather than trading securities.
No. of Unit Total Fair Gain orType Name Shares Cost Cost Value (Loss)AFS Mining, Inc 1,000 42.00$ 42,000$ 41,000$ (1,000)$ AFS Ford Motor 1,500 15.00 22,500 20,000 (2,500)
Net Unrealized Holding Loss for AFS (3,500)$
Slide 17
12-17
Securities Available for Sale ExampleSecurities Available for Sale Example
This net unrealized holding gain is reported in
other comprehensive income.
This net unrealized holding gain is reported in
other comprehensive income.
Date Description Debit Credit12/31 Net unrealized holding gains and losses-OCI 3,500
Fair value adjustment 3,500
Slide 18
12-18
Reclassification Adjustment When AFS Reclassification Adjustment When AFS Investments are SoldInvestments are Sold
EventEffect on Comprehensive
IncomeEffect on Shareholders'
Equity Period 1: hold AFS investment and
experience net unrealized loss.OCI for unrealized holding
loss. AOCI
Period 2: sell AFS investment and realize loss on sale
OCI to back out previously recognized unrealized
AOCI (so net effect on AOCI over time is zero)
holding loss (so effect on OCI over time is zero)
Net income for realized loss Retained earnings
Slide 19
12-19
On January 3, 2010, Matrix sold all available-for-sale for $65,000 cash.
Date Description Debit Credit1/3/10 Cash 65,000
Investment in Ford Motor – TS 22,500 Investment in Mining, Inc. TS 42,000 Gain on sale of investment 500
12/31/10 Fair value adjustment 3,500 Net unrealized holding gain or loss – OCI 3,500
Securities Available for Sale ExampleSecurities Available for Sale Example
Slide 20
12-20
Other Than Temporary ImpairmentsOther Than Temporary Impairments
This is called an. . .Occasionally, an Occasionally, an
investment’s value will investment’s value will decline for reasons decline for reasons that are “other than that are “other than
temporary.”temporary.”
Impairment in Value
Slide 21
12-21
Transfers Between Reporting CategoriesTransfers Between Reporting Categories
Unrealized holding gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.
Unrealized holding gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.
Transfers are accounted for at fair valuefair value on the transfer date.
Slide 22
12-22
Transfers Between Reporting CategoriesTransfers Between Reporting Categories
Transfer from: To: Unrealized Gain or Loss from Transfer at FMVEither of the other Trading Include in current net income
Trading Either of the other There is none (already recognized in net income)Held-to-maturity Available-for-sale
Report as a separate component of shareholders' in OCI.Available-for-sale Held-to-maturity Don't write-off existing unrealized holding gain or loss.
Amortize it to net income over the remaining life of
the security.
Slide 23
12-23
DisclosuresDisclosures
Aggregate Fair ValueAggregate Fair Value
Maturities of debt securitiesMaturities of
debt securities
Change in net unrealized holding gains and losses
Change in net unrealized holding gains and losses
Gross realized & unrealized holding
gains & losses
Gross realized & unrealized holding
gains & losses
Amortized cost basis by major security type
Amortized cost basis by major security type
Inputs to fair value estimates
Inputs to fair value estimates
Slide 24
12-24
Investor Has Significant InfluenceInvestor Has Significant Influence
Control Characteristics of the Investment Reporting Method Used by the InvestorThe investor lacks significant influence over the operating and financial policies of the investee:
Investment in debt securities for which the investor has the "positive intent and ability" to hold to maturity.
Held-to-maturity (HTM) - investment reported at amortized cost.*
Investment held in an active trading account. Trading securities (TS) - investment reported at fair value with unrealized holding gains and losses included in net income.
Other. Securities available-for-sale (AFS) - investment reported at fair value with unrealized holding gains and losses excluded from net income and reported in Other Comprehensive income.*
The investor has significant influence over the operating and financial policies of the investee:
Typically the investor owns between 20% and 50% of the voting stock of the investee.
Equity method - investment cost adjusted for subsequent earnings and dividends of the investee.*
The investor controls the investee:The investor owns more than 50% of the voting stock of the investee.
Consolidation - the financial statements of the investor and investee are combined as if they are a single company.
Reporting Categories for Investments
* If the investor elects the fair value option, this type of investment also can be accounted for using the same approach that's used for trading securities, with the investment reported at fair value and unrealized holding gains and losses included in earnings.
Slide 25
12-25
Investor Has Significant InfluenceInvestor Has Significant Influence
Extent of Investor Influence Reporting MethodLack of significant influence
(usually < 20% equity ownership) Varies depending on classification
previously discussedSignificant influence
(usually 20% - 50% equity ownership) Equity method
Has control(usually > 50% equity ownership) Consolidation
Slide 26
12-26
What Is Significant Influence?What Is Significant Influence?If an investor owns 20% of the voting stock of an investee, If an investor owns 20% of the voting stock of an investee, it is presumed that the investor has significant influence it is presumed that the investor has significant influence over the financial and operating policies of the investee. over the financial and operating policies of the investee. The presumption can be overcome if :The presumption can be overcome if :1.1. the investee challenges the investor’s ability tothe investee challenges the investor’s ability to exercise significant influence through litigation or exercise significant influence through litigation or other methods. other methods.
2.2. the investor surrenders significant shareholder rights the investor surrenders significant shareholder rights in a signed agreement. in a signed agreement.
3.3. the investor is unable to acquire sufficient information the investor is unable to acquire sufficient information about the investee to apply the equity method. about the investee to apply the equity method.
4.4. the investor tries and fails to obtain representation on the investor tries and fails to obtain representation on the board of directors of the investee. the board of directors of the investee.
If an investor owns 20% of the voting stock of an investee, If an investor owns 20% of the voting stock of an investee, it is presumed that the investor has significant influence it is presumed that the investor has significant influence over the financial and operating policies of the investee. over the financial and operating policies of the investee. The presumption can be overcome if :The presumption can be overcome if :1.1. the investee challenges the investor’s ability tothe investee challenges the investor’s ability to exercise significant influence through litigation or exercise significant influence through litigation or other methods. other methods.
2.2. the investor surrenders significant shareholder rights the investor surrenders significant shareholder rights in a signed agreement. in a signed agreement.
3.3. the investor is unable to acquire sufficient information the investor is unable to acquire sufficient information about the investee to apply the equity method. about the investee to apply the equity method.
4.4. the investor tries and fails to obtain representation on the investor tries and fails to obtain representation on the board of directors of the investee. the board of directors of the investee.
Slide 27
12-27
Equity Method and ConsolidationEquity Method and ConsolidationIf a company acquires more than 50% of the voting stock If a company acquires more than 50% of the voting stock of another company:of another company:1.1. it controls the company acquired (cannot beit controls the company acquired (cannot be outvoted). The “parent” controls the “subsidiary.” outvoted). The “parent” controls the “subsidiary.”
2.2. for accounting purposes, the parent and subsidiary for accounting purposes, the parent and subsidiary are considered a single reporting entity. are considered a single reporting entity. Consolidated financial statements combine the Consolidated financial statements combine the separate financial statements of the parent and separate financial statements of the parent and subsidiary each period into a single aggregate set subsidiary each period into a single aggregate set of financial statements. of financial statements.
3.3. the equity method is sometimes referred to as a the equity method is sometimes referred to as a “one line consolidation,” because it shows the “one line consolidation,” because it shows the investor’s income and investment as increasing by investor’s income and investment as increasing by their portion of the investee’s income. their portion of the investee’s income.
If a company acquires more than 50% of the voting stock If a company acquires more than 50% of the voting stock of another company:of another company:1.1. it controls the company acquired (cannot beit controls the company acquired (cannot be outvoted). The “parent” controls the “subsidiary.” outvoted). The “parent” controls the “subsidiary.”
2.2. for accounting purposes, the parent and subsidiary for accounting purposes, the parent and subsidiary are considered a single reporting entity. are considered a single reporting entity. Consolidated financial statements combine the Consolidated financial statements combine the separate financial statements of the parent and separate financial statements of the parent and subsidiary each period into a single aggregate set subsidiary each period into a single aggregate set of financial statements. of financial statements.
3.3. the equity method is sometimes referred to as a the equity method is sometimes referred to as a “one line consolidation,” because it shows the “one line consolidation,” because it shows the investor’s income and investment as increasing by investor’s income and investment as increasing by their portion of the investee’s income. their portion of the investee’s income.
Slide 28
12-28
Equity MethodEquity Method
1. The investment account is increased increased by: Original investment cost. Proportionate share of investee's
earnings.
2. The investment account is decreaseddecreased by: Dividends received.
Slide 29
12-29
Equity Method Equity Method
On January 1, 2009, Matrix, Inc. acquired 45% of On January 1, 2009, Matrix, 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, Apex’s net assets had a On the acquisition date, Apex’s net assets had a fair value of $3,000,000. During 2009, Apex paid fair value of $3,000,000. During 2009, 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 $1,750,000.
What amount will Matrix, Inc. report on the balance sheet as Investment in Apex, Inc.?
Slide 30
12-30
Equity MethodEquity Method
Date Description Debit Credit1/1/09 Investment in Apex, Inc. 1,350,000
Cash 1,350,000
3,000,000$ Fair value of assets× 45% Percentage ownership
1,350,000$ Fair value of assets purchased
Slide 31
12-31
Equity MethodEquity Method
Date Description Debit Credit1/1/09 Investment in Apex, Inc. 1,350,000
Cash 1,350,000
12/31/09 Cash 67,500 Investment in Apex, Inc. 67,500
Investment in Apex, Inc. 787,500 Investment revenue 787,500
150,000$ Dividends paid× 45% Percentage ownership
67,500$ Share of dividends
1,750,000$ Reported earnings× 45% Percentage ownership
787,500$ Share of earnings
Slide 32
12-32
Equity MethodEquity Method
Investment in Apex, Inc.
Investment 1,350,000 67,500 45% Dividends
45% Earnings 787,500
Reported amount 2,070,000
If the investee had a loss, the investment account
would have been reduced.
Slide 33
12-33
Equity MethodEquity MethodOn January 1, 2009, Matrix, Inc. purchase 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 net fair value of these assets is $600,000. During 2009, Apex paid cash dividends of $40,000, and
reported earnings of $100,000.
Fair value of assets 600,000$ Percentage ownership 25%Share of fair value of assets 150,000 Cost of investment in Apex 180,000 Excess of cost over fair value 30,000$
Slide 34
12-34
Equity MethodEquity MethodAssume that of the $50,000 excess of the fair value of net
assets acquired ($600,000 × 25% = $150,000) over the book value of those net assets on Apex’s balance sheet ($400,000 × 25% = $100,000), 75% is attributable to depreciable assets
with a remaining life of 20 years and the remainder is attributable to land. Matrix uses the straight-line method of
depreciation on similar owned assets.
Excess of cost over fair value 50,000$ Amount applicable to depreciable assets 75%Share subject to excess depreciation 37,500 Remaining useful life of assets in years 20 Additional depreciation expense 1,875$
Slide 35
12-35
Equity MethodEquity MethodDate Description Debit Credit1/1/09 Investment in Apex, Inc. 200,000
Cash 200,000
12/31/09 Cash 10,000 Investment in Apex, Inc. 10,000
Investment in Apex, Inc. 25,000 Investment revenue 25,000
Investment revenue 1,875 Investment in Apex, Inc. 1,875
40,000$ Dividends paid× 25% Percentage ownership
10,000$ Share of dividends
100,000$ Reported earnings× 25% Percentage ownership
25,000$ Share of earnings
Remember, goodwill is not amortized.
Slide 36
12-36
Changing From the Equity Method to Changing From the Equity Method to Another MethodAnother Method
At the transfer date, the carrying value of the investment under the equity
method is regarded as cost.
At the transfer date, the carrying value of the investment under the equity
method is regarded as cost.
When the investor’s level of influence changes, it may be necessary to change from the equity
method to another method.
Slide 37
12-37
Changing From the Equity Method to Changing From the Equity Method to Another MethodAnother Method
Any difference between carrying value and fair value is recorded in a valuation account and is
recognized as an unrealized holding gain or loss.
After the transfer, the investment is treated as a trading security or a security available for sale,
depending on management’s intent.
Slide 38
12-38
Changing From Another Method to the Changing From Another Method to the Equity MethodEquity Method
When the investor’s 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 investor’s
equity in the undistributed earnings of the investee since the original investment.
Reported earnings– Dividends paid= Undistributed Earnings
Slide 39
12-39
Changing From Another Method to the Changing From Another Method to the Equity MethodEquity Method
The original cost, the unrealized holding The original cost, the unrealized holding gain or loss, and the valuation account gain or loss, and the valuation account
are closed.are closed.
A A retroactiveretroactive change is recorded to change is recorded to recognize the investor’s share of the recognize the investor’s share of the investee’s earnings since the original investee’s earnings since the original
investment.investment.
The original cost, the unrealized holding The original cost, the unrealized holding gain or loss, and the valuation account gain or loss, and the valuation account
are closed.are closed.
A A retroactiveretroactive change is recorded to change is recorded to recognize the investor’s share of the recognize the investor’s share of the investee’s earnings since the original investee’s earnings since the original
investment.investment.
Slide 40
12-40
Fair Value OptionFair Value OptionSFAS No. 159 allows companies to use a “fair value option” SFAS No. 159 allows companies to use a “fair value option” for HTM, AFS and equity method investments.for HTM, AFS 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 just amounts to For HTM and AFS investments, this just amounts to classifying the investments as trading.classifying the investments as trading.
For equity-method investments, the investment is still For equity-method investments, the investment is still classified on the balance sheet with equity method classified on the balance sheet with equity method investments, but the portion at fair value must be clearly investments, but the portion at fair value must be clearly indicated.indicated.
The fair value option is determined for each individual The fair value option is determined for each individual investment, and is irrevocable.investment, and is irrevocable.
SFAS No. 159 allows companies to use a “fair value option” SFAS No. 159 allows companies to use a “fair value option” for HTM, AFS and equity method investments.for HTM, AFS 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 just amounts to For HTM and AFS investments, this just amounts to classifying the investments as trading.classifying the investments as trading.
For equity-method investments, the investment is still For equity-method investments, the investment is still classified on the balance sheet with equity method classified on the balance sheet with equity method investments, but the portion at fair value must be clearly investments, but the portion at fair value must be clearly indicated.indicated.
The fair value option is determined for each individual The fair value option is determined for each individual investment, and is irrevocable.investment, and is irrevocable.
Slide 41
12-41
Financial Instruments & DerivativesFinancial Instruments & Derivatives
Financial Instruments:
1.1. Cash.Cash.
2.2. Evidence of an Evidence of an ownership interestownership interest in an entity.in an entity.
3.3. Contracts meeting Contracts meeting certain conditions.certain conditions.
Financial Instruments:
1.1. Cash.Cash.
2.2. Evidence of an Evidence of an ownership interestownership interest in an entity.in an entity.
3.3. Contracts meeting Contracts meeting certain conditions.certain conditions.
Derivatives:Derivatives:1.1. Value is derived from Value is derived from
other securities.other securities.
2.2. Derivatives are often Derivatives are often used to “hedge” used to “hedge” (offset) risks created (offset) risks created by other investments by other investments or transactionsor transactions
Derivatives:Derivatives:1.1. Value is derived from Value is derived from
other securities.other securities.
2.2. Derivatives are often Derivatives are often used to “hedge” used to “hedge” (offset) risks created (offset) risks created by other investments by other investments or transactionsor transactions
Slide 42
12-42
Other Investments – Appendix AOther Investments – Appendix A
It is often convenient for companies to set aside money to be used for specific purposes. In the short-term, funds may be set aside for
1. Petty cash funds.
2. Payroll accounts.
In the long-run, funds are often set aside to:
1. Pay long-term debt when it comes due.
2. Acquire treasury stock.
Special purpose funds set aside for the long-term are classified as investments.
Slide 43
12-43
Appendix 12A – Other InvestmentsAppendix 12A – Other InvestmentsIt is a common practice for companies to purchase
life insurance policies on key officers. The company pays the premium and is the beneficiary
of the policy. If the officer dies, the company receives the proceeds from the policy. Some types of policies build a portion of each premium as cash surrender value. The cash surrender value of such
a policy is classified as an investment on the balance sheet of the company.
Slide 44
12-44
Appendix 12B – Impairment of a Receivable Due Appendix 12B – Impairment of a Receivable Due to a Troubled Debt Restructuringto a Troubled Debt Restructuring
When the original terms of a debt agreement are changed as a result of financial difficulties
experienced by the debtor, the new arrangement is referred to as a troubled debt restructuringtroubled debt restructuring.
Sometimes a troubled debt is settled in full when the debtor transfers assets or equities to the creditor. The creditor usually recognizes a loss on the settlement.
Such a settlement is not considered unusual or infrequent and is not an extraordinary item.