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Financial Assets (Investments) To Secure operating or financing…
Financial Assets
(Investments)
To Secure
operating
or
financing
arrangements
Debt Investment
Held-for-collection
(HFC)
NCA
Historical cost valuation:
Amortized Cost
Initial record at
Present Value
and No Fair Value
Fair Value Option:
Instrument-by- instrument
basis
Options only available at the time a company first purchase
Must report Fair Value
until losing of ownership
Report Unrealized Gain or Loss in
P/L as part of the net income
Dr. Debt Investments
(XXX Bonds)
Cr. Unrealize Holding Gain or Loss -
Income
Held-for-collection
and selling
(HFCS) NCA
Historical cost valuation:
Amortized Cost
BUT
Report
Fair Value
at reporting date
Recognized in
OCI
Record fair value gain or loss:
Single Security vs
Portfolio Approach
DR. Unrealized Holding Gain or Loss -
Equity
CR. Fair Value Adjustments
Sale of HFCS
:
Amortized
Debt Investments
Remove from the portfolio (Debt Investments) Account
Realized gain or loss on
"Other Income and Expenses"
The
Fair Value Effect should be ignored
because we will adjust the fair value account at the year end.
Trading CA
Fair Value
- Recognized in
Net Income P/L
Record fair value gain or loss
DR. Unrealized Holding Gain or Loss -
Income
CR. Fair Value Adjustments
Equity Investment
Cost Includes:
Purchase Price
Broker Commissions
as expenses
The Levels of Influence determines the accounting treatment
Little or None
(0% - 20%)
Fair Value
Method
Record Dividends declared as
dividend income
Record Gain and Losses from sale
Non-Trading Option (NCA)
Recognize UHG/L in
OCI
Use
Investment-by-Investment
basis -
Account like: Equity Investments (XXX Company)
Sale of Equity Investments
- for
TRADING ONLY
Don't need to update
fair value
Recognize Gain/Loss on sale of Investments in P/L
The
Fair Value Effects will be reflected
in fair value adjustment account at year end (Portfolio Approach)
Trading (CA)
Recognize UHG/L in
Net Income
Use
Portfolio Approach
- Fair Value Adjustment Account
Dr. Unrealized Holding Gain or Loss -
Income
Cr.
Fair Value Adjustment
Significant
(20% - 50%)
Equity
Method
Record the investment at
cost
Subsequently adjust the amount according to the
propotion
of changes in
investee's net assets (Net Profit/Loss and Dividends)
Should discontinue when the losses exceed the carrying amount
No Dividend Revenue
Investment Loss
and
Investment Gain
accounts
DR. Cash
CR.
Equity Investment
(Dividends Paid)
DR.
Investment Loss
CR. Equity Investment
(Net Loss in investee account)
Control
(50% - 100%)
Consolidation
Parent
and
subsidiary
relationship
Prepare
consolidated financial statements
Investment is reported in
parent's books
as
long term investment
Impairment of Value
If the fair value is below its carrying value
Investment Measured at Amortized Cost
Impairment Loss
Dr. Loss on Impairment
Cr.
Allowance for Impaired Debt Investments
(Contra Assets)
Recovery of Impairment Loss
Dr.
Allowance for Impaired Debt Investments
Cr. Recovery of Impairment Loss.
Reversal
shall not
result in carrying amount
exceeds
the amortized cost
Investment Measured at Fair Value (OCI)
Different Impairment Model
Divided to:
Market Interest rate
(affect whole market)
Normal Fair value adjustment entry
Individual
Credit risk
Impairment entry
Sale of Debt Investment
(Fair Value after Impairments)
Dr.
Cash
Dr.
Allowance of Impaired Debt Investment
(DR or CR Gain /Loss on Sale of Debt Investment)
Cr.
Debt Investment (Initial Recognized Cost)
Dr.
Fair Value Adjustments
Cr.
Accumulated Comprehensive Income
Investment Measured at Fair Value (Net Income)
Record at
Debt
- lower-of-amortized-cost-or-fair value
Equity
- lower-of-cost-or-fair value