Income Taxes CPA FAR

Trading Security

• Fair value through P&L (income statement)

• bought and held to sell in the near term for profit

• interest on income statement

• cash flow from selling

  • investing if non-current

  • operating if current

Available-for-sale

• fair value through OCI (directly to stockholder’s equity)

• includes all securities that don’t meet classifications for trading or held-to-maturity

• buying or selling afs securities is investing cash flow (only if non-current asset)

• realized loss recognized on income statement

• interest recognized in income statement

Held to maturity

• amortized cost (discount or premium amortized over time)

• to use this classification company must have intent and ability to hold to maturity (don’t need to sell it to pay expenses in a pinch)

• recorded as current or non-current asset based on maturity date

• buying/selling is investing cash flow

• interest recognized on income statement

own <20% of stock of another company

no significant influence, treated as trading security, fair value through P&L

own 20-50% of another company’s stock

significant influence (equity method)

own >50% of another company’s stock

ownership, consolidation and equity accounting

Fair value option

• can choose to use it with eligible financial instruments on specified election dates

• unrealized gains and losses reported in earnings

• irrevocable once elected

• applied to individual financial instruments

• Eligible financial instruments (assets and liabilities)

  • can elect this for available-for-sale

  • can elect for significant influence equity investment

  • for liabilities (not derivatives) accounted for with FV, change in instrument-specific credit risk is recognized in OCI

    • derivatives recognize these changes in NI (NI→RE→Equity)

    • once liability is derecognized, any accumulated gains or losses in OCI are reclassified to earnings

Classified as Debt Securities

• Includes corporate bonds, redeemable preferred stock, gov. securities, convertible debt…

• NOT included: options, futures, forward contracts, lease contracts, accounts and notes receivable

Realized Gains and Losses

• always recognized in NI

• occur when

  • debt security is sold

  • available-for-sale security is impaired

Reclassification

only allowed if it makes presentation of FS more fair