In this video, I cover CPA exam simulation. CPA exam simulation is a form of questions on the CPA exam. Passing the CPA exam simulation is critical to pass the CPA exam.
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Investments in Financial Assets
An investment in financial assets is typically categorized as having ownership of less than 20% in the target firm. Such a position would be considered a "passive" investment because, in most cases, an investor would not have significant influence or control over the target firm.
At acquisition, the invested assets are recorded on the investing firm's balance sheet at fair value. As time elapses and the fair value of the assets change, the accounting treatment will depend upon the classification of the assets, described as either held-to-maturity, held-for-trading, or available-for-sale.
Held-To-Maturity
Held-to-maturity refers to debt securities intended to be held till maturity. Long-term securities will be reported at amortized cost on the balance sheet, with interest income being reported on the target firm's income statement.
Held-For-Trading
Held-for-trading refers to equity and debt securities held with the intent to be sold for a profit within a short time-horizon, typically three months. They are reported on the balance sheet at fair value, with any fair value changes (realized and unrealized) being reported on the income statement, along with any interest or dividend income.
Available-For-Sale
Available-for-sale securities are similar to held-for-trading securities; however, only realized changes in fair value are reported on the income statement (along with dividend and interest income), with all unrealized changes being reported as a component of shareholders' equity on the balance sheet.
The choice of classification is an important factor when analyzing financial asset investments. A firm that classifies securities as held-for-trading would report higher earnings if the fair value of the investment rises than if it had classified the investment as held-for-sale since unrealized fair value changes in held-for-trading securities are reported on the firm's income statement, while a similar change in held-for-sale securities would be reported in shareholders' equity. Additionally, U.S. GAAP does not allow firms to reclassify investments that have been originally classified as held-for-trading or designated as fair value investments. So, the accounting choices made by investing companies when making investments in financial assets can have a major effect on its financial statements.
5 сен 2024
