Question

8) What type of investments can be classified as “Hold to Maturity” and how are they reported/valued on the balance sheet.

9) What type of investments can be classified as “Trading” or “Available for Sale”? How are they reported/valued on the balance sheet?

10) How/where are unrealized gains/losses reported for a) Trading securities, b)Available for sale securities?

11) How/where are realized gains/losses reported for a) Trading securities, b)Available for sale securities?

12) Explain the difference between Level 1, Level 2 and Level 3 fair value measurements.

Answer 1

8)type of investments can be classified as “Hold to Maturity" and how are they reported in balance sheet:

The most common form of held-to-maturity investments are bonds. Since stocks, or shares in a company, do not have a maturity date, they do not qualify as held-to-maturity securities. ... Held-to-maturity securities are only reported as current assets if they have a maturity date of one year or less.

The biggest difference between held to maturity securities and the other security types mentioned above is in their accounting treatment. As opposed to being recorded and updated on the company’s balance sheet according to the security’s fair market value, held to maturity securities are recorded at their original purchase cost. It means that from one accounting period to another, the value of the securities on the company’s balance sheet will remain constant.

Any gains or losses resulting from changes in interest rates (for bonds and other debt instruments) will be recorded when the securities reach maturity.

9) Type of investments can be classified as “Trading” or “Available for Sale”? How are they reported/valued on the balance sheet

Available-for-sale is an accounting term used to describe and classify financial assets. It is a debt or equity security not classified as a held-for-trading or held-to-maturity security — the two other kinds of financial assets. AFS securities are nonstrategic and can usually have a ready market price available.

Available for Sale Financial Assets are reported on the balance sheet at fair value. However, any unrealized gain and losses arising out in such securities are not recognized in the Income Statement but are reported in other comprehensive income as a part of shareholders' equity.

10) How/where are unrealized gains/losses reported for :

a) Trading securities

Securities held as ‘trading securities’ are reported at fair value in the financial statements. Unrealized gains or unrealized losses are recognized on the Profit and Loss statement and impact the net income of the Company, although these securities have not been sold to realize the profits. The gains increase the net income and thus the increase in earnings per share and retained earnings. There is no impact of such gains on the cash flow statement.

b)Available for sale securities

Available for sale securities are also reported at fair value. However, accounting for such securities differ from ‘trading securities’. Due to fair value treatment for “available for sale” securities, Unrealized gains or unrealized losses are included in the balance sheet on the asset side, however, such gains do not impact the net income of the Company. The Unrealized gains on such securities are not recognized in net income till they are sold and profit is realized. The Unrealized gains are reported under shareholders equity as “accumulated other comprehensive income” on the balance sheet. The cash flow statement is also not affected by such securities.

11) The question is same as 10th question.

12)Difference between Level 1, Level 2 and Level 3 fair value measurements:

Level 1 – observable, quoted prices for identical assets or liabilities in active markets.

Level 2 – quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices e.g. interest rates and yield curves

Level 3 inputs – unobservable inputs for the asset or liability. These should be based on the best information available. The company should utilise all reasonably available information, but need not incur excessive cost or effort to do so. However, it should not ignore information that can be obtained without undue cost and effort. As such, the reporting entity’s own data should be adjusted if information is reasonably available without undue cost and effort.