Free CPA Review: November 2016

SSK Advisory CPA Review in Audio FAR A10

This audio will introduce you to stock dividends and stock splits and stock rights.

Note that the stock dividends and stock splits are not recorded as income. Investor continues to own the same proportion of the stocks in the investee entity, as before. However, an investor is required to make a memo entry to record the additional stocks received as stock dividends or stock splits. The investor is also required to recompute the per share cost of the stock.

The investee company may issue the stock rights to satisfy the investor’s preemptive right to maintain an existing level of ownership in the investee. The investor may also receive stock rights to purchase additional stock in the investee company below the existing market price. Stock rights may be issued below the existing market price to encourage the exercise of the rights. Note that the stock rights are separable, this is, that they have their own market, and should be accounted for separately from the investment in common stock. The rights that represent the possible dilution of the investor ownership, should be recorded by allocating the cost of the stock between the market value of the rights, and the market value of the stock.

SSK Advisory CPA Review in Audio FAR A9

This audio will introduce you to accounting for investments using the fair value option.

An entity may elect to value its securities using the fair value option. Such election is made on instrument to instrument basis. It can be elected on the date an investment is first recognized, or when the securities no longer qualify for the equity method of accounting for investments. If the entity elects the fair value option for reporting available for sale securities or held to maturity securities, the securities will be revalued to the fair value, and any gains or losses are recorded in the earnings for the period. Also, if the entity elects the fair value option for reporting securities, that would otherwise be reported using the equity method, the securities shall be revalued, and any gains or losses shall be recorded in the earnings for the period. If fair value option is elected for instruments that would normally use the equity method, it must be applied to all interests in that entity. Note that the rules of cash flow continue to apply for determining the classification of a purchase or sale of security on the statement of cash flows. Also note that additional disclosures in the notes to financial statements are required if the fair value option is elected.

SSK Advisory CPA Review in Audio FAR A8

This audio will introduce you to accounting treatment when an investor changes to equity method of accounting, or, changes from the equity method of accounting to the cost adjusted for fair value method of accounting.

When an investor changes from the cost adjusted for fair value method of accounting to the equity method, the investment account must be adjusted retroactively, and prior years’ income statements and retained earning balances, must be retroactively restated. Note that an investor will change to the equity method of accounting only when an investor makes additional purchases of the stock, and is able to exercise significant influence, over the operating and financial decisions of the investee. ASC Topic 323 states that investments of more than 20% or more of the investee’s outstanding stock, carry a presumption that the investor has the ability to exercise significant influence. Hence in most cases, when an investment of less than 20% increases to more than 20%, the investor will retroactively change from the cost adjusted for fair value method to the equity method of accounting for investments.

Such retroactive change to the equity method, requires a prior period adjustment for the difference in the investment account and retained earnings account. Such difference, is between the amounts that were recognized in prior periods under the cost adjusted for fair value method, and the amounts that would have been recognized if the equity method had been used. In addition, any balance in the unrealized holding gains or loss accounts must be reversed.

When an investor is unable to influence the investee’s financial and operating policies, the investor will discontinue the used of equity method of accounting for investments. In such cases, when the investor discontinues the use of equity method of accounting for investments, retroactive restatement is not allowed. Thus, the earnings or losses which related to the shares retained by the investor that were previously recognized by the investor, continue to remain as a part of the carrying value of the investment. If dividends received by the investor in the subsequent period, exceed the investor’s share of the investee’s earnings for such period, the excess shall be accounted for as a return of capital. Such excess shall be recorded as a reduction in the investment’s carrying amount.

SSK Advisory CPA Review in Audio FAR A7

This audio will introduce you to cost adjusted for fair value method and equity method of accounting.

The cost adjusted for fair value method records the cost of investment in the investment account. Dividends distributed from income of the investee is recognized as income. Any dividends distributed by the investee exceeding the earnings are classified as the return of capital. They are treated as a reduction from the investment account. Under cost adjusted for fair value method, equity securities are adjusted for subsequent changes in the fair value. Unrealized holding gains and losses equals the current fair value, minus the previous period’s fair value on the books.

The equity method of accounting also records the cost of investment in the investment account. As changes occurs in the net assets of the investee, the investor, will recognize such changes, as a percentage of ownership of shares in the investment account. Differential, is the difference between the cost of the investment and the underlying book value of the net assets of the investee. If differential is related to the assets with finite useful lives, it will be amortized in the investment account. Note that the goodwill is not amortized. However, the goodwill is written down, if the investment is determined to be impaired in the equity method of accounting.

SSK Advisory CPA Review in Audio FAR A6

This audio will introduce you when investments are accounted using equity method and, when investments are accounted for cost adjusted for fair value method.

Ownership of more than 20% or more of the outstanding stock will result in an ability of an investor to exercise significant influence, over the operating and financial policies of the investee. If an investor is able to exercise significant influence over the operating and financial policies of the investee, equity method will be used to record such investments. If investor’s ability to exercise significant influence over the operating and financial policies of the investee is temporary, cost adjusted for fair value method will be used to record such investments. Cost adjusted for fair value method will also be used to account for investments in a company operating in a foreign company, which has severe restrictions on the operations, and on the transfer of monies outside the country. Also, cost adjusted for fair value method will be used to account for investments of more than 20%, that do not result in significant influence.

SSK Advisory CPA Review in Audio FAR A5

This audio will introduce you to accounting treatment, in case of impairment of held to maturity securities and available for sale securities. It also provides explanation on treatment of cash dividends, interest income, and stock dividends.

Held to maturity securities and available for sale securities may become impaired at some point of time. If decline in value is other than temporary, for held to maturity securities and available for sale securities, then such impaired security must be written down to fair value and, the realized loss is included in earnings. Any subsequent recovery is not recognized in earnings unless, such recovery is realized through sale of the security. Any other than temporary impairment cannot occur in the context of trading securities because, the holding gains and losses are recognized in current earnings without any limitation.

Cash dividends and interest income are included in current period’s income. Stock dividends are not reflected in income. Additional shares received from a stock dividend should be added to the original shares, and the per share value should be calculated upon the original share’s carrying value. At the end of the financial period, the carrying value of the stock is adjusted to the fair value, and any unrealized holding gains and losses is recorded.

For trading securities, realized and unrealized gains and losses are included in current period’s earnings. For available for sale securities and held to maturity securities, realized gains and losses are included in current period’s earnings. Unrealized gains and losses for such securities are reported in other comprehensive income.

Amortization of any unrealized holding gains and losses on securities transferred from available for sale securities to held to maturity securities, is included in income.

SSK Advisory CPA Review in Audio FAR A4

Amortization of any unrealized holding gains and losses on securities transferred from available for sale securities to held to maturity securities, is included in income.

SSK Advisory CPA Review in Audio FAR A3

This audio will introduce you to reclassifications of securities. It will also enable you to understand the adjustments with regards to unrealized gains and losses in case of reclassification of securities.

Reclassification of securities are accounted for at fair value taking into consideration any unrealized holding gains or losses. When a security is transferred from trading securities, recognized unrealized gains or losses as of that date should not be reversed. When a security is transferred into a trading securities, unrealized holding gains and losses are recognized immediately. Held to maturity securities when reclassified to available for sale securities, must be restated to fair value. Any unrealized gains or loss is reported as accumulated other comprehensive income, in the stockholders’ equity in the balance sheet. Available for sale securities when reclassified to held to maturity securities, unrealized gains and losses is also reported as accumulated other comprehensive income, in the stockholders’ equity in the balance sheet. However, such gains or losses is then amortized over the remaining life of the security as an adjustment to yield.

Thus, when held to maturity securities are reclassified as available for sale securities, unrealized gains or losses are reported as accumulated other comprehensive income. When held to maturity securities are reclassified as trading securities, unrealized gains and losses are recognized immediately. When available for sale securities are reclassified as held to maturity securities, unrealized gains and losses are reported as accumulated other comprehensive income and, such gains or loss is amortized over the useful life of security. When available for sale security is reclassified as trading security, unrealized gains and losses are recognized immediately. When trading securities are reclassified as held to maturity securities or available for sale securities, unrealized gains and losses previously recognized are not reversed.

SSK Advisory CPA Review in Audio FAR A2

This audio will introduce you to held to maturity securities, trading securities and available for sale securities. It will also enable you understand under which method are these securities accounted, how are these securities reported on the balance sheet, how are these securities classified in statement of cash flows. Also included is how are realized gains and losses, as well as unrealized gains and losses, reported on the income statement.

Investments, in which significant influence, over the operating or financial decisions of the investee, does not exist, are classified into held to maturity securities, trading securities, and available for sale securities.

Held to maturity securities includes, only the debt securities. They require, a positive intent and ability, to hold the securities to maturity. Held to maturity securities, are carried at amortized cost. Effective interest rate method, is used to account such securities. Thus, any unrealized holding gains and loss, are not reported. Note that the realized gains and losses, are included in earnings. Items included in earnings include, interest income, premium and, discount amortization. Held to maturity securities are classified on the balance sheet as, current or non-current, on individual basis. They are classified as investing activities, in the statement of cash flows. Premature sale of held to maturity securities may be considered as maturities if, any of the two conditions are met. The first condition, is that the sale, occurs so close to the maturity date, that the interest rate risk, is virtually eliminated. The second condition, is that the sale occurs after at least 85% of the principal, has been collected.

Trading securities include debt and equity securities, which are purchased and held principally for the purpose of generating gains, on current resale. Cost adjusted for fair value method, is used to account such securities. In cost adjusted for fair value method, carrying amount of securities is adjusted at financial statement dates, for subsequent changes in fair value. Thus, we can say that the trading securities are carried at fair value. Hence, both unrealized and realized gains and losses, are included in income. But note that the changes in current period, shall be reported as realized in the period of sale, only to the extent that such realized gains or losses, have been previously reported as unrealized. Dividends on equity securities held as trading securities, are recognized as income when dividends are declared. If dividends received, exceeds the cumulative earnings since acquisition, the excess dividend is accounted for as a liquidating dividend. Trading securities are reported on balance sheet as either current or non-current, as appropriate. On statement of cash flows trading securities can be classified as either under the operating activities or the investing activities, based on the nature and the purpose for which the securities are acquired. In case of debt securities classified as trading securities, which are reported at fair value, a special accounting treatment is required. The securities are carried at market value while the interest and amortization, are calculated using the effective interest method. Thus any unrealized gains or loss is actually, the difference between the fair value and amortized cost. Note that in such securities, both the interest revenue and the unrealized holding gains or losses, are included in current earnings.

Available for sale securities include debt and equity securities, which are not classified as either the trading securities or as held to maturity securities. These type of securities are not actively traded, nor are they necessarily held to maturity. All realized gains and losses which are previously recognized as unrealized holding gains and losses, are included in earnings. Also include in earnings is dividend and interest income. Cost adjusted for fair value method is used to account available for sale securities. Thus, carrying amount is adjusted at financial statement dates for subsequent changes in fair value. Unrealized gains and losses on available for sale securities, are calculated in the same manner as those on trading securities. However, such unrealized gains and losses are not recognized in income. Unrealized gains and losses on available for sale securities are reported as other comprehensive income. All the accumulated unrealized gains and losses on available for sale securities, are presented as accumulated other comprehensive income in stockholders’ equity. Available for sale securities are classified on balance sheet as current or non-current, on individual basis, based on management’s intent concerning the holding period. In statement of cash flow they are classified under investing activities.

Thus we can summarize that the trading securities and available for sale securities, are reported at fair value in the balance sheet and held to maturity securities are reported at amortized cost. Available for sale securities and held to maturity securities, may be classified as current or non-current on the balance sheet. Trading securities are grouped with current assets on the balance sheet. Unrealized gains and losses, are included in earnings in the period they occur in case of trading securities. They are excluded from earnings, in case of available for sale securities and held to maturity securities. In case of available for sale securities, unrealized gains and losses are included in other comprehensive income. Realized gains and losses are recognized as income in case of available for sale securities and held to maturity securities. Realized gains and losses which are not already recognized as unrealized, are recognized as income in case of held to maturity securities.

SSK Advisory CPA Review in Audio FAR A1

This audio will introduce you to debt securities, and equity securities.

Debt security is any security representing, a creditor relationship with an entity. Investments in debt securities, are classified into three categories, first, trading securities, second, available for sale securities, and third, held to maturity securities.

Debt securities includes corporate debt, convertible bonds, US Treasury securities, municipal securities, redeemable preferred stock and commercial paper. Debt security excludes, unsecured trade receivables, consumer loans and, note receivables, because, they are not normally traded on organized exchanges.

Equity securities, includes ownership interest, rights to acquire ownership interests, and rights to dispose ownership interests.

Ownership interests can be common, preferred, and other types of capital stock. Rights to acquire ownership interests, can be in form of rights, warrants and call options. Rights to dispose of ownership interests, can be in form of put options.

At 20% or more ownership, the investor is presumed, to be able to significantly influence the operating, or financial decisions of the investee. At more than 50% ownership, the investor has control, because of its majority in ownership of voting stock.

The equity method of accounting, is used for investments resulting in significant influence. When investor has control consolidated financial statements are prepared.

Securities are recorded at cost, including broker’s fees and taxes. This amount, is the best estimate of fair value, at acquisition. Cost equals, the cash paid in cash transactions. In non-cash transactions, cost equals the fair value of either security received, or, the fair value of resources sacrificed, whichever is more clearly determinable.

The fair value of debt security equals, the present value, of their future cash inflows. The present value is calculated, using the current market rate of interest for similar instruments with similar risks. Any accrued interest, is accounted for separately.

The fair value of equity security, must be readily determinable from quotes, obtainable from a securities exchange, or, from the over the counter market.

Investments which are considered to be non-tradeable, or, investments which do not have determinable fair values, should be carried at costs, and adjusted, only for permanent declines in value.