Financial Instruments Scenario Classification of investment Balance Sheet Presentation Initial measurement Subsequent
Question:
Financial Instruments
Scenario | Classification of investment | Balance Sheet Presentation | Initial measurement | Subsequent Measurement |
An entity acquires debt securities that it will hold until maturity to collect cash flows in the form of principal and interest. However, the entity will sell the securities if the credit risk becomes high to minimize losses or when a worst-case scenario occurs. | ||||
An entity holds financial assets (debt securities) to meet its everyday liquidity needs and to settle maturing liabilities. The entity actively manages its liquidity and, therefore, actively manages the return on the portfolio. Accordingly, the entity holds financial assets to collect cash flows and sell financial assets to reinvest in higher- yielding financial assets. Also, the entity frequently buys and sells financial assets to better match the duration of its liabilities. | ||||
An entity holds financial assets to sell them to realize fair value gains. |
Required: Determine the (a) classification, (b) presentation, (c) initial measurement, and (d) subsequent measurement in each independent scenario above. Choose only one (1) from the terms provided below for each requirement.
Classification of investment |
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Balance sheet presentation |
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Initial measurement |
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Subsequent measurement |
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Fair Value Measurement
Scenario | Likely Hierarchy Level |
Quoted shares in a company traded on a major stock exchange. | |
Unquoted shares in an unquoted private company, for which valuation uses earnings multiple from similar listed competitors along with various unobservable inputs. | |
Bonds traded on the market with quoted prices but infrequent recent transactions, where the last transaction was two (2) weeks before reporting date. Valuation uses quoted price adjusted for observable market trends in the past two (2) weeks. |
Required: Determine the hierarchy level (Level 1, Level 2, or Level 3) in each independent scenario.
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella