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CONSECUENCIAS DE LA EVALUACIÓN PROCEDIMIENTOS DE EVALUACIÓN Y RECUPERACIÓN
Bond Fair Value at 1/1/2013:
Interest [($150,000 x 6%) ÷ 2] x 14.21240 * = $ 63,956
Principal $150,000 x 0.50257 ** = 75,386
Present value of the receivable $139,342
* Present value of an ordinary annuity of $1: n = 20, i = 3.5% (= 7% ÷ 2) (from Table 4) ** Present value of $1: n = 20, i = 3.5% (= 7% ÷ 2) (from Table 2)
January 1, 2013
Investment in bonds (face amount) ... 150,000
Discount on bond investment (difference) ... 10,658 Cash (price of bonds) ... 139,342 Requirement 2
January 1, 2013
Investment in bonds (face amount) ... 150,000
Discount on bond investment (difference) ... 10,658 Cash (price of bonds) ... 139,342 June 30, 2013
Cash [(150,000 x 6%) ÷ 2] ... 4,500 Discount on bond investment (difference) ... 377
Interest revenue [($150,000 – 10,658) x 7%] ÷ 2 4,877 December 31, 2013
Cash (6% ÷ 2 x $150,000) ... 4,500 Discount on bond investment (difference) ... 390
Interest revenue [{$150,000 – ($10,658 – 377)} x 7%] ÷ 2 4,890
Problem 12–15 (continued) Requirement 3
January 1, 2013
Investment in bonds (face amount) ... 150,000
Discount on bond investment (difference) ... 10,658 Cash (price of bonds) ... 139,342 June 30, 2013
Cash ($150,000 x 6%) ÷ 2 ... 4,500 Discount on bond investment (difference) ... 377
Interest revenue [($150,000 – 10,658) x 7%] ÷ 2 4,877 Bond Fair Value at June 30, 2013:
Interest [($150,000 x 6%) ÷ 2] x 13.13394 * = $ 59,103 Principal $150,000 x 0.47464 ** = 71,196
Present value of the receivable $130,299
*Present value of an ordinary annuity of $1: n = 19, i = 4% (= 8% ÷ 2) (from Table 4) **present value of $1: n = 19, i = 4% (= 8% ÷ 2) (from Table 2)
January 1 initial cost $139,342
Increase from discount amortization 377
June 30 amortized initial cost $139,719
Comparing the amortized initial cost with the fair value of the bonds on that date provides the amount needed to adjust the investment to its fair value.
Problem 12–15 (concluded) December 31, 2013
Cash ($150,000 x 6%) ÷ 2 ... 4,500
Discount on bond investment (difference) ... 390
Interest revenue [{$150,000 – ($10,658 – 377)} x 7%] ÷ 2 4,890 Bond Fair Value at December 31, 2013:
Interest [($150,000 x 6%) ÷ 2] x 12.15999 * = $ 54,720 Principal $150,000 x 0.45280 ** = 67,920
Present value of the receivable $122,640
* Present value of an ordinary annuity of $1: n = 18, i = 4.5% (= 9% ÷ 2) (from Table 4) ** Present value of $1: n = 18, i = 4.5% (= 9% ÷ 2) (from Table 2)
June 30 amortized initial cost $139,719 Increase from discount amortization 390 Dec. 31 amortized initial cost $140,109
Comparing the amortized initial cost with the fair value of the bonds on that date provides the amount needed to adjust the investment to its fair value.
Dec. 31 amortized initial cost $140,109
Dec. 31 fair value 122,640
Fair value adjustment balance needed: debit/(credit) $ 17,469 Less: Current fair value adjustment debit/(credit) (9,420)
Change in fair value adjustment needed $ 8,049
Net unrealized holding gains and losses—I/S ... 8,049 Fair value adjustment ... 8,049
Problem 12–16
Bee Company Investment
2013: Stewart does not plan to sell the Bee investment, and does not believe it is more likely than not that it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is relevant. Stewart must recognize the $240,000 of credit losses as an OTT impairment in earnings, and the other $260,000 as a reduction of OCI, as follows:
Other-than-temporary impairment loss—I/S ... 240,000
Discount on bond investment ... 240,000 OTT impairment loss—OCI ... 260,000
Fair value adjustment—Noncredit loss ... 260,000
2014: Stewart ignores the change in Bee’s fair value during 2014, as the Bee investment is accounted for as an HTM investment and fair value changes are not relevant unless viewed as OTT impairments. GAAP does not allow recovery of prior OTT impairments when fair value increases. Over the remaining life of the bonds, Stewart would amortize the bonds as if they had a $240,000 discount. Stewart also would amortize the $260,000 of “Fair value adjustment—Noncredit loss” in AOCI over the remaining life of the bonds by crediting that account and debiting “Fair value adjustment—Noncredit loss” for a portion each period, thus gradually decreasing the amount shown in AOCI and increasing the carrying amount of the bonds.
Oliver Corporation Investment
2013: Stewart accounts for the Oliver investment as a trading security, so OTT impairment accounting is not relevant. Stewart simply continues to recognize in earnings any unrealized gains and losses associated with fair value changes. Given that the bonds already have a negative fair value adjustment of $200,000, and need a
Problem 12–16 (continued)
2014: Fair value increased to $2,700,000 during 2014, so Stewart needs to have a positive fair value adjustment of $200,000 in the balance sheet to adjust from amortized cost of $2,500,000 to fair value of $2,700,000. Therefore, Stewart must recognize an unrealized gain $500,000 for 2014, moving the fair value adjustment from a negative $300,000 to a positive $200,000. Note that this is not a recovery of the OTT impairment, but just normal ongoing accounting for a TS investment.
Fair value adjustment ... ... 500,000
Net unrealized holding gains and losses—I/S 500,000
Jones, Inc Investment
2013: Stewart does not plan to sell the Jones investment, and does not believe it is more likely than not that it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is relevant. Stewart must recognize the $225,000 of credit losses as an OTT impairment in earnings, and the other $575,000 as a reduction of OCI, as follows:
Other-than-temporary impairment loss—I/S ... 225,000
Investment in Jones bonds... 225,000 Net unrealized holding gains and losses—OCI .. 575,000
Fair value adjustment ... 575,000
Stewart also must reclassify the previously recognized $400,000 unrealized loss out of OCI and the fair value adjustment:
Fair value adjustment ... 400,000
Net unrealized holding gains and losses—OCI 400,000 Note that Stewart could net the latter two journal entries together to be:
Net unrealized holding gains and losses—OCI .. 175,000
Problem 12–16 (concluded)
However, Stewart still would need to show on the face of the income statement the total OTT impairment of $800,000 less the $575,000 in OCI, yielding a $225,000 reduction in earnings.
2014: Stewart continues to treat the Jones investment as AFS. Therefore, Stewart would show an unrealized gain associated with an increase of fair value from $2,700,000 to $2,900,000. Note that this is not a recovery of the OTT impairment, but just normal ongoing accounting for an AFS investment. The amount of credit loss and noncredit loss is not relevant to this subsequent accounting.
Fair value adjustment ... 200,000
Net unrealized holding gains and losses—OCI 200,000 Helms Corp. Investment
2013: Because the Helms Corp. investment is equity, Stewart bases the OTT impairment on the entire difference between cost and fair value.
Other-than-temporary impairment loss ... 400,000
Investment in Helms equity ... 400,000
Stewart also must reclassify the previously recognized $120,000 unrealized gain out of OCI and the fair value adjustment:
Net unrealized holding gains and losses—OCI .. 120,000
Fair value adjustment ... 120,000
2014: Stewart continues to treat the Helms investment as AFS. Therefore, Stewart would show an unrealized gain associated with an increase of fair value from
Problem 12–17
Bee Company Investment
2013: Under IFRS only the credit loss component is relevant for debt impairments. Therefore, Stewart recognizes the $240,000 of credit losses as an OTT impairment in earnings, as follows:
Other-than-temporary impairment loss ... 240,000
Discount on bond investment ... 240,000
2014: IFRS allows recovery of OTT impairments on debt investments. Therefore, Stewart would record a reversal of OTT impairment in earnings to increase the carrying value of the Bee investment to the level indicated by a $140,000 credit loss.
Discount on bond investment ... 100,000 Recovery of other-than-temporary impairment loss—I/S 100,000 Oliver Corporation Investment
2013: Stewart accounts for the Oliver investment as a trading security, which under IFRS would be called “Fair value through profit and loss,” so OTT impairment accounting is not relevant. Stewart simply continues to recognize in earnings any unrealized gains and losses associated with fair value changes. Given that the bonds already have a negative fair value adjustment of $200,000, and need a negative fair value adjustment of $300,000 to adjust from amortized cost of $2,500,000 to fair value of $2,200,000, Stewart must recognize additional unrealized losses of $100,000 for 2013.
Net unrealized holding gains and losses—I/S ... 100,000
Problem 12–17 (continued)
2014: Fair value increased to $2,700,000 during 2014, so Stewart needs to have a positive fair value adjustment of $200,000 in the balance sheet to adjust from amortized cost of $2,500,000 to fair value of $2,700,000. Therefore, Stewart must recognize an unrealized gain of $500,000 for 2014, moving the fair value adjustment from a negative $300,000 to a positive $200,000. Note that this is not a recovery of the OTT impairment, but just normal ongoing accounting for a “Fair value through profit and loss” investment.
Fair value adjustment ... ... 500,000
Net unrealized holding gains and losses—I/S 500,000
Jones Inc. Investment
2013: Given that this debt investment is AFS, IFRS bases the OTT impairment on fair value rather than on credit losses. Therefore, Stewart recognizes the entire $800,000 difference between amortized cost and fair value as an OTT impairment in earnings, as follows:
Other-than-temporary impairment loss ... 800,000
Investment in Jones bonds ... 800,000
Stewart also must reclassify the previously recognized $400,000 unrealized loss out of OCI and the fair value adjustment:
Fair value adjustment ... 400,000
Net unrealized holding gains and losses—OCI 400,000
Problem 12–17 (concluded) Helms Corp. Investment
2013: Because the Helms Corp. investment is classified as AFS, Stewart bases the OTT impairment on the entire difference between cost and fair value.
Other-than-temporary impairment loss ... 400,000
Investment in Helms equity ... 400,000
Stewart also must reclassify the previously recognized $120,000 unrealized gain out of OCI and the fair value adjustment:
Net unrealized holding gains and losses—OCI .. 120,000
Fair value adjustment ... 120,000
2014: IFRS does not allow recovery of OTT impairments for equity investment. However, Stewart continues to treat the Helms investment as AFS, so Stewart would show an unrealized gain associated with an increase of fair value from $600,000 to $700,000. This is not a recovery of the OTT impairment, but just normal ongoing accounting for an AFS investment.
Fair value adjustment ... 100,000