Financial Instruments
Financial instruments include cash, equity investments, debt investments, derivatives, and other contracts that give rise to financial assets and financial liabilities.
Explanation
Debt investments are classified as held-to-maturity (amortized cost), trading (fair value through net income), or available-for-sale (fair value through OCI). Equity investments without readily determinable fair values can use the measurement alternative (cost minus impairment, plus or minus observable price changes). The current expected credit loss (CECL) model under ASC 326 requires estimation of lifetime expected losses on financial assets at inception.
Derivatives are recognized at fair value on the balance sheet, with changes in fair value reported in earnings unless designated as hedging instruments. Hedge accounting allows matching the timing of gains/losses on hedging instruments with the hedged items through fair value hedges, cash flow hedges, or net investment hedges.
Key Points
- •Debt investments: HTM (amortized cost), trading (FVTNI), AFS (FVTOCI)
- •Equity investments generally at fair value through net income
- •CECL model requires lifetime expected credit loss estimation
- •Derivatives at fair value; hedge accounting matches timing of gains/losses
Exam Tip
Focus on the classification of debt investments and how each affects the financial statements differently. CECL is increasingly tested.
Frequently Asked Questions
Related Topics
Fair Value Measurement (ASC 820)
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Comprehensive Income
Comprehensive income includes all changes in equity during a period except those from owner transactions, encompassing net income plus other comprehensive income (OCI) items.
Bonds and Long-Term Debt
Bond accounting involves recording the issuance, interest expense, amortization of premiums or discounts, and retirement of bonds payable using the effective interest method.
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