FAR FVO, Equity Method & Securities Classification

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  • #188943
    sunchip
    Member

    Hey guys,

    Sounds silly, but I’m getting hung up on why we have Equity Method and Fair Value OPTION.

    My understanding is that you only “classify” securities if you have significant influence and elect FVO or have bought securities as an investment (not interested in controlling interest).

    If you have significant control (more than 20%) -> requires Equity Method

    Significant Influence -> Equity or FVO

    Is the Option in FVO referring to optional application of FV in lieu of Equity Method if we have significant influence?

    How does FVO treatment differ from Equity Method?

    If we elect FVO do we then classify as Trading or AFS depending on intent?

    AFS Unrealized hits OCI; Realized hits Investment – AFS

    Trading Unrealized hits RE; Realized hits Investment – Trading

    Equity Method = always Realized = hits Investment – Company Name

    Equity Method (at purchase):

    Dr – Investment – Company Name

    Cr – Cash

    AFS: (FVO)

    Dr- Investment – AFS

    Cr- Cash

    Trading: (FVO)

    Dr- Investment – Trading

    Cr- Cash

    My study materials (Gleim) say that FVO does not apply to securities classification (HTM, AFS, Trading). But we still measure AFS and Trading at Fair Value…

    Can somebody please explain the difference between FVO and Fair Value and how these relate to the Equity Method and Securities Classification? I know it’s a lot to ask. Much appreciated.

    AUD (89)
    FAR (81)
    REG (April 2)
    BEC (May 22)

    gleim boy through and through

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  • #610403
    Anonymous
    Inactive

    I'm studying for FAR so no expert here (and frankly slightly confused with the onslaught of Qs you asked) but I'll give it a shot.

    Marketable securities – Trading, AFS and HTM – are recorded at FMV, FMV and Amortized cost respectively. The difference between Trading and AFS is that Unrealized G/L for Trading are recorded in income whereas AFS records Unrealized G/L in OCI. ASC 825 allows company to elect FV option to account for its eligible items at fair value. However, that would make FAR testing too easy (think Bonds…no amortization required under FV). Nonetheless, if FV were to be elected, both Trading and AFS would record its unrealized G/L in income (so AFS would change from OCI to income and Trading would obviously remain the same).

    For Equity method investment, same would happen there as above if FV option elected. Each BS date, any Unrealized G/L would be reported in income.

    In addition, to figure out if investment will be accounted for as Cost Method or Marketable Securities you have to:

    1) own less than 20% of stock (be careful here because you can account for investment as Equity even if you have less than 20% of stock if other factors are present such as seat on the Board of Directors etc…)

    2) are the securities marketable? If so, use marketable securities if not then Cost method.

    Hope this helps!

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