Accounting for Investments in Debt Securities, written by Mark A. Kohlbeck, CPA, Ph.D., analyzes in detail accounting and reporting for investments in debt securities by presenting, interpreting, and illustrating the generally accepted accounting principles, viewed from the standpoint of a holder or investor in debt securities. 

Focusing solely on the aspects of FAS 115 (and other authoritative pronouncements) dealing with debt instruments, this Portfolio provides an overview of the current practice.  The overview includes an historical perspective leading to the current practice; the philosophy of the current practice, including the classification of securities; and the relationship of the current practice to the conceptual framework of accounting.  

Accounting for Investments in Debt Securities focuses on accounting practices and reporting as they relate to the acquisition of investments in debt securities, the recognition of interest income, disposition of investments, fair value adjustments, impairments, hedging, and transfers among investment classifications.

Key audit considerations also are discussed.

This Portfolio provides numerous examples covering a variety of different debt securities and situations. These examples illustrate the various accounting situations that companies may face when investing in debt securities and the application of generally accepted accounting principles as reflected in journal entries and amounts reported in the financial statements.  

A comprehensive example is also included.  This example incorporates many of the historical cost and fair value accounting issues covered in this Portfolio for a hypothetical company over multiple reporting periods.  

The Worksheets include amortization tables for the debt instruments included in the comprehensive illustration and sample disclosures.  For the reader’s convenience, the Worksheets also reproduce essential professional standards and implementation guidance. 

Accounting for Investments in Debt Securities allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Introduction and Overall Scope of Portfolio

II. Overview of Current Practice

A. Organization

B. Historical Perspective

C. Current Practice and Philosophy

1. Major Authoritative Pronouncements

2. FAS 115 Summarized

a. Scope

b. Background

c. Classifications

D. Relationship of Current Practice to Conceptual Framework

E. Definitions

III. Historical Cost Accounting

A. Role and Relevance

B. Rules Summarized

C. Cross References

D. Types of Investments in Debt Securities

E. Accounting for Debt Investments Purchased at Par Value

1. Perspectives and Cross References

2. Three Illustrative Scenarios

a. Base Case

b. Purchased Interest

c. Interest Accruals

d. Interest Accruals and Reversing Entries

F. Accounting for Debt Investments Purchased With Discounts and Premiums

1. Investment in a Straight Bond Issued With a Discount (With Reversing Entries)

a. Acquisition of the investment on June 1, 2006

b. Quarter-end interest accrual on June 30, 2006

c. Reversing entry on July 1, 2006

d. Quarter-end interest accrual on September 30, 2006

e. Reversing entry on October 1, 2006

f. Receipt of interest payment on December 1, 2006

g. Year-end interest accrual on December 31, 2006

2. Investment in a Straight Bond Issued With a Discount (Without Reversing Entries)

a. Acquisition of the Investment on June 1, 2006 (No Reversing Entries)

b. Quarter-end Interest Accrual on June 30, 2006 (No Reversing Entries)

c. Quarter-end Interest Accrual on September 30, 2006 (No Reversing Entries)

d. Receipt of Interest Payment on December 1, 2006 (No Reversing Entries)

e. Year-end Interest Accrual on December 31, 2006 (No Reversing Entries)

3. Investment in a Straight Bond Issued With a Premium

a. Acquisition of the Investment on June 1, 2006

b. Quarter-end Interest Accrual on June 30, 2006

c. Reversing Entry on July 1, 2006

d. Quarter-end Interest Accrual on September 30, 2006

e. Reversing Entry on October 1, 2006

f. Receipt of Interest Payment on December 1, 2006

g. Year-end Interest Accrual on December 31, 2006

4. Investment in a Zero Coupon Bond

a. Acquisition of the Investment on June 1, 2006

b. Recognition of Interest Revenue for the Quarter Ended June 30, 2006

c. Recognition of Interest Revenue for the Quarter Ended September 30, 2006

d. Year-end Interest Accrual on December 31, 2006

5. Investment in a Self-Amortizing Bond

a. Acquisition of the Investment on June 1, 2006

b. Quarter-end Interest Accrual on June 30, 2006

c. Reversing Entry on July 1, 2006

d. Quarter-end Interest Accrual on September 30, 2006

e. Reversing Entry on October 1, 2006

f. Receipt of Principal and Interest Payment on December 1, 2006

g. Year-end Interest Accrual on December 31, 2006

6. Investment in a Serial Bond

a. Acquisition of the Investment on June 1, 2006

b. Quarter-end Interest Accrual on June 30, 2006

c. Reversing Entry on July 1, 2006

d. Quarter-end Interest Accrual on September 30, 2006

e. Reversing Entry on July 1, 2006

f. Receipt of Payment on December 1, 2006

g. Year-end Interest Accrual on December 31, 2006

G. Investments in Hybrid Debt Securities

1. Structured Notes

2. Contingent and Convertible Debt

3. Beneficial Interests

4. Mandatorily Redeemable Preferred Stock

H. Maturities, Sales, and Conversions

1. Perspective

2. Maturities

3. Sales and Other Dispositions of Debt Securities Prior to Maturity

I. Trading Securities -A Special Situation

J. Determination of Effective Yield

IV. Fair Value Accounting

A. Summary

B. Trading Securities

1. Overview

2. Accounting

3. Illustration

C. Held to Maturity Securities

1. Overview

a. Intent

b. Ability

2. Accounting

D. Available-for-Sale Securities

1. Overview

2. Accounting

3. Illustration

E. Tax Effects of Fair Value Adjustments

1. Overview and Accounting

2. Illustrations

F. Estimating Fair Values

1. Traditional Discounted Cash Flow Approach

a. Discount Rate Build-Up

b. Comparison Discount Rate

c. Illustration

2. Accounting Approach

V. Impairments

A. Overview of Impairments

1. Reasons for Impairments

2. Identifying and Accounting for Impairments

a. Step 1: Determine Whether an Impairment Has Occurred

b. Step 2: Determine Whether the Impairment is Other-Than-Temporary

(1) Debt Securities Outside the Scope of EITF Issue 99-20

(2) Beneficial Interests in Securitized Financial Assets Under EITF Issue 99-20

c. Step 3: Account for the Impairment

B. Accounting for Impairments

C. Impairment Illustrations

VI. Transfers Among Categories

A. Overview

B. Accounting for Transfers Among Classifications

C. Illustrations

1. Trading to Held-to-Maturity

2. Trading to Available-for-Sale

3. Held-to-Maturity to Trading

4. Available-for-Sale to Trading

5. Held-to-Maturity to Available-for-Sale

6. Available-for-Sale to Held-to-Maturity

VII. Hedging Investments in Debt Securities

A. Overview

1. Definition of a Derivative

2. Definition of a Hedge

3. Hedge Accounting Summarized

B. Fair Value Hedges

1. Accounting

2. Fair Value Hedge Example - Swap Agreement (Receive Variable, Pay Fixed)

3. Fair Value Hedge Example - Put Option

C. Cash-Flow Hedges

1. Accounting

2. Cash-Flow Hedge Example - Swap Agreement (Receive Fixed, Pay Variable)

VIII. Presentation and Disclosures

Introductory Material

A. GAAP Requirements

1. Balance Sheet

2. Income Statement

3. Statement of Cash Flows

4. Accompanying Notes

B. SEC Requirements

C. Illustrations

1. Balance Sheet

2. Income Statement

3. Statement of Stockholders' Equity

4. Statement of Cash Flows

5. Notes to the Financial Statements

a. Accounting Policies

b. Investments - Trading

c. Investments - Held-to-Maturity and Available-for-Sale

IX. Auditor Considerations

Introductory Material

A. Fair Values

B. Classifications

C. Impairments

D. Hedging

X. Comprehensive Illustration

Introductory Material

A. Background Information

B. Base Illustration

1. First Quarter 2006

2. Second Quarter 2006

3. Third Quarter 2006

4. Fourth Quarter 2006

C. Impairments and Hedges

1. Third Quarter 2006

2. Fourth Quarter 2006

XI. Concluding Thoughts

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Principal Abbreviations Used in Portfolio

Worksheet 2 Summary of Intent-Based Accounting

Worksheet 3 Common Types of Debt Investments

Worksheet 4 Comparison of Debt Investment Cash Flows

Worksheet 5 Amortization Tables for Comprehensive Illustration

Worksheet 6 Disclosure Examples, Bed Bath & Beyond (2005 Form 10-K)

Worksheet 7 Disclosure Examples, Circuit City Stores, Inc. (2005 Form 10-K)

Worksheet 8 Disclosure Examples, Compuware Corp. (2005 Form 10-K)

Worksheet 9 FAS 115, Accounting for Certain Investments in Debt and Equity Securities (May 1993)

Worksheet 10 Q& A 115-A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities: Questions and Answers

Worksheet 11 FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (November 3, 2005)

Worksheet 12 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL

American Institute of Certified Public Accountants Materials:

Accounting Principles Board Opinions

AICPA Statement on Auditing Standards

AICPA Statements of Positions

Committee on Accounting Procedures

Financial Accounting Standards Board Materials:

FASB Financial Accounting Standards

FASB Financial Accounting Concepts:

FASB Implementation Guides

FASB Technical Bulletins

FASB Staff Positions

FASB Emerging Issues Task Force (EITF) Abstracts

FASB Meeting Minutes

International Accounting Standards Board:

Securities and Exchange Commission Materials:

Securities Act Industry Guide

Staff Accounting Bulletins

SEC Publications and Speeches

UNOFFICIAL

Books

Articles