[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.42,0:00:01.26,Default,,0000,0000,0000,,- [Instructor] In this video,
Dialogue: 0,0:00:01.26,0:00:02.46,Default,,0000,0000,0000,,I'm gonna show you how to account
Dialogue: 0,0:00:02.46,0:00:04.95,Default,,0000,0000,0000,,for unrealized gains or losses
Dialogue: 0,0:00:04.95,0:00:07.59,Default,,0000,0000,0000,,on available for sale debt investments.
Dialogue: 0,0:00:07.59,0:00:09.57,Default,,0000,0000,0000,,So available for sale debt investments
Dialogue: 0,0:00:09.57,0:00:12.06,Default,,0000,0000,0000,,are marked-to-market on the balance sheet.
Dialogue: 0,0:00:12.06,0:00:14.82,Default,,0000,0000,0000,,So that means they're gonna\Nbe presented at fair value.
Dialogue: 0,0:00:14.82,0:00:17.64,Default,,0000,0000,0000,,So we have to make changes\Nat the end of each period
Dialogue: 0,0:00:17.64,0:00:20.04,Default,,0000,0000,0000,,to make sure that they're at fair value.
Dialogue: 0,0:00:20.04,0:00:23.22,Default,,0000,0000,0000,,And any unrealized gains or losses
Dialogue: 0,0:00:23.22,0:00:25.89,Default,,0000,0000,0000,,are gonna go through other\Ncomprehensive income.
Dialogue: 0,0:00:25.89,0:00:27.99,Default,,0000,0000,0000,,They're not going to\Ngo through net income,
Dialogue: 0,0:00:27.99,0:00:30.03,Default,,0000,0000,0000,,they're not gonna show up\Nin the income statement.
Dialogue: 0,0:00:30.03,0:00:32.67,Default,,0000,0000,0000,,No changes, no realized gains or losses
Dialogue: 0,0:00:32.67,0:00:34.35,Default,,0000,0000,0000,,are gonna hit the income statement
Dialogue: 0,0:00:34.35,0:00:36.63,Default,,0000,0000,0000,,unless we were to actually sell
Dialogue: 0,0:00:36.63,0:00:39.27,Default,,0000,0000,0000,,the available for sale debt investments.
Dialogue: 0,0:00:39.27,0:00:41.19,Default,,0000,0000,0000,,So let me walk you through an example
Dialogue: 0,0:00:41.19,0:00:43.29,Default,,0000,0000,0000,,and kind of show you how this works.
Dialogue: 0,0:00:43.29,0:00:46.56,Default,,0000,0000,0000,,So let's say that we had this\NBabu's Chocolate Factory.
Dialogue: 0,0:00:46.56,0:00:48.33,Default,,0000,0000,0000,,They issued these bonds.
Dialogue: 0,0:00:48.33,0:00:53.33,Default,,0000,0000,0000,,And the bonds, the\Nissue price was $92,221.
Dialogue: 0,0:00:53.49,0:00:55.71,Default,,0000,0000,0000,,And so from the investors' point of view,
Dialogue: 0,0:00:55.71,0:00:57.99,Default,,0000,0000,0000,,they're gonna debit debt investment
Dialogue: 0,0:00:57.99,0:01:01.26,Default,,0000,0000,0000,,and they probably call it\Ndebt investment hyphen AFS,
Dialogue: 0,0:01:01.26,0:01:05.37,Default,,0000,0000,0000,,available for sale debt\Ninvestment for 92,221.
Dialogue: 0,0:01:05.37,0:01:08.28,Default,,0000,0000,0000,,They're gonna credit cash for 92,221.
Dialogue: 0,0:01:08.28,0:01:10.62,Default,,0000,0000,0000,,And then I've got a little\Neffective interest table
Dialogue: 0,0:01:10.62,0:01:12.36,Default,,0000,0000,0000,,that I put together here.
Dialogue: 0,0:01:12.36,0:01:15.93,Default,,0000,0000,0000,,Now, at the end of the first year,
Dialogue: 0,0:01:15.93,0:01:18.33,Default,,0000,0000,0000,,they're gonna need to make\Nan adjusting journal entry
Dialogue: 0,0:01:18.33,0:01:20.43,Default,,0000,0000,0000,,because they've received interest, right?
Dialogue: 0,0:01:20.43,0:01:23.40,Default,,0000,0000,0000,,So the investor has been\Npaid interest by Babu, right?
Dialogue: 0,0:01:23.40,0:01:24.87,Default,,0000,0000,0000,,So you're gonna debit cash,
Dialogue: 0,0:01:24.87,0:01:26.52,Default,,0000,0000,0000,,you're gonna debit debt investment.
Dialogue: 0,0:01:26.52,0:01:28.77,Default,,0000,0000,0000,,You're basically amortizing\Nthe discount and so forth.
Dialogue: 0,0:01:28.77,0:01:30.40,Default,,0000,0000,0000,,We've talked about those things,
Dialogue: 0,0:01:30.40,0:01:31.80,Default,,0000,0000,0000,,so I won't get into all that.
Dialogue: 0,0:01:31.80,0:01:33.63,Default,,0000,0000,0000,,We have another video on it.
Dialogue: 0,0:01:33.63,0:01:35.28,Default,,0000,0000,0000,,What I wanna introduce here
Dialogue: 0,0:01:35.28,0:01:38.40,Default,,0000,0000,0000,,is that what if at the end of year one,
Dialogue: 0,0:01:38.40,0:01:41.19,Default,,0000,0000,0000,,the end of year one\Nhere, we say that, okay,
Dialogue: 0,0:01:41.19,0:01:43.98,Default,,0000,0000,0000,,we look and we see that the fair value,
Dialogue: 0,0:01:43.98,0:01:48.06,Default,,0000,0000,0000,,the fair value of the bond is now $95,000.
Dialogue: 0,0:01:48.06,0:01:51.99,Default,,0000,0000,0000,,So the fair value of the bond is $95,000.
Dialogue: 0,0:01:51.99,0:01:53.55,Default,,0000,0000,0000,,So you might be thinking, why,
Dialogue: 0,0:01:53.55,0:01:55.44,Default,,0000,0000,0000,,why would the fair value be different
Dialogue: 0,0:01:55.44,0:01:56.55,Default,,0000,0000,0000,,than the carrying value?
Dialogue: 0,0:01:56.55,0:01:59.61,Default,,0000,0000,0000,,Because we can see at the end of year one,
Dialogue: 0,0:01:59.61,0:02:04.11,Default,,0000,0000,0000,,we can see the carrying value\Nof the bond is at 93,521.
Dialogue: 0,0:02:04.11,0:02:06.15,Default,,0000,0000,0000,,So why would the fair value be different?
Dialogue: 0,0:02:06.15,0:02:08.70,Default,,0000,0000,0000,,Well, it could be the case that maybe
Dialogue: 0,0:02:08.70,0:02:10.92,Default,,0000,0000,0000,,between when we issued the bonds
Dialogue: 0,0:02:10.92,0:02:12.54,Default,,0000,0000,0000,,and the end of the first year,
Dialogue: 0,0:02:12.54,0:02:16.08,Default,,0000,0000,0000,,maybe interest rates have gone down.
Dialogue: 0,0:02:16.08,0:02:17.31,Default,,0000,0000,0000,,Interest rates have gone down.
Dialogue: 0,0:02:17.31,0:02:21.33,Default,,0000,0000,0000,,So now our bonds are more\Nvaluable relative to other bonds.
Dialogue: 0,0:02:21.33,0:02:23.31,Default,,0000,0000,0000,,So for whatever reason, we look,
Dialogue: 0,0:02:23.31,0:02:25.86,Default,,0000,0000,0000,,we see the fair value is now 95,000
Dialogue: 0,0:02:25.86,0:02:27.90,Default,,0000,0000,0000,,and we see that the carrying value
Dialogue: 0,0:02:27.90,0:02:30.33,Default,,0000,0000,0000,,is lower than the fair value, right?
Dialogue: 0,0:02:30.33,0:02:32.73,Default,,0000,0000,0000,,So the fair value at the end of year one
Dialogue: 0,0:02:32.73,0:02:34.62,Default,,0000,0000,0000,,is greater than the carrying value.
Dialogue: 0,0:02:34.62,0:02:38.25,Default,,0000,0000,0000,,So we're gonna need to make\Nan adjusting journal entry.
Dialogue: 0,0:02:38.25,0:02:40.68,Default,,0000,0000,0000,,And so it seems kinda counterintuitive,
Dialogue: 0,0:02:40.68,0:02:42.45,Default,,0000,0000,0000,,you would think you would just debit
Dialogue: 0,0:02:42.45,0:02:44.34,Default,,0000,0000,0000,,debt investment directly
Dialogue: 0,0:02:44.34,0:02:46.95,Default,,0000,0000,0000,,and then just increase\Nthe asset account directly
Dialogue: 0,0:02:46.95,0:02:49.41,Default,,0000,0000,0000,,and then credit OCI, but\Nit doesn't work like that.
Dialogue: 0,0:02:49.41,0:02:51.00,Default,,0000,0000,0000,,We could create this silly account
Dialogue: 0,0:02:51.00,0:02:53.40,Default,,0000,0000,0000,,called fair value adjustment.
Dialogue: 0,0:02:53.40,0:02:56.16,Default,,0000,0000,0000,,I know it just adds\Ncomplexity, I apologize,
Dialogue: 0,0:02:56.16,0:02:58.17,Default,,0000,0000,0000,,but fair value adjustment
Dialogue: 0,0:02:58.17,0:03:00.39,Default,,0000,0000,0000,,hyphen available for sale securities.
Dialogue: 0,0:03:00.39,0:03:03.60,Default,,0000,0000,0000,,Okay, so what we're\Ngonna do, we debit this
Dialogue: 0,0:03:03.60,0:03:05.28,Default,,0000,0000,0000,,and this is going to be added,
Dialogue: 0,0:03:05.28,0:03:08.04,Default,,0000,0000,0000,,if we were to think\Nabout our balance sheet,
Dialogue: 0,0:03:08.04,0:03:09.60,Default,,0000,0000,0000,,if we were to look at our balance sheet,
Dialogue: 0,0:03:09.60,0:03:10.56,Default,,0000,0000,0000,,so let me,
Dialogue: 0,0:03:13.08,0:03:15.42,Default,,0000,0000,0000,,so here's our balance sheet
Dialogue: 0,0:03:15.42,0:03:17.34,Default,,0000,0000,0000,,and then we've got our assets.
Dialogue: 0,0:03:18.36,0:03:22.62,Default,,0000,0000,0000,,Okay, so we would see\Navailable for sale security.
Dialogue: 0,0:03:23.91,0:03:25.86,Default,,0000,0000,0000,,Okay, and we would have,
Dialogue: 0,0:03:25.86,0:03:28.08,Default,,0000,0000,0000,,if we just have the carrying value,
Dialogue: 0,0:03:28.08,0:03:32.04,Default,,0000,0000,0000,,it would be 93,521.
Dialogue: 0,0:03:32.04,0:03:35.70,Default,,0000,0000,0000,,But then we're gonna add\Nthe fair value adjustment.
Dialogue: 0,0:03:36.66,0:03:40.29,Default,,0000,0000,0000,,We're gonna add that 1,479.
Dialogue: 0,0:03:40.29,0:03:42.48,Default,,0000,0000,0000,,Okay, and if you add them together,
Dialogue: 0,0:03:42.48,0:03:45.96,Default,,0000,0000,0000,,the net amount is 95,000,
Dialogue: 0,0:03:45.96,0:03:48.15,Default,,0000,0000,0000,,which is the fair value.
Dialogue: 0,0:03:48.15,0:03:50.34,Default,,0000,0000,0000,,Okay, so we have marked this to market.
Dialogue: 0,0:03:50.34,0:03:51.45,Default,,0000,0000,0000,,That's what we're doing.
Dialogue: 0,0:03:51.45,0:03:53.97,Default,,0000,0000,0000,,When we're debiting this fair\Nvalue adjustment account,
Dialogue: 0,0:03:53.97,0:03:56.46,Default,,0000,0000,0000,,we are marking this to market.
Dialogue: 0,0:03:56.46,0:03:59.07,Default,,0000,0000,0000,,Now we've got a debit, we need a credit.
Dialogue: 0,0:03:59.07,0:04:02.67,Default,,0000,0000,0000,,So what do we credit? We\Ncredit unrealized gain.
Dialogue: 0,0:04:02.67,0:04:03.87,Default,,0000,0000,0000,,And if it had been a loss,
Dialogue: 0,0:04:03.87,0:04:06.15,Default,,0000,0000,0000,,you know, obviously we'd be debiting a lot
Dialogue: 0,0:04:06.15,0:04:08.46,Default,,0000,0000,0000,,and then we'd be crediting\Nthe fair value adjustment.
Dialogue: 0,0:04:08.46,0:04:09.45,Default,,0000,0000,0000,,But we have a gain here,
Dialogue: 0,0:04:09.45,0:04:12.03,Default,,0000,0000,0000,,so we're gonna credit the unrealized gain.
Dialogue: 0,0:04:12.03,0:04:16.44,Default,,0000,0000,0000,,But again, this is going to\NOCI, other comprehensive income.
Dialogue: 0,0:04:16.44,0:04:17.49,Default,,0000,0000,0000,,If you don't know what that is,
Dialogue: 0,0:04:17.49,0:04:19.95,Default,,0000,0000,0000,,I've got another video on\Nother comprehensive income.
Dialogue: 0,0:04:19.95,0:04:23.16,Default,,0000,0000,0000,,Basically other comprehensive\Nincome is an account
Dialogue: 0,0:04:23.16,0:04:24.99,Default,,0000,0000,0000,,that's ultimately gonna get closed out
Dialogue: 0,0:04:24.99,0:04:26.94,Default,,0000,0000,0000,,to accumulate other comprehensive income
Dialogue: 0,0:04:26.94,0:04:28.62,Default,,0000,0000,0000,,on the balance sheet.
Dialogue: 0,0:04:28.62,0:04:31.35,Default,,0000,0000,0000,,But basically it increases equity.
Dialogue: 0,0:04:31.35,0:04:36.35,Default,,0000,0000,0000,,OCI increases equity, but\Nit bypasses net income.
Dialogue: 0,0:04:36.54,0:04:37.71,Default,,0000,0000,0000,,Bypasses net income.
Dialogue: 0,0:04:37.71,0:04:41.16,Default,,0000,0000,0000,,If this was accounted for\Nas a trading investment,
Dialogue: 0,0:04:41.16,0:04:44.19,Default,,0000,0000,0000,,okay, then it'd be unrealized gain,
Dialogue: 0,0:04:44.19,0:04:46.26,Default,,0000,0000,0000,,but it'd be dash NI
Dialogue: 0,0:04:46.26,0:04:49.20,Default,,0000,0000,0000,,because it would go to\Nnet income instead of OCI.
Dialogue: 0,0:04:49.20,0:04:51.69,Default,,0000,0000,0000,,But this is available for sales security,
Dialogue: 0,0:04:51.69,0:04:54.33,Default,,0000,0000,0000,,so it bypasses the income statement.
Dialogue: 0,0:04:54.33,0:04:56.46,Default,,0000,0000,0000,,Okay, so equity increases,
Dialogue: 0,0:04:56.46,0:04:58.80,Default,,0000,0000,0000,,net income is not affected, okay?
Dialogue: 0,0:04:58.80,0:05:01.50,Default,,0000,0000,0000,,So our journal entry balances here.
Dialogue: 0,0:05:01.50,0:05:05.49,Default,,0000,0000,0000,,Now if and when we go and actually sell
Dialogue: 0,0:05:05.49,0:05:07.65,Default,,0000,0000,0000,,the available for sale security,
Dialogue: 0,0:05:07.65,0:05:11.01,Default,,0000,0000,0000,,then we could recognize a realized gain
Dialogue: 0,0:05:11.01,0:05:13.77,Default,,0000,0000,0000,,that would go and affect\Nnet income, right?
Dialogue: 0,0:05:13.77,0:05:15.63,Default,,0000,0000,0000,,So with available for sale securities,
Dialogue: 0,0:05:15.63,0:05:19.23,Default,,0000,0000,0000,,it's not that you will never\Never affect net income,
Dialogue: 0,0:05:19.23,0:05:22.71,Default,,0000,0000,0000,,it's just that the\Nunrealized gains and losses
Dialogue: 0,0:05:22.71,0:05:26.34,Default,,0000,0000,0000,,bypass the income statement,\Ngo to this OCI account.
Dialogue: 0,0:05:26.34,0:05:28.32,Default,,0000,0000,0000,,But then when you actually sell
Dialogue: 0,0:05:28.32,0:05:30.18,Default,,0000,0000,0000,,the available for sale security,
Dialogue: 0,0:05:30.18,0:05:32.76,Default,,0000,0000,0000,,then you're gonna have\Na charge to net income
Dialogue: 0,0:05:32.76,0:05:33.81,Default,,0000,0000,0000,,a gain or a loss.
Dialogue: 0,0:05:33.81,0:05:35.10,Default,,0000,0000,0000,,And so that's why managers
Dialogue: 0,0:05:35.10,0:05:36.57,Default,,0000,0000,0000,,like available for sale securities
Dialogue: 0,0:05:36.57,0:05:39.00,Default,,0000,0000,0000,,'cause you can time when you sell
Dialogue: 0,0:05:39.00,0:05:41.82,Default,,0000,0000,0000,,the available for sale\Nsecurity to get a little boost
Dialogue: 0,0:05:41.82,0:05:44.34,Default,,0000,0000,0000,,to your net income or so forth, right?
Dialogue: 0,0:05:44.34,0:05:46.35,Default,,0000,0000,0000,,So that's called earnings management
Dialogue: 0,0:05:46.35,0:05:49.25,Default,,0000,0000,0000,,and we'll talk about that some\Nmore in the videos to come.