Accounting For Financial Institutions

Accounting for Financial
Institutions
Lecture 20
By
Dr. Ahmed
Adel
Faculty of Commerce English Section

Investments in
Securities
Faculty of Commerce English Section

Types of security investments
Security investment can be classified into two main

categories
Securities
Debt investments Equity

investments
Types of security investments
Financial institutions account for investments based on the

type of security and their intent with respect to the
investment.
Type of Security Management Intent Valuation Approach
Held to maturity Amortized cost
Debt Available for sale Fair value
Trading Fair value

Available for Sale Securities
Financial institutions report available for sale securities at

fair values.
They record the unrealized gains and losses related to

changes in the fair value of available for sale debt securities
in an unrealized holding gain or loss account.
Unrealized Holding Gain or Loss Account is shown as a

separate component of stockholders equity section until
realized.
Example:
Assume the National Bank of Egypt purchased L.E. 100,000,
10%, five years available for sale bonds on January 1, 2013,
with interest payable on July 1 and January 1. The effective
interest rate is 8% and the bonds sell for L.E. 108,111.
The National Bank of Egypt records the purchase of the

bonds as follows:
Debt investments 108,111

Cash 108,111
The National Bank of Egypt then discloses the effect of the

premium amortization on the interest revenue recorded
every 6 months using the effective interest method.
Date Cash Interest Premium Carrying

received revenue amortization amount of
bond
1/1/2013
1/7/2013
1/1/2014
1/7/2014
1/1/2015
1/7/2015
1/1/2016
1/7/2016

received revenue Amortizati amount of
on bond
1/1/2013 -- -- -- 108,111
1/7/2013 5,000 4,324 676 107,435
1/1/2014 5,000 4,297 703 106,732
1/7/2014 5,000 4,269 731 106,001
1/1/2015 5,000 4,240 760 105,241
1/7/2015 5,000 4,210 790 104,451
1/1/2016 5,000 4,178 822 103,629
1/7/2016 5,000 4,145 855 102,774

received revenue amortization amount of
bond
1/1/2017 5,000 4,111 889 101,885
1/7/2017 5,000 4,075 825 100,960
1/1/2018 5,000 4,040 960 100,000
50,000 41,889 8,111
The entry to record interest revenue on July 1, 2013, is as
follows:
Cash 5,000
Debt Investments 676
Interest Revenue 4,324
The entry to accrue interest on December 31, 2013, is as

follows:
Interest Receivable 5,000

Debt Investments 703
Interest Revenue 4,297
As a result, the National Bank of Egypt reports interest from

investment in securities for L.E. 8,621 (4,324 + 4,297).
To apply the fair value method to these debt investments,

assume that at year-end (December 31, 2013) the fair value
of the bond is L.E. 105,000.
Comparing this fair value with the carrying amount of the
bond (amortized cost) at December 31, 2013, the National
Bank of Egypt recognizes an unrealized Loss of L.E.1,732.
The National Bank of Egypt reports this loss as a other

comprehensive income, using the following entry:
Unrealized Holding Gain or Loss 1,732

Fair Value Adjustments (AFS) 1,732
Financial statement presentation of the available for sale

investments would be as follows:
Income Statement
Interest income:
Interest income from Debt securities 8,621
Balance sheet
Security investments:
Debt investments Available for Sale (Carrying amount ) 106,732
Less: Fair Value Adjustments (1,732)
105,000
Miscellaneous assets:
Interest Receivable 5,000
Stockholders Equity:
Unrealized Holding gain or loss (1,732)
Sale of Available for Sale Securities:

Assume that Bank decided to sell the bonds on December
31, 2013 for L.E. 103,000.
Loss on Sale of investments = 105,000 103,000 = 2,000.
And the following journal entry is recorded:
Cash 103,000
Loss on Sale of debt investments 2,000
Fair Value Adjustments (AFS) 1,732
Debt Investments 106,732
Trading Securities
Companies hold trading securities with the intention of

selling them in a short period of time. Trading in this context
means frequent buying and selling. Companies thus use
trading securities to generate profits from short-term
differences in prices.
Companies report trading securities at fair values, with
unrealized holding gain or loss reported as part of net
income.

Accounting For Financial Institutions

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Accounting for Financial

Faculty of Commerce English Section

Faculty of Commerce English Section

Security investment can be classified into two main

Debt investments Equity

Financial institutions account for investments based on the

Type of Security Management Intent Valuation Approach

Held to maturity Amortized cost

Debt Available for sale Fair value

Trading Fair value

Financial institutions report available for sale securities at

They record the unrealized gains and losses related to

Unrealized Holding Gain or Loss Account is shown as a

The National Bank of Egypt records the purchase of the

Debt investments 108,111

The National Bank of Egypt then discloses the effect of the

Date Cash Interest Premium Carrying

Date Cash Interest Premium Carrying

Date Cash Interest Premium Carrying

The entry to accrue interest on December 31, 2013, is as

Interest Receivable 5,000

As a result, the National Bank of Egypt reports interest from

To apply the fair value method to these debt investments,

The National Bank of Egypt reports this loss as a other

Unrealized Holding Gain or Loss 1,732

Financial statement presentation of the available for sale

Sale of Available for Sale Securities:

Companies hold trading securities with the intention of

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