If A invested $300,000 in B’s debt securities, the carrying value of the securities is $300,000. Is this also the fair value of the securities at the time of the investment? (i.e. the fair value may change at some point of time later) If A issued $300,000 of common stock to acquire B, can we say the carrying value of B’s net assets is $300,000, which is also the fair value of B’s net assets at the time of the acquisition? Thanks!
Carrying value might equal fair value or historical (acquisition) value. It depends on if the holdings are classified as held to maturity, trading or AFS.
There are some very rare situation when carrying value at the time of the investment is different than fair value. Than we have to do with so called day-one profit. It may happen when entity uses different assumptions to value an instrument which causes the beginning value to be different from fair value (market value).
Thanks! any detailed descriptions on carrying value v.s. fair value/cost under each situation? also, in the 2nd example, since B is acquired 100% by A, I guess it’s classified as business combination and therefore not HTM/HFT/AFS? what does “carrying value” actually mean? if there is a change in fair value later, does the carrying value change to reflect the fair value or does the carrying value reflect the acquisition cost?
For general securities, AFS, Trading: carrying value = fair value, HTM: carrying value = historical value (I think accretion/amortization might apply). When you buy a company, there are lots of complicated rules that apply. You have to take the original cost and adjust it each year for earnings and dividends. I forgot what exactly happens. You should just read the book for this one.
Skies Wrote: ------------------------------------------------------- > Thanks! any detailed descriptions on carrying > value v.s. fair value/cost under each situation? carrying value is generally historical cost with adjustments to amortization > also, in the 2nd example, since B is acquired 100% > by A, I guess it’s classified as business > combination and therefore not HTM/HFT/AFS? this is correct, it would be a consolidation, not using equity or cost method > what does “carrying value” actually mean? if there > is a change in fair value later, does the carrying > value change to reflect the fair value or does the > carrying value reflect the acquisition cost? carrying value will not change and is irrelevant to what is reported on the balance sheet, just understand that all securities will be reported at fair value except for HTM securities which are reported at amortized cost.
Thank you all! This helps a lot.