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Full disclosure: Investments—debt and equity securities · PwC's accounting podcast

• 0:00
  Speaker 1: Thought leadership from PWCs national office studios.
• 0:05
  Speaker 2: Welcome to PWCs accounting podcast.
• 0:08
  Speaker 2: I'm Heather Horn.
• 0:10
  Speaker 2: Thanks for tuning into the next episode in our full disclosure summer series, the show all about presentation and disclosure from the top of the financial statements down to the last footnote, while it may sound like counting one-on-one I guarantee you'll learn something new each episode, today's focus investments, specifically debt and equity securities, and the related reporting and disclosure matters
• 0:35
  Speaker 3: My biggest piece of advice when you're using third parties or third party systems and tools, making sure that they pull the information that you need at the level that you need it
• 0:46
  Speaker 4: Start with the literature, but equally as important, don't get lost in those details and make sure you're taking the opportunity to tell the investors the whole story around your investment portfolio.
• 0:57
  Speaker 2: Those are my guests, chip Curry and bread Tooley, both partners in PWC national office.
• 1:03
  Speaker 2: While a lot of investment disclosures have been around for awhile.
• 1:06
  Speaker 2: It's an area we continue to receive questions.
• 1:09
  Speaker 2: So as prepares, think through their processes and best practices, we're going to share some recognition and measurement reminders, give a few big picture themes and clues with common stumbling blocks to avoid all of that and more coming up next chip Brett, thanks so much for joining me today to talk about disclosures related to investments.
• 1:35
  Speaker 2: And you know, this whole series has been about presentation and disclosure, but this is one case where we are going to delve just a teeny bit into recognition and measurement because the thing it will help in terms of framing some of the disclosure requirements.
• 1:50
  Speaker 2: So Brett, I'm going to go to you first and can you just give a quick refresher on the county model for debt and equity securities?
• 1:58
  Speaker 4: Uh, let's start with equity instruments first.
• 2:00
  Speaker 4: You need to determine as a result of the investment in the equity, uh, whether you need to consolidate the investi, uh, or apply the equity method of accounting and assuming you don't have a consolidation issue or don't need to apply the equity method of accounting, then we are in topic 3 21, uh, dealing with equity instruments and equity investments are generally reported at fair value with changes in fair value reported in earnings for equity instruments that don't have a readily determinable fair value.
• 2:33
  Speaker 4: Uh, there's a measurement alternative.
• 2:35
  Speaker 4: And under this measurement alternative, uh, you would record the equity investment at its cost, and you would remeasure it to fair value upon either impairment or if there's an observable transaction for an identical or similar investment on the same issue or
• 2:52
  Speaker 2: All right, good reminders.
• 2:53
  Speaker 2: And one thing that I think is really key that I want to point out to the listeners.
• 2:57
  Speaker 2: So if you were listening carefully, you heard Brett use the phrases, equity instruments and equity investments.
• 3:05
  Speaker 2: And we do do that deliberately and not to say equity securities because the scope of 3 21 and disclosure is could apply to limited partnership interests and other forms of investments in equity instruments, where you're not consolidating or applying the equity method, accounting, not just equity securities.
• 3:25
  Speaker 2: So I said equity about 15 times in that, but the bottom line is pay attention to what you have and whether or not you have an equity instrument and equity investment and how you're doing the accounting.
• 3:36
  Speaker 2: And that is going to all feed into these disclosures.
• 3:40
  Speaker 2: So chip, hopefully slightly easier.
• 3:42
  Speaker 2: Maybe we can talk about that.
• 3:43
  Speaker 2: Secure
• 3:44
  Speaker 3: The accounting for the debt security really depends upon how it's classified and what your intent is with the security.
• 3:51
  Speaker 3: So, uh, held to maturity debt securities are accounted for it, amortize costs, and we measure for impairment or credit losses under the Cecil guidance.
• 4:01
  Speaker 3: Um, at the other end of the spectrum, um, debt securities that are held for trading purposes are reported at fair value with changes in fair value reported in incurrent earnings.
• 4:11
  Speaker 3: And if it's not, uh, held to maturity or trading, the other category is available for sale.
• 4:17
  Speaker 3: And so available for sale debt, securities are reported at fair value, but changes in fair value are reported in AOC I or other comprehensive income.
• 4:25
  Speaker 3: And we assess the security for impairment under a credit loss model.
• 4:31
  Speaker 3: That's specific to AFS securities.
• 4:33
  Speaker 3: And I know Heather, we talked about equity instruments and debt securities.
• 4:36
  Speaker 3: I mean, there's all kinds of other investments, right?
• 4:39
  Speaker 3: That people could have.
• 4:40
  Speaker 3: They could have loans.
• 4:41
  Speaker 3: There could be real estate non-financial assets.
• 4:45
  Speaker 3: I know digital assets is a hot topic.
• 4:47
  Speaker 3: We won't be discussing those on these podcasts because they have different accounting models and different disclosures.
• 4:53
  Speaker 3: And maybe the last thing I would say kind of broadly about investments and it certainly applies to debt.
• 4:57
  Speaker 3: Securities is there is a fair value option that you can elect for, um, a number of financial assets.
• 5:04
  Speaker 3: This is sort of an irrevocable election election that you make and, and upon making it, you would report the investment at fair value and changes and for value would go through current.
• 5:13
  Speaker 2: All right.
• 5:13
  Speaker 2: Thank you.
• 5:14
  Speaker 2: And actually, uh, I had Tom Barberry on last week and he also mentioned fair value option.
• 5:19
  Speaker 2: I suggest that perhaps we need to have a whole podcast on that, cause I know we're not going to talk about it too much more here.
• 5:25
  Speaker 2: So anyway, potentially more to come and ship let's also, since we define equity security, I know here you use the term debt security because it is very specific to instruments that meet the definition.
• 5:38
  Speaker 2: And we also have other types of debt instruments such as loans, and those have a total interpreting county model and different disclosures.
• 5:47
  Speaker 2: So we're also not going to covering those in this part.
• 5:51
  Speaker 3: Yeah, that's absolutely correct.
• 5:52
  Speaker 3: And I guess I'm allowed to say this, but spoiler alert, I understand we might be doing a on presentation and disclosures for
• 5:59
  Speaker 4: Loans and receivable.
• 6:01
  Speaker 4: So, uh, definitely
• 6:03
  Speaker 2: I'm way to give a good preview there, chip.
• 6:05
  Speaker 2: Thank you.
• 6:06
  Speaker 2: All right.
• 6:06
  Speaker 2: So then with all of that background, uh, let's kind of go through the financial statements are going to start with the balance sheet.
• 6:12
  Speaker 2: So Brett, back to you, let's talk about some of the key things you should keep in mind for debt and equity investments for bounce sheet reporting.
• 6:20
  Speaker 4: First financial assets are required to be separately reported on the balance sheet or in the footnotes based on how the instrument is measured.
• 6:28
  Speaker 4: For example, amortize costs separate than fair value through earnings separately from fair value through OCI and also by the form of the financial asset.
• 6:40
  Speaker 4: For example, securities versus loans that may be done on the face of the balance sheet through separate line items.
• 6:47
  Speaker 4: It may be done through parent medicals within the same line item and for public companies, uh, regulation SX is going to have some more specific industry guidance.
• 6:57
  Speaker 4: Uh, for example, for bank holding companies and insurers, uh, they'll have different reporting requirements with, with respect to the balance sheet captions that are used.
• 7:06
  Speaker 4: Another consideration is for entities with classified balance sheets, uh, investments should be reported either current or noncurrent based on an investment by investment assessment.
• 7:18
  Speaker 4: And this can be complicated.
• 7:20
  Speaker 4: Um, there are a couple of approaches that we discuss in our financial statement, presentation guide.
• 7:25
  Speaker 4: Uh, one method is based on their maturities and the expectations of sales and redemptions.
• 7:32
  Speaker 4: Another method is, uh, considering whether the investment represents an investment of funds for current operations, obviously, uh, chip, uh, mentioned, uh, securities that are held to maturity, uh, for those types of securities, uh, where an entity has stated their intent to hold them until maturity.
• 7:51
  Speaker 4: The balance sheet classification should be based on the maturity date or probably probable with being exercised a, a call date.
• 7:59
  Speaker 4: And the last thing I would mention on the balance sheet is the existence of an allowance for credit losses, for debt securities.
• 8:05
  Speaker 4: This will be presented differently depending on the classification.
• 8:08
  Speaker 4: It will be deducted from the carrying amount for held to maturity securities and presented paranthetically on the balance sheet for available for sale security.
• 8:17
  Speaker 2: Okay.
• 8:17
  Speaker 2: That's helpful.
• 8:18
  Speaker 2: So couple follow up questions there.
• 8:20
  Speaker 2: You mentioned that you could paranthetically disclose investment types on the balance sheet rather than separate line items.
• 8:26
  Speaker 2: Do we see any sort of trend?
• 8:28
  Speaker 4: I think we see both, um, sometimes dependent on the level of investments they have and the types of classifications they have.
• 8:36
  Speaker 4: Oftentimes, um, companies will show them, uh, the amounts paranthetically, uh, just because they have enough line items on the balance sheet already, and they're trying to keep their balance sheet a little more simple, uh, but either method is permitted,
• 8:49
  Speaker 2: Right.
• 8:49
  Speaker 2: And then a similar question, you mentioned these two approaches to determine current and non-current.
• 8:55
  Speaker 2: So anytime we have that, I always have to ask this question, is that an overall accounting policy election, or how does that really work in practice?
• 9:04
  Speaker 4: Heather?
• 9:04
  Speaker 4: I think the methodology choices and accounting policy election, that one would apply consistently, although the evaluation is still done on an instrument by instrument basis.
• 9:16
  Speaker 4: Uh, and so for different investments could lead you to a different classification.
• 9:20
  Speaker 2: All right.
• 9:20
  Speaker 2: But no picking and choosing among your investments.
• 9:23
  Speaker 2: It sounds like.
• 9:23
  Speaker 2: So I think that's pretty much like anything else for talking about.
• 9:28
  Speaker 2: All right.
• 9:28
  Speaker 2: And then chip, why don't we turn our attention to the income statement?
• 9:32
  Speaker 3: Sure.
• 9:33
  Speaker 3: So maybe a couple of things on the income statement.
• 9:35
  Speaker 3: So the first thing is for, for debt securities, obviously you have interest income as a line item, and that includes the generally includes both the contractual coupon of the instrument, as well as any amortization or premiums or discounts.
• 9:48
  Speaker 3: You know, we use the effective interest method for reporting interesting hub.
• 9:52
  Speaker 3: Um, we also would have dividend income for, uh, equity investments.
• 9:56
  Speaker 3: We'll have unrealized gains and losses in the income statement for instruments that are measured at fair value with changes in fair value reported in earnings.
• 10:05
  Speaker 3: So think trading securities for debt, securities, and Brett mentioned earlier that sort of the default model, if you will, for, for equity investments, unless you elect.
• 10:14
  Speaker 3: And they've qualified for the measurement alternative that a lot of guidance on what to call that line item with unrealized gains or losses.
• 10:22
  Speaker 3: Sometimes you see that are labeled as like trading gains and losses, but for non-financial service companies, there may be other income statement captions that, that you might see you'll also see realized gains and losses.
• 10:33
  Speaker 3: So these are, um, gains and losses from actually disposing or selling of your, your investments impairment.
• 10:41
  Speaker 3: And I guess throughout this podcast today, Heather, we'll kind of focus our comments on the impairment guidance sort of after you've adopted sort of the, the new credit guidance that's in ASC 3 26.
• 10:53
  Speaker 3: And so for, um, for debt securities impairments that are related to credit risk or credit losses, those are in the income statement, and those will be classified in the income statement as a credit loss expense, or perhaps a reversal of a credit loss expense impairments relating to things other than, than credit for available for sale securities.
• 11:15
  Speaker 3: Those are reported in AOC and held to maturity debt securities.
• 11:19
  Speaker 3: So we're going to apply to Cecil impairment model, like I said earlier, and any credit losses that were recorded under that model would also be classified in the income statement as a credit loss expense equity instruments.
• 11:31
  Speaker 3: As I said earlier, the default model is sort of changing for value gets reported in current earnings.
• 11:37
  Speaker 3: And if you're applying the measurement alternative, you might see, uh, impairments relating to that.
• 11:44
  Speaker 3: And those are credit loss impairments, cause it's not really a credit loss model, the impairment model for measurement alternatives as Brett referred to earlier, as sort of do you believe the fair value of the securities below the carrying value?
• 11:56
  Speaker 3: So it's that credit loss concept, which, which makes sense if you're talking about an equity instrument as opposed to a, a debt instrument where there's a credit or a relationship.
• 12:04
  Speaker 2: All right.
• 12:04
  Speaker 2: So I know I'm talking to two financial services partners, but let me ask this question anyway.
• 12:09
  Speaker 2: So for non-financial service companies, from what I remember, this would always be what we call it below the lines you come to your operating income or similar type of title, and then you may or may not have some of these items listed as separate line items.
• 12:26
  Speaker 2: So chip, just curious, are any of them required to be listed separately or you're talking about sort of common practice?
• 12:34
  Speaker 3: You know, I think you're right.
• 12:35
  Speaker 3: I think in some cases, depending upon the size of individual line items, they may or may not be reported separately.
• 12:42
  Speaker 3: So for example, there may be multiple things classified together in a single line item in the income statement.
• 12:48
  Speaker 3: Um, there's some rules and regulation SX about when you would need to break those out for individual line items.
• 12:54
  Speaker 3: But I think that most companies, financial statements, you know, financial services, not financial services, you'll see things like interesting com or income from investments would include both interest and dividends.
• 13:05
  Speaker 3: You'll probably see, you know, um, something like a realized gains and losses.
• 13:09
  Speaker 3: Sometimes they might call realized or unrealized and they would break that out information out in the, uh, in the footnotes to the financial statements.
• 13:16
  Speaker 2: Alright, that's helpful.
• 13:17
  Speaker 2: And again, I think if you're in this situation where you're considering not breaking all this stuff out, it's definitely important to look at those as tax rules, if you are an sec registrar.
• 13:27
  Speaker 2: So then with that, let's move on to disclosures and chip.
• 13:30
  Speaker 2: I'm going to go back to you for the first question.
• 13:32
  Speaker 2: And that would be on disclosures for equity investments.
• 13:36
  Speaker 3: We'll do is we'll start, uh, we'll, we'll spoke as on disclosure requirements specific to equity securities.
• 13:41
  Speaker 3: So divert a little bit from what Brett said earlier about, you know, how 3 21 applies more broadly, but kind of focus a little bit on the securities.
• 13:48
  Speaker 3: There's some additional disclosures that are also required by the fair value guidance that I think we'll skip those as well.
• 13:54
  Speaker 3: Cause they're there they're numerous and they certainly cover, uh, you know, are much more broad than the fair value.
• 14:00
  Speaker 3: Disclosure are more broad than just equity instruments or equities
• 14:03
  Speaker 2: Well and chips similar to your earlier spoiler alert.
• 14:05
  Speaker 2: This is another topic we're going to have an entire podcast on, so our listeners can stay tuned for that.
• 14:10
  Speaker 3: So, so the first thing probably to mention for equity investments, and again, remember these are generally reported at fair value with changes in fair value and earnings or under the measurement alternative that Brett described.
• 14:21
  Speaker 3: You need to disclose the amount of unrealized gains and losses for all equity investments for the period.
• 14:29
  Speaker 2: All right.
• 14:29
  Speaker 2: So then this may go without saying, but I'm going to just reiterate here that this would really only apply to investments you hold at the end of the period, because if you sold them during the period, everything would be realized
• 14:42
  Speaker 3: That's absolutely correct, Heather.
• 14:43
  Speaker 3: And actually in the guidance in 3 21, it actually shows you how to compute that number.
• 14:48
  Speaker 3: And some people just disclose the young number.
• 14:51
  Speaker 3: Some people disclose the components of how it gets calculated to help reconcile back, but you're absolutely correct.
• 14:56
  Speaker 3: It's for it's for, for investments that you still hold when you've elected the measurement alternative, not surprisingly, there are some additional disclosures specific to the measurement alternative.
• 15:06
  Speaker 3: And so the first thing that you have to disclose is the carrying amount of that investment.
• 15:11
  Speaker 3: And then you also have to disclose the amount of impairments and downward adjustments that you've made and any upward adjustments that you've made as a result of observable prices.
• 15:22
  Speaker 3: And that disclosure is both on an annual and sort of a cumulative basis.
• 15:27
  Speaker 2: All right.
• 15:27
  Speaker 2: And then chip, I think a key point here is that those items can not be net,
• 15:33
  Speaker 3: Right, Heather, and, and that's a great point actually, similar to your point on the statement of cash flows.
• 15:36
  Speaker 3: Sometimes that's not always the easiest number, number to pull out.
• 15:40
  Speaker 3: You know, you might see people record downside adjustments like impairment and downward moves due to observable prices together, but then you're right separately, the upward moves need to be neat to be purported separately.
• 15:54
  Speaker 3: You know, in addition to that, the disclosure requirements ask for additional information to allow users of financial statements to really understand these quantitative disclosures and what management considered in deciding whether there was an impairment of a security under the measurement alternative.
• 16:10
  Speaker 3: And maybe a last point to mention around the measurement alternative is when we do have a remeasure event, so an impairment, or we see an observable price for the same or a similar investment from the same issuer.
• 16:23
  Speaker 3: We, we measure that to fair value as the fair value guidance would, would tell us how to come up with that number.
• 16:29
  Speaker 3: And as a result, that'd be really comes a non-recurring fair value measure.
• 16:33
  Speaker 3: So there's that table.
• 16:34
  Speaker 3: I know we promised we, weren't gonna talk about fair value disclosures, but I can't, I can help myself this teeny bit just a little bit, just a little bit, but the, you know, you would go into that non-recurring for value disclosure and you would obviously bring in all of the other fair value disclosure requirements.
• 16:47
  Speaker 2: So of what I like most by your response there, as you said, it would go into that non-recurring fair value disclosures.
• 16:53
  Speaker 2: So it's top of mind for all of our listeners, what disclosure you're talking about, but it's a fair point.
• 16:59
  Speaker 2: And again, when we'll cover further in subsequent podcasts, I think it's a good reminder there.
• 17:04
  Speaker 2: So then that's the equity investment side.
• 17:07
  Speaker 2: So then Brett, let me go back to you and talk about debt securities.
• 17:12
  Speaker 2: And I know there's many, and I remember this again from practice, but maybe if we can highlight some of the most significant ones, and then I always remind our listeners this perfect place to use their disclosure checklist for the, all the details.
• 17:27
  Speaker 4: Definitely.
• 17:27
  Speaker 4: Cause there, there is a lot of detail here.
• 17:29
  Speaker 4: Um, and I'm going to focus on the disclosure requirements specific to debt securities, uh, like chip equities.
• 17:35
  Speaker 4: So you got to get that, that, that, uh, fair value podcast coming up, uh, for, for the full picture on, uh, the debt securities disclosure requirements are going to be in topic three 20.
• 17:45
  Speaker 4: Uh, and that's a good guide, uh, to use starting with some big picture themes.
• 17:50
  Speaker 4: Uh, the, the disclosures are going to be segregated by the accounting classification trading versus AFS versus HTM.
• 17:58
  Speaker 4: All of these disclosures will, will be done separately.
• 18:01
  Speaker 4: And the, the first step is to highlight key information to investors about the types and the terms of securities, uh, that you have, uh, the tables and the information that we're going to talk about are, uh, segregated by major security types.
• 18:17
  Speaker 4: Um, and the, the number of security types, uh, that, uh, that accompany may use will often vary by the complexity of the portfolio and consideration should be given to whether this security types themselves should be further desegregated based on common characteristics like geographic concentration, credit quality, or, or other economic characteristics.
• 18:39
  Speaker 2: The question, this is a place where banks have to disclose something different than other companies or no,
• 18:45
  Speaker 4: No, the same, the same requirements, although a financial institution may have a more complex investment portfolio.
• 18:52
  Speaker 4: Um, and so it may have more categories of securities, uh, to, to talk about, but the requirements are the same.
• 18:59
  Speaker 3: Th there may be additional like specific requirements for certain financial statement companies.
• 19:04
  Speaker 3: For example, like the maturity bucket disclosure that you'll get into in a couple of minutes might be a little, like be prescribed for banks and, you know, versus others may have a little bit of discretion.
• 19:14
  Speaker 3: So there are, you know, some, some nuanced differences in the disclosures, but Brett's apps are right.
• 19:20
  Speaker 3: I think the disclosure the same for everybody.
• 19:22
  Speaker 2: All right.
• 19:22
  Speaker 2: So I think it's helpful because then it's a good reminder that really what companies should be trying to do here is to make sure that they're giving their users information about what's in the portfolio and you a single line item in many cases, not going to be really enough to do that.
• 19:37
  Speaker 2: So it's types of securities risks, et cetera.
• 19:39
  Speaker 2: So good reminder.
• 19:41
  Speaker 2: And you guys know, I always have to question and make sure it's all the same for non-financial, so it's helpful.
• 19:46
  Speaker 2: Okay.
• 19:47
  Speaker 2: Bret with that said then, so then what other disclosures should we be thinking about?
• 19:51
  Speaker 4: So let's drill into the disclosures for AFS.
• 19:54
  Speaker 4: Uh, first there are a lot of disclosures in this area, um, and I like to think of them in three different categories, um, information about the portfolio itself, information about activity going on within the portfolio, in that period, and then information about the performance or credit risk of the investments.
• 20:12
  Speaker 4: So starting with that first category of performance of portfolio related disclosures, uh, by the major security type, uh, you are required to, to disclose the amortized cost basis, the aggregate fair value, the allowance for credit loss and the total unrealized gains and losses for securities, uh, that's disclosed on a, on a gross basis.
• 20:34
  Speaker 4: So gains separately, uh, than, than on the unrealized losses.
• 20:38
  Speaker 4: And also you need to provide information about the contractual maturity of the securities, but just for the most recent balance sheet date.
• 20:46
  Speaker 4: And this is where chip mentioned, there's prescriptive guidance for financial institutions.
• 20:50
  Speaker 4: Other types of companies may use more judgment about how they, how they show those, uh, that maturity information.
• 20:57
  Speaker 4: The second category are activity-based disclosures.
• 21:00
  Speaker 4: Um, these are required disclosures when AFS securities are sold during the period or transferred between classifications.
• 21:08
  Speaker 4: Um, so this is where you need to disclose proceeds from sales and maturities gross realized gains and losses that reclassified out of OCI into net income for the period.
• 21:20
  Speaker 4: Um, you need to describe the basis for which the cost of the security was determined, whether that's a specific identification or an average costing methodology, uh, and then the amount of, and the change in the net unrealized holding gain or loss, uh, for the period that's included in AOC, I, at the end of the period, and then the third bucket, uh, are disclosures related to the credit risk.
• 21:44
  Speaker 4: And again, there's a lot of, there can be a lot of detail in here, but the objective here is to provide an understanding of the credit risk that is inherent in the AFS portfolio, which may be extensive for some, uh, companies, or it may be fairly minimal for others.
• 21:59
  Speaker 4: If they're investing in very high credit quality, uh, instruments, we want to get to the management's estimate of credit losses.
• 22:06
  Speaker 4: And then the changes in that estimate of credit losses.
• 22:09
  Speaker 4: There may be investments that are in an unrealized loss position where no allowance has been recorded, uh, for example, uh, where, where the investment is a very high credit quality, uh, and the declining for value is related only to changes in interest rates, not, not any other credit concerns.
• 22:28
  Speaker 4: So for these investments, uh, you need to provide a narrative description to allow users to understand the information that you're using to conclude that no allowance for credit losses was needed.
• 22:40
  Speaker 4: And here you show separately for investments that have been in a continuous unrealized loss position for greater than 12 months, versus those that have been in an unrealized loss position for less than 12 months.
• 22:52
  Speaker 4: So the investor can get an understanding of, of how long that those, uh, securities have been, where the fair value has been, uh, below carrying value.
• 23:01
  Speaker 4: And then for securities that do have an allowance, um, against, um, uh, you need to disclose again by major security type, the methodology and significant inputs, you used to measure that allowance for credit losses, including the policy for write offs, uh, talk about and provide a roll forward of the allowance for credit losses.
• 23:21
  Speaker 4: And then, uh, finally for purchase assets with credit deterioration, there are some specific disclosure requirements that go into even more detail and a reconciliation that's required there between par value and the purchase price of the asset.
• 23:35
  Speaker 2: All right.
• 23:36
  Speaker 2: And that's a lot of disclosures.
• 23:37
  Speaker 2: One question for you there, you mentioned a couple of times major security types.
• 23:42
  Speaker 2: So just for our listeners to give some context, can you some examples of the types of line items that might be typical?
• 23:49
  Speaker 4: Sure.
• 23:49
  Speaker 4: Some typical categories may be us treasuries and mortgage backed securities, commercial mortgage backed securities, um, you know, corporate issued debt securities.
• 24:00
  Speaker 4: Uh, those are common investment types that are, that are provided.
• 24:05
  Speaker 2: All right.
• 24:05
  Speaker 2: So basically depends really on the size of your portfolio, whether you're going to wind up with many, many different line items here and lots of disclosures, or, you know, maybe just one or two line items that's helpful.
• 24:16
  Speaker 2: Uh, so then chip, that was a lot on debt securities, but I know we still haven't hit held to maturity.
• 24:24
  Speaker 2: So can you run through those for us?
• 24:27
  Speaker 3: Yeah.
• 24:27
  Speaker 3: And I think Heather for today, we'll, we'll skip the trading securities since I think that's a less used category.
• 24:33
  Speaker 3: And again, we'll get to the fair value disclosures in a different podcast, but, but focusing on like health maturities, there, there are a lot of similarities, but some differences from the AFS disclosures that that Brett talked about.
• 24:46
  Speaker 3: But again, we're looking for information about the portfolio by major security type.
• 24:51
  Speaker 3: And some of the information we're required to disclose is amortized cost basis, fair value, credit losses, unrealized holding gains and losses and the net carrying amount.
• 25:03
  Speaker 3: Now the fair value disclosures they're only required for public companies.
• 25:08
  Speaker 3: Um, they're not required for non-public companies that kind of distinction exists for held to maturity securities because unlike available for sale securities that Brett talked about, which are being carried for value, held maturity, securities are being curated advertising costs.
• 25:22
  Speaker 3: So computing for value is an additional requirement that you would need to do for disclosure purposes.
• 25:29
  Speaker 3: And then there's some disclosures around if you were, you know, hedging, the forecast and acquisition of health future securities, you have to disclose information about credit risk and estimated credit losses.
• 25:40
  Speaker 3: And as I mentioned earlier, um, held to maturity securities are subject to the Cecil credit risk model.
• 25:46
  Speaker 3: And like I said, we've, we've got to do a podcast coming up on the disclosures for, you know, loans and receivables.
• 25:52
  Speaker 3: And they're really the same for held to maturity securities.
• 25:55
  Speaker 3: But, you know, maybe it will give a couple of spoiler alerts here too, to some of our folks who I'm sure will be listening into that podcast as well.
• 26:03
  Speaker 3: Um, but again, the objectives are very similar to the available for sale disclosures.
• 26:07
  Speaker 3: They're designed to enable users to really understand the credit risk and the credit quality of the portfolio and how management came up with our estimate of credit losses.
• 26:17
  Speaker 3: So one of the big disclosures is disclosing by major security type, the amortized cost basis of their portfolios segregated by key credit quality indicators, as well as by their year of origination.
• 26:34
  Speaker 3: They call this the vintage tables is what is commonly referred to the allowance for credit loss has a number of disclosures, the methodology and the factors that were included in computing.
• 26:45
  Speaker 3: It any changes to policies or methodologies that occur on a periodic basis.
• 26:50
  Speaker 3: Uh, Brett mentioned a roll forward of the allowance for credit losses.
• 26:54
  Speaker 3: That's required for held to maturity securities as is information on past due and non-accrual status.
• 27:01
  Speaker 3: And, and similar to what Brett mentioned for purchase assets with credit deterioration.
• 27:05
  Speaker 3: There's, uh, another series of disclosures that are required.
• 27:09
  Speaker 2: So chip, one of the things came to mind when you were talking is, you know, we talked about AFS, we talked about held to maturity and we said, we're not going to talk about trading.
• 27:18
  Speaker 2: And I know one of the things we deal with sometimes is transfers between those categories or perhaps I should say better, no transfers between those categories.
• 27:29
  Speaker 2: So can you just quickly remind listeners what those sort of rules are around that?
• 27:35
  Speaker 2: And then if there's any specific disclosures, if you do have movement among those different categories.
• 27:40
  Speaker 3: Yeah.
• 27:41
  Speaker 3: Sure.
• 27:41
  Speaker 3: So when you think about the debt securities model, like we talked about earlier, the classification of those securities is based on intent.
• 27:48
  Speaker 3: And so generally we wouldn't expect people's intent to change.
• 27:52
  Speaker 3: And in fact, the guidance says, moving a security out of trading is rare.
• 27:57
  Speaker 3: And if you have the intent to hold to maturity security, that has to be your intent.
• 28:03
  Speaker 3: If you don't do that, that can have consequences.
• 28:05
  Speaker 3: Sometimes we call that tinting your health, maturity portfolio.
• 28:08
  Speaker 3: The most common thing that we see is moves from available for sale to help some maturity of the strategy for those securities changes.
• 28:16
  Speaker 3: And you no longer have you are holding the sale.
• 28:19
  Speaker 3: You really have an intent to hold them to maturity, but, but generally the transfers are, are between categories to your point out.
• 28:25
  Speaker 3: They don't, they don't happen very quickly.
• 28:27
  Speaker 3: The accounting literature dictates exactly what we're supposed to do because we're moving from one measurement basis to another.
• 28:35
  Speaker 3: So for example, uh, if you're moving from AFS to help to maturity, we're moving from a fair value model through OCI to an amortized cost model.
• 28:44
  Speaker 3: So it tells us exactly how to deal with that and the disclosure sort of follow that.
• 28:49
  Speaker 3: So, you know, disclosures talk about like what actually transferred, you know, between categories and whatnot.
• 28:56
  Speaker 2: All right.
• 28:56
  Speaker 2: Very helpful.
• 28:57
  Speaker 2: And then chip, I know you highlighted a couple of differences that are public private companies in terms of the disclosures we just talked about, but anything else you'd like to highlight there
• 29:07
  Speaker 3: As it relates to the things that we talked about here today?
• 29:11
  Speaker 3: No, not specifically.
• 29:13
  Speaker 3: Um, when we get into our discussion around the fair value disclosures, which again, a lot of these instruments have to do the fair value disclosures because they're being measured in fair value.
• 29:23
  Speaker 3: In addition to the, to the ones that we went through today there, you'll see a little bit more differences between public and private companies, but really, as it relates to what we talked about today, it's just the HTM that held to maturity security, isn't disclosing for value.
• 29:37
  Speaker 2: Alright, that's helpful.
• 29:38
  Speaker 2: And then Brett, let me ask you a question from a different angle.
• 29:41
  Speaker 2: I know you have experience, uh, preparing these disclosures, at least reviewing someone else's preparation and from a public company perspective.
• 29:50
  Speaker 2: How do you think about these disclosures particularly sort of in light of maybe other disclosures you're making in your K like an M DNA?
• 29:58
  Speaker 4: Yeah, I think, I think that's a great point because there are a number of disclosures made in MTNA about liquidity capital, uh, and, and other factors.
• 30:09
  Speaker 4: And, and this investment, these investment portfolios often have a big, uh, role to play in, in those types of disclosures too.
• 30:17
  Speaker 4: So I think, uh, it's often useful to think of them kind of holistically and making sure you're painting a full picture.
• 30:25
  Speaker 4: Uh, we talked a lot about the details, um, in the footnotes of the debt securities, but stepping back and thinking about how those debt securities, for example, will be used as a source of liquidity in a time of stress may be helpful, uh, for companies to talk about in M DNA, um, and how, how the, um, different accounting treatments for different securities classification impacts capital and capital ratios specifically for financial institutions is a really important factor to consider, to tie it all together,
• 30:58
  Speaker 3: Tying it all together.
• 30:59
  Speaker 3: Great point prep because I think investors really want to understand people's investment strategies and not all investments.
• 31:07
  Speaker 3: Like we went through follow the same accounting models.
• 31:09
  Speaker 3: So a corporate that invest in a portfolio of debt securities will be following the three 20 model, did poor classification.
• 31:17
  Speaker 3: We based on tent, if on the other hand, instead of investing in a portfolio of diverse debt securities, a corporate decides to invest in a mutual fund that owns debt securities as a way to get exposure to debt securities on a diversified basis.
• 31:32
  Speaker 3: Well, that they're going to count for that as an equity instrument, and it's going to be through valued through P and L.
• 31:36
  Speaker 3: So linking all of the investment strategy together, describing to people how investments of similar strategies might get accounted for differently because of their form or the reasons is also important to sort of link all that stuff together
• 31:49
  Speaker 2: Well, and chip, I think to that exact point, another thing where a lot of non-financial institutions may come across some of these investments and different strategies in particular as if they're holding investments, for example, for pension funds, and that's a whole other set of required disclosures.
• 32:07
  Speaker 2: So I think that's something, you know, for companies take a mine.
• 32:09
  Speaker 2: I remember when I was, again, back in my days of audit or keeping track, which ones are pension and which ones aren't, you know, there are a key differences there.
• 32:17
  Speaker 2: So, all right.
• 32:19
  Speaker 2: There's a lot of detail.
• 32:21
  Speaker 2: I think you guys may have felt a little, like you were reciting a laundry list there, but if someone, you know, has questions or wants to look this up after the fact, uh, chip, where should they go look for more information,
• 32:32
  Speaker 3: I'd say a couple of things, right?
• 32:34
  Speaker 3: One, if you look at our financial statement, presentation guide, that's where we have information on some of the balance sheet closures or the balance sheet presentation, things that Brett went through.
• 32:44
  Speaker 3: And some of the income statement, presentation, guidance that, that, that I went through.
• 32:48
  Speaker 3: It also has a lot of the disclosure requirements for debt and equity securities before the new guidance.
• 32:54
  Speaker 3: You know, we kind of taught this podcast, but not all have adopted some of the new credit loss guidance.
• 32:59
  Speaker 3: So that guidance is in our financial statement, presentation guide, our lawns and investment guys has chapter 12, which is also on presentation and disclosure.
• 33:07
  Speaker 3: And that's really for those who have adopted the new credit loss model and the new, the new equity instruments model is in there as well.
• 33:14
  Speaker 3: So that's a, that's a good point of reference for people.
• 33:17
  Speaker 3: And then I think you mentioned earlier, I think our disclosure checklist tool is really key.
• 33:22
  Speaker 3: Um, that's really a comprehensive list of all of the disclosures.
• 33:26
  Speaker 3: You know, it's, it's programmed to, you know, bring out the industry specific disclosures that, that Brett mentioned for that are required by regulation, ESX for public companies.
• 33:36
  Speaker 3: It also toggles between, you know, what standards have you adopted.
• 33:40
  Speaker 3: Um, and so that's clearly a very valuable tool to make sure that you've incorporated all the required disclosures.
• 33:45
  Speaker 2: All right.
• 33:46
  Speaker 2: Great.
• 33:46
  Speaker 2: And then just to wrap things up, um, I had been asking for a quick summary of the disclosures and sort of an elevator speech, but given the long list we ran through, I will not ask that question.
• 33:58
  Speaker 2: However, I will ask.
• 34:00
  Speaker 2: Uh, and it's starting with you Brett in preparing these disclosures.
• 34:04
  Speaker 2: What are a couple of key reminders that you would give to companies as they're kind of thinking about process or best practices?
• 34:12
  Speaker 4: I would say, you know, obviously start with the literature and use topic three 20 and 3 21 as your guide through the details.
• 34:21
  Speaker 4: Uh, but equally as important, don't get lost in those details and make sure you're taking the opportunity to tell investors the whole story around your investment portfolio.
• 34:31
  Speaker 4: All of these disclosures we talked about are really getting at the nature of your portfolio, what it's used for which will drive off and how it's accounted for talking about the valuation of the portfolio, and then talking about the risks inherent in the securities.
• 34:47
  Speaker 4: So don't forget those, those big picture themes, and always remember to go back to M DNA and, and talk about, um, the liquidity and other uses of this portfolio and how it's going to affect, uh, the risks of your health.
• 35:00
  Speaker 2: All right.
• 35:00
  Speaker 2: That's helpful.
• 35:01
  Speaker 2: And then chip from your perspective, any common pitfalls that you've seen, you know, when you get questions from companies or, um, we see various SCC comment, letter comments that you would emphasize.
• 35:14
  Speaker 3: I mean, I think a lot of these disclosures have been around for, for awhile.
• 35:17
  Speaker 3: And so, um, people, you know, kind of are aware of the requirements and whatnot.
• 35:22
  Speaker 3: I guess my biggest piece of advice where I see people struggle is a lot of times companies use service providers for gathering some of this information.
• 35:32
  Speaker 3: Sometimes they use service providers for managing their investment portfolios and reporting through values.
• 35:37
  Speaker 3: And so when you're using third parties or third party systems and tools, making sure that they pull the information that they, that you need at the level that you need it.
• 35:47
  Speaker 3: So Heather, you mentioned that you remember the difficulties in practice from having to gross report the gains separately from losses, and so planning for that and making sure that your systems and your service providers can provide that information without having to try to pick it out of the details I think is important.
• 36:04
  Speaker 3: Um, and so that would be my biggest tip is just make sure that your system and your system providers have the ability to do that, particularly if you're changing systems or you're changing, um, some of your third party providers.
• 36:16
  Speaker 2: All right, those are both great reminders.
• 36:19
  Speaker 2: And then final question then chip, I'll distract this one to you as a frequent podcast guest.
• 36:25
  Speaker 2: I know you've been on many.
• 36:27
  Speaker 2: Are there any of these have sort of a soft spot for that you would recommend to our listeners if they're going back and trying to catch up on some other technical accounting?
• 36:37
  Speaker 3: Well, you know, Heather, I, I, I love to talk about Cecil.
• 36:39
  Speaker 3: It's my, it's my thing.
• 36:41
  Speaker 3: Um, and so, uh, you know, and we mentioned it a little bit here today.
• 36:45
  Speaker 3: I couldn't help, but mention it as many times as possible that, you know, a lot of the health maturity debt, securities follow the Cecil type disclosures.
• 36:53
  Speaker 3: So, you know, I think listening back on some of the podcasts on, you know, lessons learned on the Cecil calculations and, and some of the credit loss disclosures, you know, I mean, you can ask me, I always think those are great lessons.
• 37:05
  Speaker 2: All right.
• 37:06
  Speaker 2: Thank you.
• 37:06
  Speaker 2: And for our listeners benefit, I did get a huge file on my face when chip said he loved to talk about sea salt because he does kind of light up when the topic comes up.
• 37:15
  Speaker 2: So good reminder, and definitely whether you've adopted or not.
• 37:18
  Speaker 2: There are some great reminders in, in those podcasts, but for today, Brett chip really appreciate all the insight.
• 37:25
  Speaker 2: And thank you so much for joining me.
• 37:28
  Speaker 2: That's it for today.
• 37:29
  Speaker 2: Thanks for joining me.
• 37:31
  Speaker 2: New podcast episodes are released every Tuesday and Thursday to make sure you never miss an episode follow PWCs counting podcast series, wherever you listen to your content and to stay up to date on all the latest content let's connect on LinkedIn for PWCs national office studios.
• 37:50
  Speaker 2: I'm Heather Horn.
• 37:51
  Speaker 2: Thanks for tuning in
• 37:57
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• 37:59
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• 38:17
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