Investments

Types of Investments
Debt securities
Equity securities
Categories of Debt Investments
1. Held-to-maturity
2. Available-for-sale
3. Trading
Levels of Equity Investment
1. No influence (less than 20% ownership)
2. Significant influence (20-50% ownership)
3. Control (more than 50% ownership)
Six Methods of Accounting
1. Amortized cost
2. Fair value through OCI
3. Fair value through Income Statement
4. Cost (less impairment, if any)
5. Equity
6. Consolidation
Accounting for Investments
in Debt Securities
1. Held to Maturity
Carried at amortized cost.

Unrealized gains and losses are not

recorded.

Interest and realized gains and losses are

reported in net income.
2. Available for Sale Debt Securities
Accounted for at fair value.

Adjusted each period to fair value.

Unrealized G/L on the balance sheet as

part of other comprehensive income.

Interest and realized gains and losses are

reported in net income.
3. Trading Debt Securities
Accounted for at fair value.

Adjusted each period to fair value.

Unrealized G/L on the income statement.

Interest, and realized gains and losses

reported in net income.
Reassessment of Classification
At each reporting date the investor
company must reassess the classification
of its investments in debt securities for
their continued appropriateness.
Fair Value Option for Debt Securities
An investor may choose to report a
specific debt security using the fair
value option.

If chosen, all unrealized gains and losses

related to changes in its fair value are
reported on the income statement.
Accounting for Investments in
Equity Securities
Without Significant Influence
No Significant Influence
Two situations:
1. Equity security HAS a readily
determinable fair value, and
2. Equity security DOES NOT have a
determinable fair value.
1. Determinable Fair Value
Recorded at the cost of acquisition.

Each time financial statements are

prepared, the investment will be valued
at fair value at the balance sheet date.

The unrealized gain or loss is reported on

the income statement as an unrealized
holding gain or loss.
Realized Gain or Loss
When an equity security is sold, the realized gain
or loss on the sale is recorded as follows:
DrCash sales price
Cr Gain balance
Cr Investment original acquisition price
Realized gain or loss is calculated as follows:
Cash received
Less Acquisition price
Equals Realized gain or (loss)
2. NO Determinable Fair Value
Carried at cost and assessed each period
for impairment.

Additionally, if there is an observable price

change for the shares, the carrying value
should be adjusted upwards or
downwards for this observable change.
Dividends Without
Significant Influence
A. Cash dividends
B. Stock dividends
C. Liquidating dividends
A. Cash Dividends
The following entry is made on the date of record
when the company has a legal right to the
dividend.
Dr Dividend receivable X
CrDividend incomeX

When the dividend is received:

Dr Cash X
CrDividend receivable X
B. Stock Dividends
Stock dividends do not give rise to any
journal entry.
C. Liquidating Dividends
A dividend paid from a source other than RE.
Occurs when the accumulated amount of
dividends received by an investor exceeds
their share of the amount of retained
earnings of the investee company since
the investor acquired its shares.
Dr Cash X
CrInvestment X
 Equity Investment with
Significant Influence
(Usually 20 – 50% ownership)
When to Use Equity Method
Used when the investor has significant influence over
operating and financial policies of the investee.
ASC 323 provides other indicators of “significant influence,”:
• The investor is represented on the board of directors of the
investee.
• The investor participates in the policy-making processes of
the investee.
• There are material intra-entity transactions.
• There is an interchange of managerial personnel between the
investor and the investee.
• There is technological dependency between the entities, for
example using the same systems.
Equity Method Events
1. Initial recording of investment
2. Investor’s share of investee profit or loss
3. Cash dividends received from investee
4. Intercompany profits and losses and
receivables and payables
5. Goodwill
6. Disposal of equity method investment
1. Initial Recording
Recorded at cost.

Dr Invest. in Company A (bal. sheet) X

Cr Cash (balance sheet) X
2. Investor’s Share of Profit/Loss
Investment account adjusted for investor’s
share of investee profit or loss.
Reported on income statement of investor.

Dr Investment in Company A X
Cr Income from investment in Co. A X

Dr Loss from investment in Co. A X

Cr Investment in Company A X
3. Cash Dividends Received
Carrying amount of investment decreased
by dividends.

Investment account may not be reduced

below zero.

Dr Cash X
Cr Investment in Company A X
4. Intercompany Events
The investor’s pro rata share of profits or
losses on transactions between the investor
and the investee should be eliminated for
any items not yet sold to an outside party at
the financial statement date.
Intercompany receivables and payables are
not eliminated under the equity method of
accounting, should be disclosed
separately.
5. Goodwill Acquired in Equity Method
The excess of the amount paid over the fair
value of the net tangible assets is called
equity method goodwill.

Equity method goodwill is included in the

investment account with all other assets.
6. Disposal of Equity Investment
A gain or loss is recognized for the
difference between the carrying amount
and the selling price.
Financial Statement
Presentation
The investment account is shown in one
line on the balance sheet.

The earnings or losses from the investment

are shown on the income statement as
ordinary income, but not as operating
income.
FV Option for Equity
Investments
Investor may choose the fair value option
instead, with all gains and losses related to
changes in its fair value reported on the
income statement.
Consolidation Method
(50% +1 ownership)
Consolidated Financial Statements
Parent and subsidiaries are consolidated.

Consolidated financial statements present

the financial statements as if the parent
and subsidiaries were one entity.
Consolidation Method
Two situations in which it is used:
• Voting-Interest Model - 50% +1 of voting
• Variable Interest Entity Model – don’t
own the voting shares, but there is still
control

Intercompany transactions are eliminated.

Consolidation Eliminations
Eliminate:
• Intercompany payables and receivables
(accounts, interest, bonds…)
• Intercompany sale of inventory
• Intercompany sale of fixed assets
• Parent company’s investment account
• Noncontrolling interest