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Investments

Investments. purpose as line of business idle cash strategic financial instruments stocks bonds derivatives. Debt Instruments Trading Securities Available for Sale Securities Held to Maturity Securities. Equity Instruments Trading Securities Available for Sale Securities

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Investments

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  1. Investments • purpose • as line of business • idle cash • strategic • financial instruments • stocks • bonds • derivatives Mugan-Akman 2007

  2. Debt Instruments Trading Securities Available for Sale Securities Held to Maturity Securities Equity Instruments Trading Securities Available for Sale Securities Affiliates Subsidiary Classification Mugan-Akman 2007

  3. SUBSIDIARY AFFILIATE Types of Investments-Stocks The accounting for investments depends on the purpose of the investment and the percentage of voting stock held. Investor Corporation Minority, Passive Investments (less than 20% ownership) Minority, Active Investments (typically between 20% and 50% ownership) Majority, Active Investments (greater than 50% ownership) held as current assets, (trading Securities) held as long-term Investments (available for sale) Mugan-Akman 2007

  4. Short-Term Investments-Trading Securities • usually consist of : • marketable equity securities (stocks of other companies) • investment funds • precious metals like gold • government bonds • treasury bills • asset securitized bonds • private bonds • Characterized by frequent and active buying and selling with the object of generating profit • Typically only financial institutions hold trading securities • Since trading securities are acquired for short-term profit, unrealized gains or losses that result from adjustments to market value pass through the income statement and increase or reduce net income before there is a sale of the securities. Mugan-Akman 2007

  5. Accounting for Trading Securities • Accounting for trading securities has the following key points: • Recording of purchase, • Dividends or interest received, • Valuation at the end of the accounting period, and • Sale of securities. Mugan-Akman 2007

  6. Accounting for Trading Equity Securities • Purchase price + commissions+taxes • Dividend revenue when declared • Marking to market at the end of the accounting period Mugan-Akman 2007

  7. Accounting for Marketable Equity Securities Bizim Bank acquires 1.000 shares of Is Bankasi (C) for TL 150 each plus TL 2.000 for taxes and commissions IS Bankasi declares dividends of TL 15.000 on 15 April 2007 to Bizim Bank receives cash for the dividends declared Mugan-Akman 2007

  8. Adjusting Entries-Trading Securities • at the end of an accounting period, cost/carrying value of the portfolio of marketable equity securities is compared with the fair value (market value) • carrying value = fair value at the latest reporting date • if the fair value of the securities is greater than the cost -unrealized holding gain • if the fair value is less than the cost - unrealized holding loss • any unrealized gains or losses on trading securities are charged to income statement • securities are reported at the fair value in the balance sheet Mugan-Akman 2007

  9. End of period entries-example Sonsan A.S. acquired the following equity securities as short-term investments as trading securities during 2007 Mugan-Akman 2007

  10. End of period entries-example Sonsan A.S. acquired the following equity securities as short-term investments as trading securities during 2007 Mugan-Akman 2007

  11. End of the period-example 31 March 2007 Mugan-Akman 2007

  12. End of period entries-example Sonsan A.S. acquired the following equity securities as short-term investments as trading securities during 2007 Mugan-Akman 2007

  13. End of the period-example Assume that no securities are purchased or sold during the second quarter of 2007. At the end of June: Mugan-Akman 2007

  14. End of period entries-example Sonsan A.S. acquired the following equity securities as short-term investments as trading securities during 2007 During August the company sold all shares of Dogan for TL 320. Mugan-Akman 2007

  15. Sale of Trading Securities Sonsan A.S. sold all DG shares for TL 320 in August 2007 Mugan-Akman 2007

  16. End of period entries-example Sonsan A.S. acquired the following equity securities as short-term investments as trading securities during 2007 Mugan-Akman 2007

  17. Mugan-Akman 2007

  18. Accounting for Marketable Debt Securities • same as the accounting for marketable equity securities –both are trading securities • carrying value of these securities will be compared to the market or fair value at the reporting dates • carrying value = the market value or fair value at the latest reporting date • unrealized holding gains or losses will be reflected in the income statement Mugan-Akman 2007

  19. Available for Sale Securities • neither as trading securities or held to maturity securities • held by non-financial companies usually • both equity and debt securities • non-derivative financial assets that are initially designated by the management as available for sale (AFS) • typically tied to a specific cash need • usually classified as long-term assets • measured at fair value in the balance sheet • unlike trading securities; any unrealized holding gains or losses - shown under the owners’ equity section with the name “Unrealized Holding Gains or Losses” • realized gain or loss when these securities are sold • interest or dividend revenues received from AFS securities are reflected in the income statement Mugan-Akman 2007

  20. AFS - example Bala A.S. acquires of shares of Alda A.S. on 17 November 2007 for the purpose of generating funds for its new manufacturing facility. Bala pays TL 400.000 including brokerage fees, taxes and other applicable duties 31 December 2007- end of the accounting period-Alda’s market value TL 435.000 Mugan-Akman 2007

  21. AFS- example 3 January 2008, Bala sells the shares of Alda and receives TL 480.000 Mugan-Akman 2007

  22. Comparison - trading and available for sale securities • Similarities • Initial recognition-acquisition cost • Valuation-Marking to market • Differences • Unrealized gains/losses • Income statement-trading securities • Balance sheet/shareholders’ equity-available for sale securities Mugan-Akman 2007

  23. Derivatives as Trading Securities • financial instruments that derive their value from the underlying security or asset • value of a derivative changes in response to the change in an underlying variable • requires a minimal amount of initial investment or no initial investment • Options • Futures • When derivatives are used as financial instruments they are accounted for similar to trading securities Mugan-Akman 2007

  24. Held to Maturity Investments • Debt Securities such as: • Corporate bonds • Treasury bills • Government bonds • Time deposits at banks • The intention of the company is to keep these securities until maturity • These securities are valued at amortized cost Mugan-Akman 2007

  25. Strategic Equity Securities Investments • to receive income in addition to the regular income of the business • to secure trade ties with the invested companies • between 20% and 50% • More than 50% Mugan-Akman 2007

  26. Equity Method of Accounting for Investments • 20% and 50% of the voting power - associate or an affiliate • significant influence - use the equity method • accounts for the failure and success of the investee • investment increases by the share of net income (or decreases by the share of net loss) of the investee • dividends received from the associate causes a decrease in the carrying value of the investment Mugan-Akman 2007

  27. Equity Method - example Edin AS purchases 30 % of the shares of Burg AS for TL 4.000 in January 2007 Burg AS reports net income of TL 2.500 30% x 2.500= TL 750 Mugan-Akman 2007

  28. Equity Method - example Burg AS declares and pays dividends of TL 1.000 in April 2008 Edin AS sells half of its investments in Burg AS for TL 2.500 on 5 May 2006. The carrying value of the sold portion is TL 2.225 Mugan-Akman 2007

  29. Debt Instruments Trading Securities (fair value through profit and loss) Available for Sale Securities (fair value through the balance sheet) Held to Maturity Securities (amortized cost) Equity Instruments Trading Securities (fair value through profit and loss) Available for Sale Securities (fair value through the balance sheet) Affiliates (Associates) (equity method of accounting) Subsidiary (consolidation) Summary Mugan-Akman 2007

  30. Mugan-Akman 2007

  31. Trading Securities Mugan-Akman 2007

  32. Available for Sale Securities Mugan-Akman 2007

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