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Investment Securities & Reporting Methodologies

Discover the various types of investment securities like bonds, stocks, and notes, along with detailed accounting methods for valuing them on balance sheets. Learn about reporting categories, adjusting entries, and disclosures related to investments.

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Investment Securities & Reporting Methodologies

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  1. Chapter 12 Investments

  2. Bonds and notes (Debt securities) Common and preferred stock (Equity securities) Accounting for Investment Securities Investments can be accounted for in six different ways, depending on the nature of the investment relationship.

  3. Reporting Categories for Investments

  4. Reporting Categories for Investments Held to maturity (HTM) securities are those where the investor intends and has the ability to hold the security to maturity date. Securities available for sale (SAS) are expected to be held for an unspecified period of time. Trading securities (TS) are bought and held primarily to be sold in the near term.

  5. When an investment is held for an unspecified period of time, it is reported at the fair valueof the security on the reporting date. Investments Held for an Unspecified Period of Time . Otherwise, the investment is reported at cost. Must be “readily determinable”

  6. Adjustments to fair value are recorded as: a direct adjustment to the investment account, and an allowance account in the equity section of the balance sheet called “Unrealized Holding Gains/Losses”. Securities Available-for-Sale

  7. Securities Available for Sale Unrealized holding gains and losses from securities available-for-saleare reported in the equity section of the balance sheet.

  8. Foot, Inc. purchased the securities listed below in 2003. They are classified as Securities Available for Sale (SAS). Prepare the journal entries for Foot, Inc. to adjust the securities to fair value at Dec. 31, 2003. Securities Available for Sale Example

  9. Securities Available for Sale Example . The Unrealized Holding Gain is reported as an allowance in the Equity Section.

  10. Securities Available for Sale This is called . . . Occasionally, an investment’s value will decline for reason’s that are “other than temporary”. Impairment of Value

  11. Securities Available for Sale If the value is impaired . . . . . . the recorded cost of the security is reduced to the impaired fair value, and the difference is included in the current period’s income. The new cost basis (the impaired fair value) is not changed for subsequent recoveries in fair value.

  12. Adjustments to fair value are recorded as: a direct adjustment to the investment account, and a net unrealized holding gain/loss on the Income Statement. Trading Securities Gains Losses Income Statement

  13. Trading Securities Unrealized holding gains and losses from trading securities are reported on the income statement.

  14. Foot, Inc. purchased the addition securities classified as Trading Securities (TS) in 2003. Prepare the journal entries for Foot, Inc. to adjust the securities to fair value at 12/31/03. Trading Securities Example

  15. Trading Securities & Securities Available for Sale - Example The Net Unrealized Holding Loss is reported on the Income Statement.

  16. Transfers Between Reporting Categories Transfers are accounted for at fair value on the transfer date. Unrealized holding gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.

  17. Gross Realized & Unrealized Holding Gains & Losses Disclosures Aggregate Fair Value maturities of debt securities The change in net unrealized holding gains & losses Amortized cost basis by major security type

  18. The cost method is used for investments in equity securities when significant influence is not present. The equity method is used for investments in equity securities resulting in significant influence (20%-50%). When an investment results in the control of the investee (generally > 50%), the subsidiary is consolidated with the parent company.

  19. The investment account is increasedby: Original investment cost. Proportionate share of investee’s earnings. The investment account is decreasedby: Dividends received. Equity Method

  20. Equity Method • The investment account is reported on the balance sheet as a single amount. • The investor’s share of the investee’s earnings is reported as a single item on the investor’s income statement.

  21. If the investor acquires the equity securities of an investee by paying more than the fair value of net assets . . . . . . the difference is allocated between GOODWILL and identifiable intangible assets. Equity Method

  22. Rings & More acquired 45% of the equity securities of Diamonds Galore for $1,350,000. On the acquisition date, Diamonds Galore’s net assets had a fair value of $3,000,000. During the year, Diamonds Galore paid dividends of $150,000 and net income of $1,750,000. What amount will Rings & More report on the balance sheet as Investment in Diamonds Galore? Equity Method Example

  23. Equity MethodExample Investment in Diamonds Galore Investment 1,350,000 67,500 45% Dividends 45% Earnings 787,500 Reported Value 2,070,000 If the subsidiary had a loss, the investment account would have been reduced.

  24. Reporting the Investment • When the Investee Reports a Net Loss • The investment account is decreased. • When the Investment if Acquired in Mid-Year • The investment account is adjusted only for the income (loss) since the date of acquisition.

  25. At the transfer date, the carrying value of the investment under the equity method is regarded as cost. Changing From Equity Method To Cost Method

  26. Any difference between cost and fair value is recorded in a valuation account and is recognized as an unrealized holding gain or loss. After the transfer, the investment is treated as a trading security or a security available for sale, depending on management’s intent. Changing From Equity Method To Cost Method

  27. When ownership level increases to a significant influence, the investor must change to the equity method. At the transfer date, the recorded value is the initial cost of the investment adjusted for the investor’s equity in the undistributed earnings of the investee since the original investment. Changing From Cost Method To Equity Method

  28. The original cost, the unrealized holding gain or loss, and the valuation account are closed. A retroactive change is recorded to recognize the investor’s share of the investee’s earnings since the original investment. Changing From Cost Method To Equity Method

  29. Financial Instruments & Derivatives Financial Instruments: • Cash. • Evidence of an ownership interest in an entity. • Contracts meeting certain conditions. Derivatives: • Hedges created to offset risks created by other financial investments or transactions. • Value is derived from other securities.

  30. End of Chapter 12

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