Chapter 18

Investments

DebtSecurities

EquitySecurities

Investments in Debt Securities• Represent a creditor relationship with

an enterprise–U.S. government securities–Municipal securities–Corporate bonds–Convertible debt–Commercial paper–All securitized debt instruments

• Three separate portfolios

–Held to Maturity

–Trading Securities

–Available for Sale

Valuation and Reporting of Investments in Debt Securities

Investments in Debt Securities (SFAS 115)

Valuation Unrealized Holding

Gains or Losses

Held-to-Maturity

Amortized Cost

Not recognized

Trading Securities

Fair Value Recognized in net income

Available-for-sale

Fair Value Recognized in compre-hensive income and as a separate component of stockholders’ equity

• Held to Maturity

–Entity must have positive intent and ability to hold securities until maturity.

–Carried at amortized cost

Valuation and Reporting of Investments in Debt Securities

Valuation and Reporting of Investments in Debt Securities• Trading Securities–Used to generate profits from short-

term differences in prices.–Holding period is usually less than 3

months.–Reported at fair market value.–Unrealized gains and losses reported in

net income.–Discount or premium is not amortized.

• Available for Sale:

–Reported at fair market value.

–Unrealized gains and losses reported in comprehensive income and as a separate component of stockholders’ equity.

Valuation and Reporting of Investments in Debt Securities

Investments in Equity Securities

• Ownership interests such as common, preferred, or other capital stock

• Rights to buy and sell the ownership interests (i.e., warrants, rights, call options, and put options).

Investments in Equity Securities

Percentage of Ownership

Less than 20%

20% - 50%More than

50%

Level of Influence

Little or None

Significant Control

Valuation Method

Fair Value Method

(SFAS 115)

Equity Method

(APB 18)Consolidation

• Two separate portfolios

–Trading Securities (TS)

–Available for Sale (AFS)

• No Held to Maturity (HTM) portfolio because shares do not have a maturity date.

Valuation & Reporting of Equity Securities: Fair Value Method

• Available-for-Sale– Recorded at cost when

acquired– Valued and reported at

fair value subsequent to acquisition

– Unrealized holding gains and losses are reported as:• Part of compre-

hensive income, and• A component of

stockholders’ equity

• Trading Securities– Recorded at cost when

acquired– Valued and reported at

fair value subsequent to acquisition

– Unrealized holding gains and losses are reported in net income

Valuation & Reporting of Equity Securities: Fair Value Method

Investments in Equity Securities:Fair Value Method Vs. Equity Method

Fair Value Method Equity Method

Dividends received from investee

Recorded as dividend revenue

Recorded as a decrease to carrying value of investment account

Investor’s share of investee’s net income (loss)

Not recognized Recognized as income (loss) and as increase (decrease) to carrying value of investment

Changes in fair value of investment

Recognized either in net income (TS) or as a component of stockholders’ equity (AFS)

Not recognized