12 – Financial
Reporting of
Investments
CORPORATE
FINANCIAL
REPORTING
·1
Long-Lived Assets
INVESTMENT IN THE STOCK OF
ANOTHER COMPANY
Reporting investments is a continuum based on
some measure of influence over the investee:
We can own:
1 share
100% of
shares
Financial Reporting of
Investments
2
INVESTMENT IN THE STOCK OF
ANOTHER COMPANY
Reporting investments is a continuum based on
some measure of influence over the investee:
We can own:
1 share
50%
100% of
shares
passive
investor
active investor
Financial Reporting of
Investments
3
INVESTMENT IN THE STOCK OF
ANOTHER COMPANY
Reporting investments is a continuum based on
some measure of influence over the investee:
We can own:
1 share
50%
100% of
shares
passive
investor
market
value
active investor
equity
consolidated
method
financial statements
Financial Reporting of
Investments
4
INVESTMENT IN THE STOCK OF
ANOTHER COMPANY
1 share
passive
investor
market
value
Marketable security or
Trading security
or
Security available for sale
The difference is where the
“unrealized” gains or losses
will appear
Financial Reporting of
Investments
5
Reporting Trading Securities vs.
Securities Available for Sale
International rules differ slightly, but in general:
Trading Securities are meant to be held for short
periods of time and are part of a company’s
“operating activity.”
Securities Available for Sale are not part of a
company’s “operating activity” rather they are
investments made as a short or long term investment
to generate financing (not operating) profits.
Held to maturity securities - later
Financial Reporting of
Investments
6
Reporting Trading Securities vs.
Securities Available for Sale
A brief aside - a visit to the
“hidden” income statement Other Comprehensive Income
and a bizarre new account.
Financial Reporting of
Investments
7
REPORTING “PASSIVE” INVESTMENTS
(our company prepares quarterly f/s)
In Feb. 2011, our company buys shares of X Company common
stock for $10,000 (includes broker charges).
On Mar. 31, 2011, our X stock has a fair value of $9,000.
On June 30, 2011, our X stock has a fair value of $12,000.
In July, 2011, our company buys shares of Y company for $14,000.
On Sep. 30, 2011, our X stock is worth $12,200; Y is worth $13,300.
In Oct. 2011, we sell our X stock for $12,700,
On Dec. 31, 2011, our Y stock is worth $13,000
Two scenarios – once treating the stock as a trading security and
then treating it as a security available for sale.
Investments
8
REPORTING “PASSIVE” INVESTMENTS
(our company prepares quarterly f/s)
In Feb. 2011, our company buys shares of X Company common
stock for $10,000 (includes broker charges).
On Mar. 31, 2011, our X stock has a fair value of $9,000.
On June 30, 2011, our X stock has a fair value of $12,000.
In July, 2011, our company buys shares of Y company for $14,000.
On Sep. 30, 2011, our X stock is worth $12,200; Y is worth $13,300.
In Oct. 2011, we sell our X stock for $12,700,
On Dec. 31, 2011, our Y stock is worth $13,000
Scenario A: IF TRADING SECURITY (unrealized gains and losses
on the income statement). The tax rate is 40%.
Investments
9
REPORTING “PASSIVE” INVESTMENTS
(our company prepares quarterly f/s)
In Feb. 2011, our company buys shares of X Company common
stock for $10,000 (includes broker charges).
On Mar. 31, 2011, our X stock has a fair value of $9,000.
On June 30, 2011, our X stock has a fair value of $12,000.
In July, 2011, our company buys shares of Y company for $14,000.
On Sep. 30, 2011, our X stock is worth $12,200; Y is worth $13,300.
In Oct. 2011, we sell our X stock for $12,700,
On Dec. 31, 2011, our Y stock is worth $13,000
Scenario B: IF SEC. AVAIL. FOR SALE (unrealized gains and
losses in Other Comprehensive Income). The tax rate is 40%.
Investments
10
Reporting Trading Securities vs.
Securities Available for Sale
IF YOU HAD A CHOICE, WHICH WOULD YOU
CHOOSE AS A CEO OF A COMPANY?
WHY?
Financial Reporting of
Investments
11
Reporting Trading Securities vs.
Securities Available for Sale
QUESTIONS?
Financial Reporting of
Investments
12