Chapter 15
Unit 09 Seminar
Investments
Intermediate Accounting 11th edition
Nikolai Bazley Jones
Presented by Professor Stanley Self
2
Why Companies Invest in Other Companies
1. Additional revenues from idle cash
2. Control over another company
3. Beneficial relationship with another company
3
Classification of Investments
1. Trading securities
2. Available-for-sale
securities
3. Held-to-maturity debt
securities
4
Trading Securities
Trading securities are investments in debt
and equity securities that are purchased and
held principally for the purpose of selling them
in the near term. These securities are reported
at their fair market value on the ending
balance sheet, and unrealized holding gains
and losses are included in net income of the
current period
5
Available-for-Sale Securities
Investments in available-forsale securities are (a) debt
securities that are not classified
as being held to maturity,
and…(b) debt and equity
securities that are not classified
as trading securities.
6
Available-for-Sale Securities
Investments in available-for-sale
securities are reported at their fair
value on the ending balance sheet
date, and the unrealized holding gains
or losses are reported as a component
of other comprehensive income.
Therefore, the unrealized holding
gains and losses for available-forsale securities are not included in net
income.
7
Held-to-Maturity Debt Securities
Investments in held-to-maturity debt
securities are debt securities for
which the company has the “positive
intent and ability to hold those
securities to maturity.” Investments in
held-to-maturity debt securities are
reported at their amortized cost on the
balance sheet…not their fair value.
8
Accounting for Investments
Investment Categories
Investment in Equity Securities
1. No significant influence
(less than 20% ownership)
a. Trading
b. Available for sale
2. Significant influence
(20 to 50% ownership)
3. Control
(more than 50% ownership)
Accounting
Method
Fair value
Fair value
Reporting of
Unrealized Holding
Gains and Losses
Equity method
Net income
Other comprehensive
income
Not recognized
Consolidation
Not recognized
9
Accounting for Investments
Investment Categories
Accounting
Method
Investment in Debt Securities
1. Trading
2. Available for sale
Fair value
Fair value
3. Held to maturity
Amortized cost
Reporting of
Unrealized Holding
Gains and Losses
Net income
Other comprehensive
income
Not recognized
10
Investments in Debt and Equity Trading Securities
1. The investment is initially recorded at cost.
2. It is subsequently reported at fair value on the
ending balance sheet(s).
3. Unrealized holding gains and losses are
included in net income of the current period.
4. Interest and dividend revenue, as well as
realized gains and losses on sales, are included
in net income of the current period.
11
Investments in Available-for-Sale Debt and Equity Securities
1. The investment is initially recorded at cost.
2. It is subsequently reported at fair value on the ending
balance sheet(s).
3. Unrealized holding gains and losses are reported as a
component of other comprehensive income.
4. The cumulative unrealized holding gains and losses are
reported in the accumulated other comprehensive
income section of stockholders’ equity
5. Interest and dividend revenue, as well as realized gains
and losses on sales, are included in net income for the
current period.
12
Page references for Investment
Examples
 Available-for-Sale Debt & Equity Securities ……. 720
 Realized Gains & Loses on sales of A4S ………….. 724
 Held-to-Maturity (Remember, only Debt) ……… 726
 Effective Interest Rate Method (Review) ...... 657 to 665
 Accounting for Bond Premiums & Discounts 727 to 731
 Amortization of bonds Acquired Between Int. Dates 729
 Sale before Maturity Date ………………….... 730 to 731
13
Accounting for Investments
Classify
According to
Management
Intent as:
Recognize
Interest and
Dividend
Revenue in:
Recognize
Realized
Gain or
Loss in:
Compute
Realized
Gain or
Loss as:
Trading
Net Income
Net Income
Selling Price minus
Fair Value at Most
Recent Balance
Sheet Date
Available-for-Sale
Net Income
Net Income
Selling price minus
(Amortized) Cost
Held-to-Maturity
Net Income
Net Income
Selling Price minus
(Amortized) Cost
14
Transfers of Investments Between Categories
1.
2.
3.
4.
A transfer from the trading category
A transfer into the trading category
A transfer into the available-for-sale category
A transfer of a debt security into the held-tomaturity category from the available-for-sale
category
(See Pages 732 to 734 for specific examples)
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Impairments
Impairments may be an “other than
temporary” decline below the amortized
cost of an investment in a debt security
classified as available for sale or held to
maturity. (See Page 734)
Disclosures – see page 735.
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Disclosures
1. Trading Securities. A company must disclose the
change in the net unrealized holding gain or loss that is
included in each income statement.
2. Available-for-Sale Securities. For each balance sheet
date, a company must disclose the aggregate fair value,
gross unrealized holding gains and gross unrealized
holding losses, and (amortized) cost by major security
types.
3. Held-to-Maturity Debt Securities. For each balance
sheet date, a company must disclose the aggregate fair
value, gross unrealized holding gains, gross unrealized
holding losses, and amortized cost by major security
types.
17
Financial Statement Classification
See page 737.
18
A Conceptual Evaluation
1. Fair value is required in the balance sheet for
trading securities and available-for-sale
securities, but amortized cost is required for
held-to-maturity securities.
2. Fair value is not required for certain liabilities.
3. Unrealized holding gains and losses are
reported in net income for trading securities
but in other comprehensive income for
available-for-sale securities.
4. The classification of securities is based on
management intent.
19
IFRS vs. U.S. GAAP
 IFRS also use the trading, available-for-sale,
and held-to-maturity categories.
 The valuation methods are the same for each
category as under U.S. GAAP.
 IFRS also apply these categories to all financial
instruments, such as loans and receivables.
 IFRS allow for the reversal of impairment
losses related to held-to-maturity securities and
available-for-sale securities.
20
Equity Method
When an investor
corporation owns a
significantly large
percentage of common
stock, it is able to exert
significant influence over the
operating and financial
policies of the investee
corporation. The equity
method is used to account
for this investment.
21
Equity Method
 Acknowledges the existence of a material
economic relationship between the investor and
the investee
 Is based upon the requirements of accrual
accounting
 Supplies more relevant information for
decision makers who rely on financial
statements
22
Equity Method
In the absence of evidence to
the contrary, an investment of
20% or more in the
outstanding common stock of
the investee leads to the
presumption of significant
influence.
23
Equity Method
According to GAAP, what are
the facts and circumstances
that indicate that investors
with 20% or more in the
investee’s stock should not use
the equity method?
(See Page 741)
24
Equity Method
See Journal Examples – Pages 742 – 743
See Disclosure Examples – Page 743
See Change to Equity Method – Page 744
See Change from Equity Method – Page 744
25
Additional Issues
Non-marketable Securities
Stock Splits
Stock Dividends
Stock Warrants
Convertible Securities
Life Insurance Cash Surrender Value
26
Sample Exercises
Assigned
Exercise E15-4, p. 762
Exercise E15-8, p. 763
Problem 15-18, p. 771
Similar
E15-5 p. 762
P15-9 p. 769
E15-16 p. 764
27
Exercise 15-5 (Page 1 of 2)
28
Exercise 15-5 (Page 2 of 2)
2.
Noncurrent assets:
Investment in available-for-sale securities (at cost)
Plus: Allowance for change in value of investment
Investment in available-for-sale securities (at fair value)
$92,000
1,500
$93,500
Stockholders' equity:
Accumulated Other Comprehensive Income: Unrealized
increase in value of available-for-sale securities
$ 1,500
29
Problem 15-9 (Page 1 of 4)
HYDE CORPORATION
Bond Investment Interest Revenue
and Premium Amortization Schedule
Effective Interest Method
Date
01/01/10
06/30/10
12/31/10
03/31/11
06/30/11
12/31/11
06/30/12
12/31/12
06/30/13
Cash
Debita
$ 19,500.00
19,500.00
157,754.03e
9,750.00
9,750.00
9,750.00
9,750.00
159,750.00
Investment in
Interest Revenue Debt Securities
Creditb
Creditc
$18,502.41
18,442.56
4,594.78e
9,189.56
9,155.93
9,120.28
9,082.50
9,042.48f
$
997.59
1,057.44
153,159.25e
560.44
594.07
629.72
667.50
150,707.52
Carrying Value
of Debt
Securitiesd
$308,373.53
307,375.94
306,318.50
153,159.25
152,598.81
152,004.74
151,375.02
150,707.52
-0-
30
Problem 15-9 (Page 2 of 4)
aBonds outstanding x 0.13 x 1/2 + Cash
received to retire bonds
bCarrying value of bonds x 0.12 x 1/2
(except 3/31/11 when times ¼ instead of 1/2)
cFootnote a - footnote b
dPrevious carrying value - footnote c
eSee March 31, 2011 journal entries; for
Cash, $159,500.00 less $1,745.97 gain
fDifference due to $0.03 rounding error
31
Problem 15-9 (Page 3 of 4)
32
Problem 15-9 (Page 4 of 4)
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Exercise 15-16
2010
Jan.
During
the
year
Dec.
1 Investment in Stock: Fink Company
Cash (3,000 x $16)
48,000
Investment in Stock: Fink Company
Investment Income ($22,000 x 0.30)
6,600
Cash ($6,000 x 0.30)
Investment in Stock: Fink Company
1,800
31 Investment Income
Investment in Stock: Fink Company
a[($115,000
- $90,000) x 0.30] 10 years
48,000
6,600
1,800
750a
750
34
Q & A Session
?
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Chapter 15