1. Chapter 13: Investments Fundamentals of Intermediate Accounting
Weygandt, Kieso, and Warfield
Chapter 13: Investments
Prepared by
Bonnie Harrison, College of Southern Maryland,
LaPlata, Maryland

2. Chapter 13 Investments
After studying this chapter, you should be able to:
Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.
Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
Explain the equity method of accounting and compare it to the fair value method for equity securities. 1 2 3

3. Chapter 13 Investments
After studying this chapter, you should be able to:
Describe the disclosure requirements for investments in debt and equity securities.
Discuss the accounting for impairments of debt and equity investments.
Describe the accounting for transfer of investment securities between categories. 4 5 6

4. Scopes of APB No.18 and SFAS No. 115
Scope: SFAS 115
Scope: APB No. 18
All debt
securities
transactions
Equity securities
transactions, if
they are less than 20%
of voting stock
Equity securities,
if they are
20% or more
of voting stock
20 to 50%
> 50%

5. Investment Categories under SFAS 115
SFAS No. 115
Debt Securities
Equity Securities
Trading
Available
for Sale
Held to
Maturity
Trading
Available
for Sale

6. APB No. 18: Scope Equity Method Consolidations Equity Securities
applies to
Equity Securities
Equity Method
If 20% to 50%
voting stock
Consolidations
If more than 50%
voting stock

7. Debt Securities: Types and Reported Amounts
Debt Instruments representing a
CREDITOR relationship
TRADING
Securities
Available
for Sale
Held-to-
Maturity
Record at
fair value
Amortized cost
M.V.changes
recorded as part
of income
recorded as other
comprehensive
income and as part
of equity
M.V. changes
not recognized

8. Held-to-Maturity Debt Securities
The operating entity has both:
a positive intent to hold the securities, AND
the ability to hold them to maturity
These securities are accounted for at amortized cost, not fair value.

9. Available-for-Sale Debt Securities
These investments are reported at fair value in the balance sheet.
Differences between the fair value and amortized cost are reported as unrealized holding gains and losses (part of equity)
When realized, gains and losses in fair value are reported as part of net income

10. Trading Securities
Trading securities are used to generate profits from short term differences in prices.
The holding period is usually less than 3
months
The securities are reported at fair value
Unrealized gains and losses are reported as part of net income
Any discount or premium is not amortized.

11. Investments in Debt Securities: Example
Investment in debt security: (Issue at a discount)
Cost to investing entity: $ 924,183
Par value: $ 1,000,000
Discount $ ,817
Effective rate of interest: 10%
Stated (contractual) rate: 8%
Fair value of security:
End of year 1 $1,000,000
End of year 2 $ 975,000
Compute gains or losses for the three types of debt securities

12. Investments in Debt Securities: Example
Given: Investment in Debt Security
Amortization Schedule (Discount Issue)
Carrying Interest Cash Received Amortized
Value (beg) Revenue for Interest cost (end)
924,183
924,183 92, , ,601
936,601 93, , ,262
End of year
Fair
Value
(in mil)
1,000,000
975,000
Effective rate = 10%; Stated Rate = 8%; Par = $1,000,000

13. Investments in Debt Securities: Trading Security
Compute gain: FMV less Acquisition cost
$1,000,000 less $924,183 = $75,817
Securities Fair Value (Trading) 75,817
Unrealized Holding Gain
or Loss – Income 75,817
Add to Trading
Securities in
balance sheet
Report as income

14. Investments in Debt Securities: Available-for-Sale Security (year 1)
Determining Unrealized gain or loss:
FMV end of year 1: $1,000,000
Carrying value end of year 1 $ 936,601
Unrealized gain (year 1): $ ,399
Securities Fair Value Adjustment ,399
Unrealized Holding Gain or Loss 63,399
Add to Trading
Securities in
balance sheet
Report as part
of equity

15. Investments in Debt Securities: Available-for-Sale Security (year 2)
Determining Unrealized gain or loss:
FMV end of year 2: $ 975,000
Carrying value end of year 2 $ 950,262
Unrealized gain (year 2): $ 24,738
Unreal. G & L: End of year 1: $63,399 credit
End of year 2: $24,738 credit
Reverse $ debit
Unrealized Holding Gain or Loss
Securities Fair Value Adjustment

16. Investments in Debt Securities: Held-to-Maturity Security
No entry is needed for fair value adjustment.
Fair value changes are not recognized at balance sheet date
Show security at amortized cost

17. Equity Securities
Equity securities represent ownership interests such as common, preferred, or other capital stock.
They include rights to buy and sell the ownership interests
Convertible debt and redeemable preferred stock are not equity securities for this purpose
The extent of ownership in common stock by an investor in an investee determines the accounting treatment for equity securities.

18. Investments in Equity Interests: Control
Ownership Percentage
0% 20% 50% 100%
Little Significant CONTROL
or none
Level of Influence

19. Investment in Equity Securities: Available for Sale Securities
Securities when acquired are recorded at cost
Subsequent to acquisition, the investments are valued and reported at fair value
Investor does not recognize its proportionate share of investee’s net income, unless dividends are declared by investee
Unrealized holding gains and losses are reported as:
part of comprehensive income, and
a component of stockholders’ equity

20. Investment in Equity Securities: Trading
The accounting guidelines are the same as for the available for sale securities.
Unrealized gains and losses, however, are reported in net income.
The account Unrealized Holding Gain or Loss Income is used.

21. Investments in Equity Securities: Equity Method
A substantive economic relationship is acknowledged between the investor and the investee
The investment’s carrying value is increased by investor’s proportionate share of earnings
The investment’s carrying value is decreased by:
investor’s proportionate share of losses
dividends received by investee

22. Absence of Significant Influence by Investor: Examples
The FASB has provided examples of cases in which significant influence may not exist:
Investee opposes investor’s acquisition of stock
Investor surrenders significant shareholder rights
Majority ownership concentrated among group of shareholders who have no regard for views of investor
Investor is unable to obtain representation on investee’s board of directors

23. Investments in Equity Securities: Consolidation
A voting interest of more than 50% results in a controlling interest
The investor is the parent corporation; the investee is the subsidiary corporation
The investor prepares consolidated financial statements for the parent and the subsidiary
The investor accounts for the investment on its books by the equity method

24. Investments in Equity Securities: Summary
Ownership in Capital Stock
less than
20% of voting
% of
voting
more than
50% voting
Trading
Available
for Sale No
Consolidation
Consolidation
Fair
value
Equity
method
Equity
method

25. Equity Securities: Accounting by Category
Category Valuation Unrealized Holding Other Income
Gains and Losses Effects
<20% Fair value Comprehensive Dividends and
Avail for sale Income & Equity G & L (sale)
<20% Fair value Net income Dividends;
Trading G & L (sale)
20% - Equity Not recognized Proportionate
50% investee’s inc
>50% Consolidate Not recognized Not applicable

26. Disclosure Requirements Under Equity Method
Name of investee and % ownership of common stock
Accounting policies of investor regarding investments in common stock
Any difference in the amount in the investment account and underlying equity in net assets of investee
Aggregate value of each identified investment based on quoted market price (if available)
If necessary, summarized information concerning assets, liabilities and results of operation of investee

27. Debt securities: TRANSFERS between categories
Concerns:
At what value is the security transferred?
How are gains and losses accounted for?
What is the effect of the gain/loss accounting on income and equity?

28. Transfers between Categories (1 of 4)
Type of Measurement Impact of Impact of
Transfer Basis Transfer on Transfer on
Stockholders’ Equity Net Income
Trading Transferred at Unrealized gains or Unrealized gains or
to fair value to losses at date of losses at date of
Available Available for transfer increase transfer are
for Sale Sale category or decrease recognized in income.
and is the new stockholders’
COST basis equity.
of security

29. Transfers between Categories (2 of 4)
Type of Measurement Impact of Impact of
Transfer Basis Transfer on Transfer on
Stockholders’ Equity Net Income
From Transferred at The unrealized The unrealized
Available fair value at the gains or losses at gains or losses at
for date of transfer the date of the date of transfer
Sale and becomes transfer increase are recognized
to the new cost or decrease in income
Trading basis of security stockholders’
equity

30. Transfers between Categories (3 of 4)
Type of Measurement Impact of Impact of
Transfer Basis Transfer on Transfer on
Stockholders’ Equity Net Income
From Transferred at Unrealized gains or None
Held fair value at losses at date of
to date of transfer transfer increase or
Maturity decrease a separate
to component of equity
Available
for
Sale

31. Transfers between Categories (4 of 4)
Type of Measurement Impact of Impact of
Transfer Basis Transfer on Transfer on
Stockholders’ Equity Net Income
From Transferred at The unrealized gain None
Available fair value at or loss (at date of
for date of transfer transfer) is carried
Sale as a separate
to component of equity
Held and is amortized
to over the remaining
Maturity life of the security

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