1. Chapter 18: Investments Intermediate Accounting, 10th Edition
Kieso, Weygandt, and Warfield
Chapter 18: Investments
Prepared by
Krishnan Ranganathan, Angelo State University,
San Angelo, Texas

2. Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)
Part 1 :
Investments in
Debt
Securities
11/9/2018
Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

3. Accounting Guidelines: History
There are two standards involved: APB No. 18 and SFAS 115.
Under APB No. 18: Investments are classified as either short term or long term depending on management’s intent, and
Valuation is lower of cost-or-market (LCM)
SFAS 115 applies to periods beginning after Dec 15, 1993.
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

4. History: continued ---
SFAS 115 applies to the following investments:
all investments in debt securities
investments in equity securities (with less than 20% of voting stock)
APB No. 18 applies to other investments in equity securities with voting stock of 20% or more
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

5. 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%
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

6. Investment Categories under SFAS 115
SFAS No. 115
Debt Securities
Equity Securities
Trading
Available
for Sale
Held to
Maturity
Trading
Available
for Sale
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

7. Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)
APB No. 118: Scope
APB No. 118
applies to
Equity Securities
Equity Method
If 20% to 50%
voting stock
Consolidations
If more than 50%
voting stock
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

8. 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
income or as part
of equity
M.V. changes
not recognized
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

9. 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.
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

10. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

11. Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)
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.
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

12. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

13. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

14. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

15. Investments in Debt Securities: Available-for-Sale Security (year 1)
Determining Unrealized gain or loss:
FMV end of year 1: $1,000,000
Amortized cost 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

16. Investments in Debt Securities: Available-for-Sale Security (year 2)
Determining Unrealized gain or loss:
FMV end of year 2: $ 975,000
Amortized cost 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

17. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

18. 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?
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

19. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

20. 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 is recognized
to the new cost or decrease in income
Trading basis of security stockholders’
equity
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

21. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

22. 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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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

23. Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)
Part 2 :
Investments in
Equity
Securities
11/9/2018
Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

24. Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)
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 forequity securities.
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

25. Investments in Equity Interests: Control
Ownership Percentage
0% 20% 50% 100%
Little Significant CONTROL
or none
Level of Influence
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

26. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

27. 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.
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

28. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

29. 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
Investor is unable to obtain needed financial information from investee
Investor is unable to obtain representation on investee’s board of directors
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

30. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

31. 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

32. Equity Securities: Accounting by Category
Category Valuation Unrealized Holding Other Income
Gains and Losses Effects
<20% Fair value Other income and Dividends and
Avail for sale 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
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

33. Derivatives in General
Derivatives are financial products, used for risk management
They are used primarily for purposes of hedging a company’s exposure to:
fluctuations in interest rates,
foreign currency exchange rates, and
commodity prices.
Speculators and arbitrageurs in the derivatives market provide liquidity to the market
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

34. Reporting Derivatives in Financials
Derivatives are reported as assets and liabilities and at fair value
Derivative gains and losses from speculation must be reported in income.
Derivative gains and losses from hedging transactions are reported in different ways, depending upon the type of the hedging transaction.
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

35. Accounting for Fair Value Hedges
The derivative in a qualifying fair value hedge is recorded at fair value in the balance sheet
The gains and losses (from adjustment to the hedged fair value) are recorded in income
The items hedged also are accounted for at fair value
Derivatives from cash hedges are accounted for at fair value.
The gains and losses from cash hedges are reported as other comprehensive income (in equity)
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Intermediate Accounting, 10th Edition, Ch. 18 (Kieso et al.)

36. COPYRIGHT
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