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) ValuationUnrealized Holding Gains or Losses Held-to- Maturity Amortized Cost Not recognized Trading Securities Fair ValueRecognized in net income Available- for-sale Fair ValueRecognized 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
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 SignificantControl 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 MethodEquity 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 recognizedRecognized 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