Accounting

Chapter 12. Investments

I. Introduction

Investment assets are classified into 3 groups;

1. Held-To-Maturity Security: Investors have intent and ability to hold the security until maturity. Only for investments in bonds because stock has no maturity. Classified as long-term investment asset.

2. Trading Security: Investors buy the security for resale in the near future (less than 3 months). Classified as current asset. For investments in stock or bonds.

3. Available-For-Sale Security: Investments not classified as (1) or (2). For investments in stock or bonds.

One of the most important issues in investment accounting is the treatment of unrealized holding gain. The unrealized holding gain of trading securities is recognized as a gain and reported on income statement. This is quite different from the lower of cost or market rule for inventory assets under which the market value increase above the cost of inventory is not recognized, based on the conservatism convention.

*Broker’s fee should be included in the cost of investment!

In this chapter, only investments in equity security (stock) are discussed, i. e., trading security and available-for sale security. Investment in HTM will be briefly discussed in Chapter 14.

For equity security, there is no held-to-maturity security because stock has no maturity.   Accounting method for stock investment is determined by whether or not the investor has a significant control over the investee’s operations, mostly determined by the percentage of the investor’s stock ownership.

    0%                       20%                                 50%                                                  100%

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            Fair Value                       Equity                                 Consolidation

              Method                         Method            ...