Investments

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Investments In general, investments in debt and
equity securities are categorized as three
types Held to maturity (debt securities only) -
securities that will be held until they mature
and principal will be repaid enterprise must
demonstrate positive intent and ability to hold
to maturity. Trading - bought and held primarily
for sale in the near term to generate income on
short-term price differences often help for a
matter of days Available for sale - securities
not categorized as the other two.
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Debt Securities
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Available for Sale and Other Comprehensive
Income Unrealized losses are included as a
component of comprehensive income and are shown
on the balance sheet in the stockholder's equity
section. When an unrealized gain/loss becomes
realized, it goes into net income. Thus it has to
be removed from unrealized gains/losses. Thus
there are essentially 2 components to the
comprehensive income adjustment (1) holding
gains/losses during period and (2) previously
recognized holding gains/losses that were
realized this year.
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Equity Method Use when you have influence which
is presumed at 20 ownership. Try to make your
balance in account equal your proportionate share
of investee's equity. Treat your share of
investee's income as investment income. Treat
dividends as a reduction of investment. Amortize
difference paid over investee's book value
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Consolidation If you own over 50, consolidate
the records of the two companies when preparing
financials Still use equity method on parent's
books
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Transfers between Categories All transfers are
at market value. Gains and losses recognized in
income for transfers between available for sale
and trading or back. When transferring from held
to maturity to available for sale, transfer at
fair value, but take unrealized gain/loss
directly to equity. When transferring for
available for sale to held to maturity, transfer
at fair value and amortized unrealized gain/loss
over remaining life.
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Derivatives

• Derivatives are securities that derive their
  value from the value of something else (the
  underlying).
• Can be used to hedge, speculate or arbitrage
• Basic accounting is to recognize as assets and
  liabilities, value at fair value, and put
  gains/losses into income on all speculation and
  some hedges.

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Criteria to be a Derivative

• Should have one or more underlyings and an
  identified payment provision
• There is little or no investment at the inception
  of the contract
• Requires or permits net settlement (dont have to
  take possession of the underlying)

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Fair Value Hedge

• Used to offset the change in value of an asset
• Recognize at fair value with gains or losses to
  income on both derivative and underlying
• Interest rate swaps are common example, interest
  is recognized at swapped rate, and gains or
  losses on swap are offset by losses or gains on
  the underlying debt. Ex 27