Financial Statement Presentation of Securities & Investments

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  • 0:04 Why Make Investments?
  • 1:28 Non-Influential Securities
  • 1:56 Held-to-Maturity Securities
  • 2:39 Available-for-Sale Securities
  • 3:29 Accounting for…
  • 4:35 Lesson Summary
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Lesson Transcript
Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson, you'll learn how to account for investment securities and classify them on your company's balance sheet. You'll also learn when to account for investments with the equity method or when you must use consolidation accounting.

Why Make Investments?

There are many reasons why a company may hold investments. One common scenario includes parking money for a period of time until it's needed to fund operations. An example of this is when a toy company collects its outstanding receivables in the first quarter and doesn't need to purchase inventory until the third quarter to manufacture toys for the holiday season. Another reason may be to accumulate resources for a major project that the company plans to undertake. Stockpiling money for a bank loan payment is an example of this situation.

Accounting for investments can be a little tricky since it takes the intent of management into consideration. For instance, investments intended for liquidation within the year are classified as current assets on your company's balance sheet. Two other factors also impact how investments are accounted for: these are the type of investment and the amount of security owned.

If you own less than 20% of the outstanding voting shares of another company, you are said to have non-influential investments. Companies generally must report investments in non-influential securities at fair value. If you own over 20% of the outstanding voting shares of a company, you are said to own influential investments. Special accounting rules then apply.

Non-Influential Securities

When management intends to actively trade securities for profit, they are classified as trading securities. Trading securities are recorded at fair value with any adjustment to the carrying value of the security being recorded in current earnings on the income statement of the company for the current year. Trading securities are always classified as current assets on a classified balance sheet and can be either debt or equity securities.

Held-to-Maturity Securities

Debt securities (such as a bonds or notes) of another company or governmental entity you intend to hold until maturity are accounted for as held-to-maturity (HTM) securities. HTM securities can only be debt securities, since equity securities don't have a maturity date. HTM securities can be classified as either short- or long-term assets on the classified balance sheet depending on the maturity of the debt security, and are accounted for at an amortized cost. Amortized cost is defined as the cost of the security plus an unamortized premium or less any unamortized discount.

Available-for-Sale Securities

Available-for-sale (AFS) securities may be either debt or investment securities, or a current asset or long-term asset, depending on the intent of management. AFS securities are investments not classified as either trading securities or HTM securities and are recorded at fair value. Unlike trading securities, the fair value adjustment isn't recorded in current earnings. The fair value adjustment is recorded on a company's balance sheet in an equity account.

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