Question

An important part of the accounting for investments in marketable securities is the distinction between the various classifications of investments.

Respond to the four topics below:

• When a company has excess cash, what types of securities may it invest in?

• Explain how the distinction between the various investment classifications is made.

• Discuss the distinction between realized and holding gains and losses on investments in debt and equity securities.

• Explain how a company discloses realized and holding gains and losses on investments in equity securities on its financial statements.

Answer 1

If a company had excess cash it can invest in:

· Fixed Deposit for any term from 6 months to 1 Year. This option is risk free and would require a minimum funds block for a certain term of FD.

· Equity Securities. This will allow company to provide better return and also high liquidity. However, this option is very risky.

· Debt Securities. This will allow company to provide better return than FD and is also risk free.

· Government Bonds. This option also provides higher return but would require a long holding period.

Classification of Investment:

· Based on the holding it can be classified as Current and Non Current. For Ex. If any investment is held for purpose to sale within 1 year than it will be classified as current year and if purpose is to hold for more than 1 year than it would be classified as Non Current Investment.

· Based on Nature:

1. Equity Investment: Equity investment is investment made into equity securities of the company. They provide a higher return in form of dividend and capital appreciation. But with higher return comes higher risk as it is very volatile.

2. Debt Investment: Debt investment is investment made in bond and debentures of company. The generally provide return in form of interest and are risk free.

3. Hybrid Investment: Combination of investment made in equity and debt are consider as hybrid investment.

4. Other Investment : Investment made in Gold, Fixed Deposit, Government Bonds, Commercial Papers are consider as Other Investment

Distinction between realized and holding gains and losses on investments in debt and equity securities:

The basic difference is that in realized gains and losses, the investment is sold and the resulting actual gain or loss is recorded in the income statement. While Holding gains and losses are notional this states that resultant gain or losses will occur if the investments are sold.

Disclosure of realized and holding gains and losses on investments in equity securities on its financial statements:

The realized gains and losses are disclosed in Credit and Debit side of Income Statement respectively. While Holding gains and losses are disclosed in Credit and Debit side of Other Comprehensive Income Statement respectively.