Question

What are the requirement(s) for an investment to be classified in each of the 3 categories?
Also, that are the requirements for an investment to be accounted for using the equity method of accounting?

Answer 1

The investment may be recognised in three different categories

The initial recognition in different categories is based on the intention of the purchaser at the time of purchase

Say for example

A company buys 3 shares and decides it will sell when the share price goes up. Then these securities are held for short term profit

These are to be classified under trading for securities

Valuation: Since these are held for trading, these to be valued at fair value

Each closing period, that day value of the securities is taken into consideration, and the unrealised gains and losses are recognised in income statement

The investments should reflect the fair value / i.e the existing value of the investments

A company buys 3 shares and decides it will hold the asset till maturity

The company buys the assets and decides it will hold it till the life of the share, i.e until the share value matures

These are to be classified as investment held to maturity

Valuation: these are recorded at cost (all cost involved in acquiring the asset) and any change in the market value of the share is recorded only when the share matures and actual profit/ loss is recognised

There is a residual category, namely asset held for sale, these assets are held for sale, ready for sale, and waiting for the purchaser.

Valuation:The profits and losses of the value of the share are recognised immediately , in the comprehensive income statement, and once the actual share is sold, and unrealised gains and losses are accounted in other comprehensive income, in stock holders equity in the balance sheet the invesments can be valued in equity method under following circumstances When the investments held ensure us the power to significantly influence the decisions in the company , then the shares held may be valued under equity method significant influence is believed when the % of holding is equal or more than 20% of the total shares