Question

What are some of the reasons companies invest in the debt and equity securities of other companies? Do the reasons for making an investment affect the way the investment is reported in the financial statements? How should the reasons be established and documented?

Answer 1

Companies invest in the debt and securities of other companies to earn high yield on interest. Usually banks and insurance companies invest their collections in high yield bonds and debts of other companies through stock market and other channels.

Investment in the debt and equity securities are made by companies if they have surplus cash in hand and there is no investment project available for investment.Surplus cash can give certain return if invested in debts and bonds of other companies.

Reasons for making an investment affect the way the investment is reported in financial statements. Companies need to decide the reason for investment at the time of making investment and investment should be classified accordingly.If the investment is "held till maturity" then it is to be shown as amortized cost, if the investment is held for speculation purpose then it is to shown as fair value and difference between fair value and cost of investment will be debited or credited to profit and loss account as normal profit or loss. If the investment is held for hedging purpose then it to be shown as fair value and difference between purchase value and fair value will be credited or debited to other comprehensive income.