Question

If anyone could simplify this for me. I'm having trouble understanding the material and I just need a keep it simple stupid approach

Discuss the various non influential as well as influential investments that company may have on their financial statements. Also compare and contrast how they are treated/recorded on the companies financial statements.

Answer 1

The various types of non-influential investments a company can make are as follows:

• Available for sale

• Held for trading
• Held to maturity

Available-for-sale securities

The available-for-sale securities describe debt or equity securities that an investor purchases with the intention to gain profit by selling them before their stipulated maturity date. The said securities are regonized at fair value and any valuation adjustments are taken to comprehensive income and not to income account.

Held-to-maturity securities

These are debt investments held by investors till they reach the maturity date. The purpose for purchasing held-to-maturity is not to sell but to generate interest. These securities are fixed-income assets and rarely affected by changes in the market price. While the interest derived from these securities are taken to the income statement and any gains or losses are taken to comprehensive income.

Held-for-trading securities

These are debt and equity investments that investors buy and sell within a short period. Accounting standards classify held-for-trading securities as short-term assets. In this regard, gains or losses derived from these securities are taken to income statement unlike securities held for available for sale. The securities are recorded at fair value and any changes to the fair value at the year end are taken to the income statement. affect the gains and losses on an income statement.

The influential investments that a company can make are as follows:

• Investments in equity shares resulting in exercise of significant influence
• Investments in equity shares resulting in controlling the investee company

Investments in equity shares resulting in exercise of significant influence-

In the said case the investor company can exercise significant influence over the investee company and cannot control the investee company. The investment is recorded at the value at which the shares are acquired. Any dividend received from the investee company is treated as return of capital and given to credit to investment in equity account. Proportionate share of net income earned from investee company is added to the investment account and not given affect to income statement.

Investments in equity shares resulting in controlling the investee company-

The company can influence the investee company by acquiring more than 50% of the stake in the investee company. The investor exercise full control and can affect all the decisions of the investee company. The investment is recorded at the purchase consideration value and any contribution over and above the fair value of assets acquired would be recorded as good will and vice versa as a capital reserve. The accounts are consolidated for presentation every year and inter company transactions are netted of.