Question

What is the difference between a trading security, available-for-sale, and held-to-maturity investment? What is the equity approach? When must entities consolidate their financial statements?

Answer 1

Held to maturity securities are debt securities which the enterprise has the intent and ability to hold to maturity. ... Available for sale securities include all other debt and equity securities, and are reported at fair value.

The equity method is an accounting technique used by firms to assess the profits earned by their investments in other companies. The firm reports the income earned on the investment on its income statement, and the reported value is based on the firm's share of the company assets.

According to FASB Statement No. 94, consolidated statements must be prepared (1) when one company owns more than 50 per cent of the outstanding voting common stock of another company, and (2) unless control is likely to be temporary or if it does not rest with the majority owner (e.g. the company is in legal reorganization or bankruptcy).[2] Thus, almost all subsidiaries must be included in the consolidated financial statements under FASB Statement No. 94. Previously, the consolidated statements did not include subsidiaries in markedly dissimilar businesses than those of the parents.

Financial transactions involving a parent and one of its subsidiaries or between two of its subsidiaries are intercompany transactions.