Question

In: Accounting

What are the two main types of investment securities that companies hold? What are the key...

What are the two main types of investment securities that companies hold? What are the key issue in accounting for these investment securities, including cost and fair value accounting? Discuss accounting for investment in debt securities, including held-to-maturity, trading, and available-for-sale securities, at initial recognition and subsequent to acquisition. Discuss in detail accounting for investment in equity securities when the investor has no significant influence and the securities are held as trading securities or available-for-sale securities at initial recognition and subsequent to acquisition. Include accounting for investment without readily determinable fair values. Discuss accounting for investment in equity securities where the investor has significant influence over the investee company.   Explain the accounting procedures for long-term notes receivable. Discuss the fair value option in accounting for investing assets. What are the required disclosures for investing assets.

Solutions

Expert Solution

Basically , the two type of securities ,which are issued by a Company are Equity and Debt.

Equity stands for the Share Capital , which is issued to Public and the money collected is used into business

Debit is the another option for a Company, where Company approaches to Banks and Financial Institutions for Loans and these are long term loans. Interest on Debt is the return to the Bankers.

The difference between the cost of equity and cost of debt is different for tax point of view

Dividend is declared or paid on Equity shares , which is at the will of the Company and it is not tax deductible

Dividend is recorded , below the line and it is an appropriation out of profits

A Shareholder cannot claim a Dividend , until declared by the Company

On the contrary , Debt is having a certain cost in terms of Interest , which is payable to the Banks or Financial Institutions.

Debt is charged to Profit & Loss Account and it is an allowable expenses and shown , above the line.

In comparison, Debt is a cheaper version for a company as it is eligible for tax deduction , while Cost of Equity or Dividend is not cheaper than Debt since it is not charged to Tax.

Debt includes the Debentures , which is issued in Public with a prior decided rate of return for example 9% or 10%  

In the Financial Statements , the Equity of Share Capital is displayed in the Balance Sheet , alongwith the Proposed dividend, if any declared by the Company.

In case of Debt or Debentures or Long Term Loans from Banks and Financial Institutions , the historical cost of debt is shown in the Balance sheet.

However, in case of long term loans , the present value of the outflows may be different in comparison with historical cost

It means that if the Present value is discounted @ 10% per year, a debt cost of 10000 will be 1000 after 10 years.

Hence , debt is definitely a cheaper version as the company will have to pay as per book value and the fair value might be less at the time of redemption

Holding the securities for trading purpose - In such cases , the Investor is not really interested in the Dividend but the growth of the Share as per the Share Market of the Country.

If the Company is doing good and the Economy is doing good, the market price of the share might increase and this will be the growth model for an Investor.

In day to day trading , an Investor doesn't care about the Dividend but takes benefit of the ups and downs of the share market.

the rule says that when the market is low, buy it and when the market is high , sell it .. Most of the people follow this and take benefit , with their study of the market

Though , the ups and downs in the Share market can never be understood , there are market experts , who predicts about a certain share growth . People use their skill and knowledge to take benefit about the decision to sell and purchase a commodity.

When the Investor has significant influence over the Investee Company , the Investment Accounting doesn't change as it is always done at the book value of the Investment.

long term notes receivables

Fair value option of the Assets - Now , as per the new Accounting Standards , the valuation can be done at Fair Value of the Investment , for that you can record the cost of purchase of the Investment and record it at the Fair value

Disclosure - Investment are shown as - Fair value of the Investment ( Cost of acquisition to be deducted out of the Investment Amount )


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