Investments in Debt Securities
Companies invest in all kinds of debt securities to include government securities (federal or municipal), corporate bonds, notes, and commercial paper. How a company accounts for these investment in debt is based on the managements intentions for these investments.
Based on managements intentions, debt investments can be broken down into three categories.
- Held-to-maturity - The company wants to hold the debt to maturity.
- Trading - The debt is intend to be traded in the near term for small profit gains.
- Available-for-sale - The company intends to sell at some point in the future. It isn't intended to be held to maturity, but it also wasn't intended to be traded,
When we talk about trading, we are talking about very short-term buying and selling. If a debt was going to be bought with the intention of selling within an accounting period, a company could justify that it was intended for trading. Why the difference? Later on when we talk about income recognition the method that we account for the resulting income differs.
Held-to-maturity securities are recorded at amortized cost and not at fair value.
- Effective-interest method
Available-for-sale securities are recorded at fair value but changes to fair value are not included in net income until after the security is sold.
Securities that are for trading are recorded at fair value and unrealized gains or losses is reported in net income.
Investments in Equity Securities
- Fair Value Method (holdings less than 20%)
- Equity Method (holdings between 20% to 50% or significant influence)
- Consolidated Statements (controlling interest)
Investments in Derivative Instruments
- Forward Contracts
- Option Contracts
- Fair Value Hedge
- Bifurcation of hybrid securities
- Disclosures for derivatives
Kieso, Donald E., Weygandt, Jerry J., and Warfield, Terry D. (2007). Intermediate Accounting, 12ed. John Wiley & Sons. ISBN 0-471-74955-9 pages 837-882