Financial Accounting (Fach) / Investments (Lektion)
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- Minority Passive Investments (1) Intend to sell soon: Trading Securities Management has every intention of turning the securities over -> WILL SELL Bal Sheet: Market Value Δ Market Value: Net Income Income Statement: Dividends, Interest, Δ Market Value Hold longer-term: (A) Available-for-sale Securities Mark-to-market with unrealized gains/losses to SE Held principally as investments Management may respont to market opportunities -> MAY SELL Bal Sheet: Market Value Δ Market Value: OCI (until sold) Income Statement: Dividends, Interest, Realized Gains/Losses (B) Held-to-maturity Securities Historical amortized cost Debt securities Firm has positive intent and ability to hold to maturity Management has no intention of selling in response to opportunities -. WON'T SELL Bal Sheet: Amortized Cost Δ Market Value: Ignored Income Statement: Interest Only / Debt securities only
- Minority Active Investments Between 20%-50% ownership -> Can influence management Accounting with Equity Method; Adjusted Historical Cost Bal Sheet: Adjusted Cost = Cost + Share of NI - Dividends Received Income Statement: Share of NI, Realized Gains Ignore Changes in Market Value
- Disposal/Sale of Minority Passive Investments 1. Trading Securities Balance Sheet: Remove carrying value asset (time of sale) Income Statement: Final Gains and losses 2. Available for Sale Securities Balance Sheet: Remove carrying value (time of sale) + Remove any unrealized gains/losses in OCI Income Statement: Any Gains and losses 3. HTM Securities Should not be sold! ONLY when management has ability and intent to hold until maturity Record at cost on acquisition date (including premium or discount) Record interest received over life of bond (including amortization of premium or discount) Record principal received at maturity.
- How do Manager’s Determine and Report Fair Value? To measure fair value, accounting standards recognize the three approaches (decreasing reliability): Level 1: Quoted prices in active markets for identical assets. Level 2: Estimates based on other observable inputs (e.g., prices for similar assets). Level 3: Estimates based on unobservable estimates (the company’s own estimates of factors that market participants would consider).
- Comprehensive Income Shareholders’ Equitybeg + NI – dividends ± net capital contributions = Shareholders’ Equityend Regulators have allowed certain wealth changes not to flow through the Income Statement, BUT in a broader summary measure called Comprehensive Income (“CI”). CI = NI ± other comprehensive income (“OCI”) Among the items included in OCI are: Foreign currency translation adjustments Available-for-sale securities - Unrealized Gains&losses Derivative Instruments Gains & losses
- Statement of Changes in Shareholders Equity Shows movements in detail for current year for share capital share premium revaluation reserve other reserves retained profit other comprehensive income
- Rationale Minority Active Investments Increase efficiency of present operations Access to raw materials, channels and markets (vertical integration) Exploit expertise by improving operations of an inefficiently-run investee