Investments in Debt and Equity Securities, ASC 320

 

Investments in Debt and Equity Securities

 

Debt securities: represent creditor relationship
Equity securities: represent ownership interest

 

Investments in Equity Securities

 

1. more than 50% of voting power
–> prepare consolidated financial statements
2. 20% or more, but no more than 50%
–> equity method accounting

 

3. less than 20%
–> classified as either (a) or (b)
(a) trading securities
(b) available for sale securities

 

Investments in Debt Securities

 

1. Held-to-maturity securities
–> intent and ability to hold until maturity
2. No intent or ability to hold until maturity
–> classified as either (a) or (b)
(a) trading securities
(b) available for sale securities

 

Trading Securities

Characteristics
(a) “active and frequent” buying and selling
(b) profits on “short-term price differences”

 

Available for Sale (AFS) Securities

 

Securities not classified as either (a) or (b)
(a) Trading Securities
(b) Held-to Maturity (HTM) Securities

 

Measurement of Investments in Securities

 

1. Trading Securities: Fair Value
2. AFS Securities: Fair Value
3. HTM Securities: Amortized Cost

 

Changes in Fair Value: Unrealized holding gains or losses

 

1. Trading Securities: recognized in earnings
2. AFS Securities: recognized in Other Comprehensive Income (OCI), not in earnings
3. HTM Securities: not recognized

 

Impairment of AFS and HTM Securities

 

If the decline in fair value is “other than temporary”
–> recognize impairment losses in earnings

 

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