BU487 Chapter 2: Chapter 2 - Investments in Equity Securities
Chapter 2 – Investments in Equity Securities
Two main categories of equity investments
Strategic – investor intends to establish or maintain a long-term operating relationship with the entity,
where he has some level of influence over strategic decisions of the company
• Level of influences
o Full control - consolidation
o Joint control – equity method
o Significant influence – equity method
Nonstrategic – investor is hoping for a reasonable rate of return without wanting or having the ability to
play an active role in the strategic decisions of the company
• Fair value through profit or loss (FVTPL) – fair value method, in net income
• Fair value through OCI (FVTOCI) – Fair value method, in OCI
FVTPL – include investments held for short term trading, classified as current assets on the basis that
they are actively traded and intended to be sold within one year
FVTOCI – not held for short term trading, classified as noncurrent assets
Equity Method – should use this method when investor has significant influence
• Requirement is the ability to exercise significant influence, such as:
o Representation on the BOD or governing body of the investee
o Participation in policy making processes, including participation in decisions about
dividends or other distributions
o Material transactions between the investor and the investee
o Interchange of managerial personnel
o Provision of essential technical information
• Entries
o When there is net income, debit investment and credit income
o When there is dividends, debit cash and credit investment income
o When there is a discontinued operation loss, debit investment income, credit
investment
o When the share price changes, no JE is required
o Must record the following separately if it exists
▪ Continuing operations
▪ Discontinued operations
▪ Other comprehensive income
Cost Method – used under the following situations:
• Used under the following situations:
o Investments in controlled entities
o For available for sale investments that do not have a quoted market price in an active
market and whose fair value cannot be reliably measured
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