Chapter 8
Valuation and Reporting of Investments in Other Corporations
By Boundless
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Types of investments include: 20% to 50% (as an asset), greater than 50% (as a subsidiary), and less than 20% (as an investment position).
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Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.
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How debt sales are recorded depends on whether the debt is classified as "held-to-maturity," "a trading security," or "available-for-sale".
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How the stock sale is accounted for depends on the type of stock sold.
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Companies must calculate the fair market value for these available for sale securities at the end of each subsequent accounting period.
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The ownership of less than 20% creates an investment position carried at fair market value in the investor's balance sheet.
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Calculating fair value involves considering objective factors including acquisition, supply vs. demand, actual utility, and perceived value.
Stock investments of 20% or less are recorded at cost (considered its fair value) and reported as an asset on the balance sheet.
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Equity method is the process of treating equity investments (usually 20–50%) of companies. The investor keeps such equities as an asset.
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An investor has significant influence by holding 20% to 50% of shares, serving on the board, or participating in policy making.
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Investments recorded under the equity method usually consist of stock ownership of a company between 20% to 50%.