Invetments in Debt and Equity Securities

Generally Accepted Accounting Principles
in the United States

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Investments in Debt and Equity Securities
(SFAS No. 115)

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Statements of Financial Accounting Standards (SFAS)

Investments in Debt and Equity Securities

Statement of Financial Accounting Standards (SFAS) No. 115
        a. Accounting for Certain Investments in Debt and Equity Securities
        b. Issued in May 1993
        c. Supersedes SFAS No. 12, "Accounting for Certain Marketable Securities."

Investments in Equity Securities
        a. More than 50% ownership of another company
                 --> Consolidated Financial Statements
                 --> Accounting Research Bulletin (ARB) No. 51, August 1959

        b. At least 20%, but no more than 50% ownership of another company
                 --> Equity Method is used.
                 --> Accounting Principles Board (APB) Opinion No. 18, March 1971

        c. Less than 20% ownership of another company
                 --> No significant influence
                 --> Rules of SFAS No. 115 (May 1993) are applied.

Investments in Debt Securities
a. Rules of SFAS No. 115 (May 1993) are applied.

Investments in Equity Securities
        a. Trading securities
                 --> Purpose of selling in the near term

        b. Available-for-sale securities
                 --> Investments in equity securities
                 --> not classified as "Trading Securities"

Investments in Debt Securities
        a. Trading securities
                 --> Purpose of selling in the near term

        b. Available-for-sale securities
                 --> Investments in debt securities
                 --> not classified as "Trading Securities"
                 --> nor as "Held-to-maturity Securities"

        c. Held-to-maturity securities
                 --> Intent and ability to hold to maturity
                 --> Reported at amortized cost

Unrealized holding gains and losses
        a. Trading securities
                 --> Included in earnings

        b. Available-for-sale securities
                 --> Not included in earnings
                 --> Reported in a separate component of shareholders' equity
                 --> Reported as a net amount

        c. Held-to-maturity securities
                 --> Unrealized holding gains and losses are not recognized.

Transfers between Categories
        a. Transfer FROM trading securities
                 --> Unrealized holding gain or loss (at the date of transfer)
                        is recognized in earnings

        b. Transfer INTO trading securities
                 --> Unrealized holding gain or loss (at the date of transfer)
                        is recognized in earnings

        c. FROM held-to-maturity INTO available-for-sale
                 --> Unrealized holding gain or loss (at the date of transfer)
                        is recognized in the shareholders' equity section

        d. FROM available-for-sale INTO held-to-maturity
                 --> Unrealized holding gain or loss (at the date of transfer)
                        continues to be reported in the shareholders' equity section
                 --> amortized over the remaining life

Examples of Unrealized Holding Gains and Losses

Unrealized Holding Gains and Losses

   [Example 1]

   Company A invested in the following securities during 2006.

Securities	Type of Securities	Cost	Fair value at 12/31/2006	Fair value at 12/31/2007
TA	Trading	$250,000	$275,000	sold in 2007
TB	Trading	$360,000	$350,000	sold in 2007
AA	Available-for-sale	$620,000	$580,000	$615,000
AB	Available-for-sale	$470,000	$530,000	$485,000
HA	Held-to-maturity	$120,000	$125,000	$140,000
HB	Held-to-maturity	$290,000	$300,000	$310,000

    Unrealized holding gains and losses

    Trading Securities

Securities Cost Fair Value at 12/31/2006 Holding Gain (Loss) during 2006

TA $250,000 $275,000 $25,000

TB $360,000 $350,000 ($10,000)

Total $15,000

Journal Entry (12/31/2006)

Debit Credit

Market adjustment - trading securities 15,000

Unrealized gain on trading securities (*1) 15,000

(*1) reported on the income statement, included in earnings

Available-for-sale Securities

Securities Cost Fair Value at 12/31/2006 Holding Gain (Loss) during 2006

AA $620,000 $580,000 ($40,000)

AB $470,000 $530,000 $60,000

Total $20,000

     Journal Entry (12/31/2006)

Debit Credit

Market adjustment - available-for-sale securities 20,000

         Unrealized increase (decrease)
         in value of available-for-sale securities (*2)
20,000

(*2) reported on the balance sheet, in the shareholders' equity section

Securities Fair Value at 12/31/2006 Fair Value at 12/31/2007 Holding Gain (Loss) during 2007

AA $580,000 $615,000 $35,000

AB $530,000 $485,000 ($45,000)

Total ($10,000)

Journal Entry (12/31/2007)

Debit Credit

Unrealized increase (decrease)
in value of available-for-sale securities
10,000

Market adjustment - available-for-sale securities 10,000

    Example 1 of unrealized holding gains and losses in pdf
    Example 2 of unrealized holding gains and losses in pdf
    Example 3 of unrealized holding gains and losses in pdf

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Accrual Basis vs. Cash Basis Accounting

Basics of Journal Entries

Ratios for Financial Statement Analysis

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Statements of Financial Accounting Standards (SFAS)

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