TAILIEUCHUNG - Investments in Debt and Equity Securities

The difference between investee earnings and investee dividends is the amount of earnings accruing to the investor that the investee retained, or the unremitted earnings of the investee. Thus, the equity-based investment account is equal to the original investment plus the investor’s proportionate share of the investee’s cumulative retained earnings since the invest- ment was made. In this sense, the equity method represents an extension of accrual account- ing to investments in common shares. However, the balance sheet doesn’t reflect the cost of the investment anymore. This number isn’t market value, either, and is hard to interpret. EXTRAORDINARY ITEMS AND DISCONTINUED OPERATIONS When the investee reports extraordinary items,. | C HAPTE R 1 1 Investments in Debt and Equity Securities INTROD U CTI O N The cash flow associated with an investment in the securities of another company can be straightforward. Such an investment is usually purchased for cash produces an annual cash flow of interest or dividends that can be recorded as revenue and is sold for cash. What can be so complicated First the cost and market value of an investment will be different over the period for which it is held. If the investments can or will be sold market value information is likely far more relevant to the financial statement user and it is objectively determinable in securities markets. It stands to reason that market value should be recorded. The related issue is what to do with any gain or loss on the value of the investment while it is held. It hasn t been realized though a sale transaction. Is it income or not Accounting for investments is further complicated by the fact that investments in voting securities can represent more than just a passive investment undertaken to generate investment income. Long-term investments in voting shares may be used to establish an intercompany relationship through which the investor corporation can control or significantly influence the operating investing and financing strategies of the investee corporation. If the investor can control or influence the dividend policy of the investee dividends received from the investee are not the result of an arm s-length transaction. If investment revenue was measured as dividends declared the amount could easily be manipulated. Furthermore if a control relationship exists it may not be possible to grasp the activities of the economic entity both the investor and investee corporations unless their records are consolidated or added together. In accounting for investments in the shares of other corporations the accounting problem is twofold 1. What is the nature of the investment 2. How can the investment and the investment revenue be .

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