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Chapter 17 Lecture Notes Part 1

Chapter 17 Lecture Notes Part 1 - Investments Investments...

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Investments in Debt Securities Investments in Equity Securities Other Reporting Issues Held-to-maturity securities Available-for-sale securities Trading securities Holdings of less than 20% Holdings between 20% and 50% Holdings of more than 50% Financial statement presentation Impairment of value Transfers between categories Fair value controversy Investments
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Chapter 17-2 1. 1. Identify the three categories of debt securities and describe the Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. accounting and reporting treatment for each category. 2. 2. Understand the procedures for discount and premium Understand the procedures for discount and premium amortization on bond investments. amortization on bond investments. 3. 3. Identify the categories of equity securities and describe the Identify the categories of equity securities and describe the accounting and reporting treatment for each category. accounting and reporting treatment for each category. 4. 4. Explain the equity method of accounting and compare it to the Explain the equity method of accounting and compare it to the fair value method for equity securities. fair value method for equity securities. 5. 5. Describe the disclosure requirements for investments in debt and Describe the disclosure requirements for investments in debt and equity securities. equity securities. 6. 6. Discuss the accounting for impairments of debt and equity Discuss the accounting for impairments of debt and equity investments. investments. 7. 7. Describe the accounting for transfer of investment securities Describe the accounting for transfer of investment securities between categories. between categories. Learning Objectives Learning Objectives
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WHY CORPORATIONS INVEST Excess cash Operating cycle Economic cycle To generate earnings Banks invest mostly in debt security (regulatory constrains) Pension and mutual funds Strategic reasons synergies versus “empire building” Vertical acquisitions Horizontal acquisitions
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TYPES OF CORPORATE INVESTMENTS Reason Typical Investment To house excess cash until needed Low-risk, high-liquidity, short-term securities such as government- issued securities To generate earnings Debt securities (banks and other financial institutions); and stock securities (mutual funds and pension funds) To meet strategic goals Stocks of companies in a related industry or in an unrelated industry that the company wishes to enter
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ACCOUNTING GUIDELINES FOR STOCK INVESTMENTS Stock investments are investments in the capital stock of corporations. When a company holds stock or debt of various corporations, the group of securities is identified as an investment portfolio .
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The FASB has provided examples of cases in which significant influence may not exist: Investee opposes investor’s acquisition of stock Investor surrenders significant shareholder rights Investor is unable to obtain needed financial information from investee
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