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Chp12 Slides - Chp 12 Investments Anthony Meder Ph.D Nov 29...

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Chp. 12: Investments Anthony Meder, Ph.D. Nov 29, Dec. 1 & 6
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What we will learn How to account for investments Differentiate between Held-to-maturity, Available-for-sale and Trading securities The Fair Value Option How to account for ‘Significant influence’ Equity method of reporting an investment GAAP and IFRS differences
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Coca-Cola Note 10 Gross Unrealized Cost Gains Losses Est. Fair Value 2008 Trading Securities: Equities $ 74 $ -- $ (30) $ 44 Other Securities 7 -- (2) $ 5 $ 81 $ -- $ (32) $ 49 Avail. For sale Equities $ 329 $ 193 $ ( 7) $ 515 Other Securities 12 -- ( 5) 7 $ 341 $ 193 $ ( 12) $ 522 Held-to-maturity Bank Debt & Bonds $ 74 $ -- $ -- $ 74
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FOUR CRITICAL EVENTS During the life of an investment, 4 critical events for the investor 1. Purchase of the investment 2. Recognizing investment revenue 1. Dividends from equity securities (stocks) 2. Interest from debt securities (bonds) 3. HOLDING the investment during changes in fair value ( unrealized holding gains and losses) 4. Selling the investment ( realized gain or loss)
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Investor’s influence No significant influence Investor does not influence operating/financial policies Typically < 20% of voting stock held by investor Significant influence Investor can ‘flex muscle’ and influence the firm Typically holds between 20% and 50% of voting stock Investor has controlling interest
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No influence Choices in classification (SFAS 115) Each as a different accounting treatment Held-to-maturity (HTM) Debt securities only (equities do not have maturity date) Intent and ability to hold until maturity Trading Debt or equity Held for short-term trading gain Available for sale
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