Classification and Reporting for Financing Investment

Accounting for investments in securities depends on three factors:

• (1) security type, either debt or equity,
• (2) the company’s intent to hold the security either short term or long term, and
• (3) the company’s (investor’s) percentage of ownership in the other company’s (investee’s) equity securities.

Trading securities

include both debt and equity investments that are actively traded and are reported in the balance sheet at fair value.

Held-to-maturity

investments represent investment in debt instruments of another company. In the balance sheet, held-to-maturity investments are shown at amortized cost.

Available-for-sale investments

are those investments that cannot be classified as held-to-maturity or trading. Like trading securities, available-for-sale securities are shown in the balance sheet at fair value rather than historical cost.
A company that owns between 20 and 50 percent of the voting common stock of another company is assumed to have

Significant influence

over the operating policies of that company.

Equity method

When a company has significant influence over another company, equity method of accounting for the investment is used.

Controlling influence

When a company owns more than 50 percent of the voting common stock of another company, it has a controlling influence over that company. In this case, consolidation is the proper accounting treatment.