Investment Reporting

Reporting of Debt Securities

Accounting and reporting of debt securities are categorized by:

• Held-to-maturity: the intent and ability to hold the securities until maturity. This asset is classified as non-current while more than a year from maturity.
• Trading: when held with the intent to sell in the near term.
• Available-for-sale: when not classified otherwise.

Category	Valuation Basis	Unrealized Gains or Losses
Held-to-maturity	Amortized cost	Not recognized
Trading securities	Fair Value	Recognized as net income
Available-for-sale	Fair Value	Recognized as other comprehensive income and as a separate component of owner's equity

Held-to-Maturity Securites

Only debt securities can be classified as held-to-maturity. Accounting is at amortized cost not fair value. Unless the bonds are bought at par, the premium or discount must be amortized using the effective-interest method; unless some other method gives similar results. (see our bond calculator for an example)

Trading Securities

Companies report available-for-sale securities at fair value on the balance sheet, and unrealized holdings gains and losses are reported as part of net income. Any discount or premium must be amortized.

Available-for-Sale Securites

Companies report available-for-sale securities at fair value on the balance sheet, but do not report changes in fair value as part of net income while holding it. Instead unrealized gains and losses are reported in other comprehensive income.

Premiums or discounts must be amortized. Unrealized gains and losses are recorded in an unrealized holding account. The difference between the cost of a bond and its fair market value is held in Fair Value Adjustment account, which lets us maintain a record for amortizing.

Reporting of Equity Securities

Equity securities are instruments that signify ownership (equity) in a corporation, and represent a claim on it proportional share in the corporation’s assets and profits. For reporting purposes we also include instruments that include rights to acquire or dispose of ownership at an agreed-upon or determinable price such as warrants and options.

The way equities are reported is determined by the level of influence the investor has in the company: Nominal Influence, Significant Influence, and Controlling Interest.

Level of Influence	Valuation Basis	Reporting Classification	Report Presentation	Ownership
Nominal Influence	Cost or FMV	Trading or Available-for-Sale	Investment current of non-current	0 - 20%
Significant Influence	Equity method or FMV	Equity Investment	Investment non-current	20% - 50%
Controlling Interest	Equity or Cost Method	Subsidiary	Consolidated financial statement	50% - 100%

The percentage of ownership is a general guideline not a hard rule, rather substance must come first. If for example the investor held 70% of outstanding shares, but was prohibited from exercising any control then it would be more appropriate to classify its influence as nominal.

Nominal Influence

Publicly traded equities held with nominal influence are valued and reported at fair market value; if not publicly traded the cost method is used.

These investments can be classified as Trading or Available-for-Sale depending on management’s intentions. Unrealized gains and losses are treated like bonds: Available-for-Sale will report on other comprehensive income and Trading will be included in net-income.

Significant Influence

The equity method effect on the balance sheet can be found by: Original cost + Pro-rata share of income – pro-rata share of dividends – amortization.

The equity method effect on the income statement can be found by: Pro-rata share of income - amortization

The amortization is for the book value to adjusted book value based on FMV differences in assets and liabilities.

If the investee is an actively traded equity, then the investor has the option to use Fair Market Value. If chosen the investment is marked-to-market with unrealized gains and losses recorded in earnings; once chosen FMV is irrevocable.

Controlling Interest

When a company has controlling interest in the investment it will refer to the investee corporation as a subsidiary, and reporting is done with consolidated financial statements. Usually reporting for the subsidiary is with the equity method, but in some instances the parent company may choose to use the cost method.