Investments (Debt & Equity Securities)

Debt securities

• Held-to-maturity (HTM): amortized cost; needs intent and ability.
• Trading: fair value → net income.
• Available-for-sale (AFS): fair value → other comprehensive income (OCI); recycle on sale; credit loss → allowance through net income, capped at fair value shortfall.

Equity securities

• < 20%, no influence: fair value → net income (never OCI). Dividends = income.
• No readily determinable fair value: cost − impairment ± observable price changes.
• 20–50%: equity method. > 50%: consolidate.

Equity method

• Investment + share of income − dividends received − excess depreciation.
• Dividends reduce the investment.
• Excess cost: specific assets first (depreciate), remainder = goodwill (not amortized).
• Stepping up to significant influence: prospective, no restatement.
• Losses stop at zero unless guarantees exist.

Transfers

Into trading → gain or loss to net income now. AFS → HTM → keep in OCI and amortize.

Exam traps

• Significant influence is about facts, not just the 20% line: board seats can give influence below 20%, and a holding above 20% may lack it.
• Trading securities: because fair value changes are already in income, the gain on sale is only the change since the last remeasurement.
• Held-to-maturity bonds bought at a premium: premium amortization reduces interest income.
• Equity method: unrealized profit on sales with the investee is eliminated to the extent of the investor's ownership share.