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Investments in Debt and Equity Securities
(SFAS No. 115)


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Investments in Debt and Equity Securities

Statement of Financial Accounting Standards (SFAS) No. 115
        a.  Accounting for Certain Investments in Debt and Equity Securities
        b.  Issued in May 1993
        c.  Supersedes SFAS No. 12, "Accounting for Certain Marketable Securities."

Investments in Equity Securities
        a.  More than 50% ownership of another company
                 --> Consolidated Financial Statements
                 --> Accounting Research Bulletin (ARB) No. 51, August 1959

        b.  At least 20%, but no more than 50% ownership of another company
                 --> Equity Method is used.
                 --> Accounting Principles Board (APB) Opinion No. 18, March 1971
        
        c.  Less than 20% ownership of another company
                 --> No significant influence
                 --> Rules of SFAS No. 115 (May 1993) are applied.            

Investments in Debt Securities
        a.  Rules of SFAS No. 115 (May 1993) are applied. 

Investments in Equity Securities
        a.  Trading securities
                 --> Purpose of selling in the near term

        b.  Available-for-sale securities
                 --> Investments in equity securities
                 --> not classified as "Trading Securities"

Investments in Debt Securities
        a.  Trading securities
                 --> Purpose of selling in the near term

        b.  Available-for-sale securities
                 --> Investments in debt securities
                 --> not classified as "Trading Securities"
                 --> nor as "Held-to-maturity Securities"
               
        c.  Held-to-maturity securities
                 --> Intent and ability to hold to maturity
                 --> Reported at amortized cost 

Unrealized holding gains and losses
        a.  Trading securities
                 --> Included in earnings

        b.  Available-for-sale securities
                 --> Not included in earnings
                 --> Reported in a separate component of shareholders' equity
                 --> Reported as a net amount

        c.  Held-to-maturity securities
                 --> Unrealized holding gains and losses are not recognized.
 
Transfers between Categories
        a.  Transfer FROM trading securities
                 --> Unrealized holding gain or loss (at the date of transfer)
                        is recognized in earnings

        b.  Transfer INTO trading securities
                 --> Unrealized holding gain or loss (at the date of transfer)
                        is recognized in earnings

        c.  FROM held-to-maturity INTO available-for-sale
                 --> Unrealized holding gain or loss (at the date of transfer)
                        is recognized in the shareholders' equity section           

        d.  FROM available-for-sale INTO held-to-maturity
                 --> Unrealized holding gain or loss (at the date of transfer)
                        continues to be reported in the shareholders' equity section
                 --> amortized over the remaining life       


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Examples of Unrealized Holding Gains and Losses

Unrealized Holding Gains and Losses
    
   [Example 1]
       
   Company A invested in the following securities during 2011.
 
Securities Type of Securities Cost Fair value at 12/31/2011 Fair value at 12/31/2012
TA Trading $250,000  $275,000  sold in 2007
TB Trading $360,000  $350,000  sold in 2007
AA Available-for-sale $620,000 $580,000  $615,000
AB Available-for-sale $470,000  $530,000  $485,000
HA Held-to-maturity $120,000 $125,000  $140,000
HB Held-to-maturity $290,000  $300,000  $310,000

    
    Unrealized holding gains and losses

    Trading Securities
Securities Cost Fair Value at 12/31/2011 Holding Gain (Loss) during 2011
TA $250,000 $275,000 $25,000
TB $360,000 $350,000 ($10,000)
Total $15,000

     Journal Entry (12/31/2011)
Debit Credit
Market adjustment - trading securities 15,000
         Unrealized gain on trading securities (*1) 15,000

      (*1) reported on the income statement, included in earnings


    Available-for-sale Securities
Securities Cost Fair Value at 12/31/2011 Holding Gain (Loss) during 2011
AA $620,000 $580,000 ($40,000)
AB $470,000 $530,000 $60,000
Total $20,000

     Journal Entry (12/31/2011)
Debit Credit
Market adjustment - available-for-sale securities 20,000
         Unrealized increase (decrease) 
         in value of available-for-sale securities (*2)

20,000

      (*2) reported on the balance sheet, in the shareholders' equity section

Securities Fair Value at 12/31/2011 Fair Value at 12/31/2012 Holding Gain (Loss) during 2012
AA $580,000 $615,000 $35,000
AB $530,000 $485,000 ($45,000)
Total ($10,000)

     Journal Entry (12/31/2012)
Debit Credit
Unrealized increase (decrease) 
in value of available-for-sale securities

10,000

         Market adjustment - available-for-sale securities 10,000

    Example 1 of unrealized holding gains and losses in pdf
    Example 2 of unrealized holding gains and losses in pdf
    Example 3 of unrealized holding gains and losses in pdf







 
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