Question

Do you think the reason for making an investment should affect the way investment is reported in the financial statements? If so, how should that reason be established and documented? If not, explain what the reason for the investment is irrelevant to how it is reported in the financial statements.

Answer 1

Answer:-

Investing your money can allow you to grow it. Most investment vehicles, such as stocks, certificates of deposit, or bonds, offer returns on your money over the long term. This return allows your money to build, creating wealth over time.

At acquisition, the assets (investment in investee) are recorded on the investing firm's (investor) balance sheet at fair value. As time elapses and the fair value of the assets changes, the accounting treatment will be dependent upon the classification of the assets. Assets are classified as:

• Held-to-Maturity
  These are debt securities intended to be held till maturity. Long-term securities will be reported at amortized cost on the balance sheet, with interest income being reported on the investee's income statement.
  

• Held-for-Trading
  Equity and debt securities held with the intent to be sold for a profit (hopefully) within a short time-horizon, typically three months. They are reported on the balance sheet at fair value, with any fair value changes (realized and unrealized) being reported on the income statement, along with any interest or dividend income.
  

• Available-for-Sale
  These are neither held-to-maturity nor held-for-trading. Available-for-sale securities are similar to held-for-trading securities, however only realized changes in fair value are reported on the income statement (along with dividend and interest income), with all unrealized changes being reported as a component of shareholders' equity on the balance sheet.

The choice of classification is an important factor when analyzing financial asset investments. A firm that classifies securities as held-for-trading would report higher earnings if the fair value of the investment rises than if it had classified the investment as held-for-sale, since unrealized fair value changes in held-for-trading securities are reported on the firm's income statement, while a similar change in held-for-sale securities would be reported in shareholders' equity. Additionally, U.S.GAAP does not allow firms to reclassify investments which have been originally classified as held-for-trading or designated as fair value investments. So the accounting choices made by investing companies when making investments in financial assets can have a major effect on its financial statements.

That reason for the investment is irrelevant

? Permanent Decline in Value of Investment

Investment reported in financial statements Nil value and

Permanent decline in value of investment written off through Profit & Loss Account.

Other reason for the investment is irrelevent

? Volatility

? Uncertainty

? Overwhelming Options

? Not The Biggest Priority