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A company’s excess revenue is often reinvested to earn even more income. At the very least, it may sit in a savings account. However, many companies choose to reinvest their profits in stocks and bonds.
Stocks and bond assets are reported similarly to other assets. There are various methods for reporting the value of an investment in the balance sheet. How an investment is classified depends on its marketability, management’s intent and the investment’s type.
Three Reporting Methods:
- Present Value
- Equity Method
Five Classifications of Management’s Intent
Typically all securities traded on an exchange or in over-the-counter markets are considered marketable.
- Trading Securities-These are stocks and bonds purchased with the intent to resell. These short-term investments are considered current assets. They are recorded on the balance sheet at market value.
- Securities Available for Sale– These are stocks and bonds management intend to hold indefinitely. If management thinks they may sell them within a year, they are classified as current assets. If not, they are recorded on the balance sheet as long-term investments and reported at market value.
- Securities Held-to-Maturity-These are bonds management has in mind to hold until the issuer redeems them. They are classified on the balance sheet as long-term investments at present value.
- Securities Held to Obtain Significant Influence- For this type of securities, the equity method of accounting is applied. These are considered a long-term investment. Once a company owns more than 20% of another company’s stock, the accountant can assume significant influence exists.
- Securities Held to Collect Controlling Interest- An investor obtains controlling interest of a company when he holds more than 50% of the company’s common shares. The reason being he has the ability to elect the majority of the directors. This is defined as a parent-subsidiary relationship and a consolidated financial statement presentation is required by the accounting rules.