FASB ASC 320 – Investments – Debt and Equity Securities

The Financial Accounting Standards Board (FASB) released the 300 section of the Accounting Standards Codification for the purpose of discussing the broad topic of Assets.

Accounting Standards Codification 320 (ASC 320) was released to address the more specific topic of investments in debt and equity securities.

This category of debt and equity securities would include those long and short term investments such as marketable equity securities (stocks) and debt securities (bonds). Some of the more pertinent topics related to these types of investments would be the presentation of them on the financial statements, including potential impairment, equity method of accounting for investments, fair value measurements, and those related disclosures.

ASC 320 Short term versus Long Term Investments
An investment’s planned horizon for profit should be considered when accounting for that investment on the balance sheet. While it may seem impossible to determine when the stock or bond market may fluctuate positively or negatively, financial analysts that make purchase decisions do so with an end in mind. If funds related to a security must be used in a shorter time period and are planned on being sold, investors are interested in knowing this as in the event that the economy or market is depressed for a significant period of time then they will likely not see the return they would want. Conversely, if an investment is classified as long term then investors may be impatient for the eventual profits if there is no end in mind to reap the relevant rewards for the risks undertaken.

Fair Value of Investments in ASC 320
Determining the correct fair value of an investment can be tricky, and is an important topic as it relates to investments. As companies may often have excess surpluses of cash, and seek to obtain influence in other companies which are in similar or complimentary lines of business as themselves, it is not uncommon for them to enter into investments which are not available to the general public or traded on the open exchanges. Furthermore, when investments are not regularly traded, they can become difficult to value due to the potential for the last sale price to not be current, and the possibility that market conditions (and sale prices) having changed as a result.

Control and Ownership of Investments
Certain investments are riskier than others, and in accounting this is typically considered to be when an entity does not have control of influence over the decisions a company makes. This control or influence is determined by the related percentage of ownership in the investment had. Therefore, when the parent company has a controlling share in an investment, the accounting for the investment would change to reflect that level of control whereas the accounting for an investment in a company where there was no degree of control would have a separate type of accounting applied to it.

These various considerations which play into the accounting for investments in debt and equities are significant matters to consider and ones that are surrounded with complexity. As a result, one should always consider what the GAAP guidance is on these.

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