12-1

Investments
Chapter 12

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright2013byTheMcGrawHillCompanies,Inc.Allrightsreserved.

12-2

Nature of Investments
Bonds
Bonds and
and
notes
notes
(Debt
(Debt
securities)
securities)

Common
Common and
and
preferred
preferred stock
stock
(Equity
(Equity
securities)
securities)

Investments can be accounted for in a

variety of ways, depending on the nature
of the investment relationship.

12-3

Reporting Categories for Investments

12-4

Investor Lacks Significant Influence

12-5

Securities to Be Held to Maturity

Securities are investments in bonds or other debt security
that have a specified maturity date. The bonds or other debt
are initially recorded at cost. The investor may have the
positive intent and ability to hold the securities to maturity
and can therefore be classified as held-to-maturity (HTM).
They are reported on the balance sheet at amortized cost.

Amortized cost (Face amount less unamortized

discount, or plus unamortized premium).

Balance
Sheet

12-6

Securities to Be Held to Maturity

On January 1, 2013, Matrix Inc. purchased as an investment
$1,000,000, of 10%, 10-year bonds, interest paid semiannually. The market rate for similar bonds is 12%. Lets look
at the calculation of the present value of the bond issue.

Amount

$
Interest 50,000

Present

PV
Factor

Value

11.4699 $573,49
2
=
6

Principa 1,000,00
PV of ordinaryl annuity of
= 6%
0 $1, n = 20,i0.31180
= 311,805
Present value of
$885,30
PV of $1, n = 20, i = 6%
bonds

12-7

Securities to Be Held to Maturity

Partial Bond Amortization Table

January 1, 2013
Investment in bonds
Discount on bond investment
Cash
June 30, 2013
Cash (stated rate face amount)
Discount on bond investment
Investment revenue

1,000,000
114,699
885,301
50,000
3,118
53,118

12-8

Securities to Be Held to Maturity

This investment would appear on the
June 30, 2013, balance sheet as follows:

$114,699
$114,699 -- $3,118
$3,118 == $111,581
$111,581 unamortized
unamortized discount
discount

Unrealized holding gains and losses are not

recognized for HTM investments.

12-9

Securities to Be Held to Maturity

On December 31, 2013, after interest is received by Matrix, all the bonds
are sold for $900,000 cash.

December 31, 2013

Cash
Discount on bond investment
Investment revenue

50,000
3,305

December 31, 2013

Cash
900,000
Discount on bond investment
108,276
Investment in bonds
Gain on sale of investment

53,305

1,000,000
8,276

1210

Trading Securities
Investments in debt or equity securities acquired
principally for the purpose of selling them in the near
term.
Adjustments to fair value are recorded
1.in a valuation account called fair value adjustment, or
as a direct adjustment to the investment account.
2.as a net unrealized holding gain/loss on the income
statement.

Unrealized Gain

Unrealized Loss

Income
Statement

1211

Trading Securities
Matrix Inc. purchased securities classified as Trading
Securities (TS) on December 22, 2013. The fair value
amounts for these securities on December 31, 2013,
are shown below. Prepare the journal entries for
Matrix Inc. to show the purchase of the securities,
and adjust the securities to fair value at 12/31/13.

1212

Trading Securities
December 22, 2013
Investment in Mining Inc. stock
Investment in Toys and Things stock
Cash

42,000
22,500
64,500

Reported
Reported on
on the
the balance
balance sheet
sheet as
as
aa adjunct
adjunct account
account to
to the
the investment.
investment.

December 31, 2013

Net unrealized holding gains and losses I/S
Fair value adjustment

The
The Net
Net Unrealized
Unrealized Holding
Holding Loss
Loss is
is
reported
reported on
on the
the Income
Income Statement.
Statement.

3,500
3,500

1213

Trading Securities
On January 3, 2014, Matrix sold all trading securities for
$65,000 cash. Lets record the entry for the sale and the
adjustment to the fair value adjustment account.
January 3, 2014
Cash
Investment in Mining, Inc. stock T/S
Investment in Toys and Things stock T/S
Gain on sale of investment
December 31, 2014
Fair value adjustment
Net unrealized holding gains or losses I/S

65,000
42,000
22,500
500
3,500
3,500

1214

Financial Statement Presentation

Trading securities are presented on the financial
statement as follows:

1. Income Statement and Statement of

Comprehensive Income: Fair value changes are included
in the income statement in the periods in which they occur,
regardless of whether they are realized or unrealized.
Investments in trading securities do not affect other
comprehensive income.
2. Balance Sheet: Securities are reported at fair value,
typically as current assets, and do not affect accumulated
other comprehensive income in shareholders equity.
3. Cash Flow Statement: Cash flows from buying and
selling trading securities typically are classified as operating
activities, because the investors that hold trading securities
consider them as part of their normal operations.

1215

Financial Statement Presentation

Presented below are the partial financial statements showing
the accounting for TS owned by Matrix:

1216

Securities Available-for-Sale
Investments in debt or equity securities that are not for active trading and
not to be held to maturity are classified as available-for-sale (AFS).
Adjustments to fair value are recorded
1.in a valuation account called fair value adjustment, or as a direct
adjustment to the investment account.
2.as a net unrealized holding gain/loss in other comprehensive income
(OCI), which accumulates in accumulated other comprehensive income
(ACOI).

Unrealized
Unrealized Gain
Gain

Unrealized
Unrealized Loss
Loss

Other Comprehensive
Income (OCI)

1217

Other Comprehensive Income (OCI)

When we add other comprehensive income to net

income we refer to the result as comprehensive income.

Accumulated Other Comprehensive

Income
Unrealized holding gains and losses on availablefor-sale securities are accumulated in the
shareholders equity section of the balance sheet.
Specifically, the account is included in accumulated
other comprehensive income (AOCI).
Net unrealized
holding gains
and losses.

Shareholders Equity
Common stock
Paid-in capital in excess of par
Accumulated other comprehensive
income
Retained earnings
Total shareholders equity

1218

1219

Securities Available for Sale Example

Assume the same information for our T/S
example for Matrix Inc., except that the
investments are classified as available-forsale securities rather than trading securities.

December 31, 2013

Net unrealized holding gains and losses OCI
Fair value adjustment

3,500
3,500

1220

Financial Statement Presentation

AFS securities are presented on the financial statement as
follows:

1.Income Statement and Statement of Comprehensive Income:

Realized gains and losses are shown in net income in the period in
which securities are sold. Unrealized gains and losses are shown in
OCI in the periods in which changes in fair value occur, and
reclassified out of OCI in the periods in which securities are sold.
2.Balance Sheet: Investments in AFS securities are reported at fair
value. Unrealized gains and losses affect AOCI in shareholders
equity, and are reclassified out of AOCI in the periods in which
securities are sold.
3.Cash Flow Statement: Cash flows from buying and selling AFS
securities typically are classified as investing activities.

1221

U. S. GAAP vs. IFRS

Until recently, IFRS did not allow transfers out of their Fair
Value through Profit and Loss (FVTPL) classification.

U.S. GAAP also allows

transfers out of the trading
security category.

Reclassifications under U.S.

GAAP are rare.

IAS No. 39 now allows

transfer of debt
investments out of the fair
value category into AFS or
HTM in rare
circumstances.

The current financial crisis

qualified as one of those
circumstances.

1222

U. S. GAAP vs. IFRS

IFRS No. 9 eliminates the HTM and AFS classifications, replaced by new
classifications that are more restrictive. This has the general effect of pushing more
investments into being accounted for at Fair Value Through Profit & Loss
(FVTPL), and thus having unrealized gains and losses included in net income.

U.S. GAAP permits

classification as HTM, AFS,
and TS.

Investments in debt securities

are classified as either
Amortized Cost or FVTPL.

No significant tests are

required to classify a debt
investment.

There is no comparable
FVTPL or FVTOCI
classification.

To be classified as a debt
investment, two important tests
must be met. The current
financial crisis qualified as one
of those circumstances.

Investments in equity securities

are classified as either FVTPL
or FVTOCI (Fair Value through
Other Comprehensive Income).

1223

Transfers Between Reporting Categories

Any unrealized holding gain or loss at reclassification should be accounted for in a
manner consistent with the classification into which the security is being
transferred. Securities are transferred at fair market value on the date of transfer.

1224

Impairment of Investments
Occasionally, an
investments value will
decline for reasons
that are other-thantemporary (OTT).
For HTM and AFS investments, a company
recognizes an OTT impairment loss in earnings.
Determining an other than temporary decline for
debt securities can be quite complex. For both
equity and debt investments, after an OTT
impairment is recognized, the ordinary treatment of
unrealized gains and losses is resumed.

1225

U. S. GAAP vs. IFRS

Until recently, IFRS did not allow transfers out of the fair value
through P&L (FVTPL) classification (which is roughly
equivalent to the trading securities classification in U.S. GAAP).

U.S. GAAP has no

prohibition against
transfers between
categories as long as they
can be reasonably justified.

Under IAS No. 39 transfers

of debt investments out of
the FVTPL category into
AFS or HTM in rare
circumstances.
The 2008 financial crisis
qualifies as one of those
rare circumstances.

Financial Statement Presentation

and Disclosure
Aggregate
Fair Value

Gross realized
& unrealized
holding gains &
losses

Maturities of
debt securities

Amortized cost
basis by major
security type

Change in net
unrealized
holding gains
and losses

Inputs to fair
value
estimates

1226

1227

Investor Has Significant Influence

1228

Investor Has Significant Influence

Extent of Investor Influence
Lack of significant influence
(usually < 20% equity
ownership)
Significant influence
(usually 20% - 50% equity
ownership)
Has control
(usually > 50% equity
ownership)

Reporting Method
Varies depending on
classification
previously discussed
Equity method
Consolidation

1229

What Is Significant Influence?

IfIf an
an investor owns
owns 20%
20% of
of the
the voting
voting stock of
of an
an investee, it is
is
presumed
presumed that
that the investor has significant
significant influence over the
the financial
and
and operating
operating policies
policies of
of the investee.
investee. The presumption
presumption can
can be
be
overcome
overcome ifif
1.the
1.the investee challenges the
the investors ability to
to exercise
exercise significant
influence
influence through litigation or
or other methods.
2.the
2.the investor surrenders
surrenders significant
significant shareholder rights in
in aa signed
agreement.
agreement.
3.the
3.the investor is
is unable to acquire
acquire sufficient
sufficient information
information about
about the
the
investee
investee to
to apply
apply the
the equity
equity method.
method.
4.the
4.the investor tries
tries and
and fails
fails to
to obtain representation on the
the board of
of
directors
directors of
of the
the investee.
investee.

1230

A Single Entity Concept

Under
Underthe
theequity
equitymethod
method .. .. ..

1.The
1.Theinvestor
investorrecognizes
recognizesinvestment
investmentincome
incomeequal
equaltotoits
its
percentage
percentageshare
share(based
(basedon
onstock
stockownership)
ownership)ofofthe
thenet
net
income
incomeearned
earnedby
bythe
theinvestee
investeerather
ratherthan
thanthe
theportion
portionofofthat
that
net
netincome
incomereceived
receivedas
ascash
cashdividends.
dividends.
2.Initially,
2.Initially,the
theinvestment
investmentisisrecorded
recordedatatcost.
cost.The
Thecarrying
carrying
amount
amountofofthis
thisinvestment
investmentsubsequently
subsequentlyis:
is:
a)
a) Increased
Increasedby
bythe
theinvestors
investorspercentage
percentageshare
shareofofthe
the
investees
investeesnet
netincome
income(or
(ordecreased
decreasedby
byits
itsshare
shareofofaa
loss).
loss).
b)
b) Decreased
Decreasedby
bydividends
dividendspaid.
paid.

1231

Equity Method
On January 1, 2013, Wilmer Inc. acquired
45% of the equity securities of Apex Inc.
for $1,350,000. On the acquisition date,
Apexs net assets had a fair value of
$3,000,000. During 2013, Apex paid cash
dividends of $150,000 and reported net
income of $1,750,000.
What amount will Wilmer Inc. report on the
balance sheet as Investment in Apex Inc. on
December 31, 2013?

1232

Equity Method
January 1, 2013
Investment in Apex Inc. stock
Cash

1,350,000

2013
Investment in Apex Inc. stock
Investment revenue

787,500

2013
Cash

1,350,000

787,500

67,500
Investment in Apex Inc. stock

67,500

1233

Equity Method

Investment in Apex Inc.

Investment

1,350,000

45% Earnings

787,500

67,500 45% Dividends

Reported amount 2,070,000

If the investee had a loss,
the investment account
would have been
reduced with a credit.

1234

Equity Method
On January 1, 2013, Wilmer Inc. purchased 25% of the
common stock of Apex Inc. for $180,000. At the date of
acquisition, the book value of the net assets of Apex was
$400,000, and the fair value of these assets is $600,000.
During 2013, Apex paid cash dividends of $40,000, and
reported earnings of $100,000.

1235

Equity Method
The excess of the fair value of net assets over book value of
those net assets is 75% attributable to depreciable assets
with a remaining life of 20 years and is 25% attributable to
land. Wilmer uses the straight-line depreciation.

1236

Equity Method
January 1, 2013
Investment in Apex stock
Cash
2013
Cash

180,000
180,000
10,000

Investment in Apex stock

Investment in Apex stock
Investment revenue
December 31, 2013
Investment revenue
Investment in Apex stock

10,000
25,000
25,000
1,875
1,875

Changing From the Equity Method to

Another Method
When the investors level of influence changes, it
may be necessary to change from the equity
method to another method.

At the transfer
date, the carrying
value of the
investment under
the equity method
is regarded as cost.

1237

Changing from Another Method to the

Equity Method
When the investors ownership level increases
to the point where they can exert significant
influence, the investor should change to the
equity method.
At the transfer date, the recorded value is the
initial cost of the investment adjusted for the
investors equity in the undistributed earnings
of the investee since the original investment.

1238

Changing from Another Method to the

Equity Method

1239

The original cost, the unrealized holding

gain or loss, and the valuation account
are closed.
A retroactive change is recorded to
recognize the investors share of the
investees earnings since the original
investment.

1240

Fair Value Option

GAAP
GAAP allows
allows companies
companies to
to use
use aa fair
fair value
value option
option for
for HTM,
HTM, AFS,
AFS,
and
and equity
equity method
method investments.
investments.
The
The investment
investment is
is carried
carried at
at fair
fair value.
value.
Unrealized
Unrealized gains
gains and
and losses
losses are
are included
included in
in income.
income.

For
For HTM
HTM and
and AFS
AFS investments,
investments, this
this amounts
amounts to
to classifying
classifying the
the
investments
investments as
as trading.
trading.
For
For equity
equity method
method investments,
investments, the
the investment
investment is
is still
still classified
classified on
on
the
the balance
balance sheet
sheet with
with equity
equity method
method investments,
investments, but
but the
the portion
portion at
at
fair
fair value
value must
must be
be clearly
clearly indicated.
indicated.
The
The fair
fair value
value option
option is
is determined
determined for
for each
each individual
individual investment,
investment,
and
and is
is irrevocable.
irrevocable.

Financial Instruments and

Investment Derivatives

1241

Financial
Financial Instruments:
Instruments:

Investment
Investment Derivatives:
Derivatives:

1.
1.Cash.
Cash.
2.
2.Evidence
Evidence of
of an
an
ownership
ownership interest
interest in
in an
an
entity.
entity.
3.
3.Contracts
Contracts meeting
meeting
certain
certain conditions.
conditions.

1.
1. Value
Value is
is derived
derived from
from
other
other securities.
securities.
2.
2. Derivatives
Derivatives are
are often
often
used
used to
to hedge
hedge (offset)
(offset)
risks
risks created
created by
by other
other
investments
investments or
or
transactions
transactions

1242

Appendix 12A Other Investments

It is often convenient for companies to set aside money to
be used for specific purposes. In the short-term, funds may
be set aside for
1.Petty cash funds.
2.Payroll accounts.
In the long-run, funds are often set aside to:
1.Pay long-term debt when it comes due.
2.Acquire treasury stock.
Special purpose funds set aside for the long-term are
classified as investments.

1243

Appendix 12A Other Investments

It is a common practice for companies to purchase
life insurance policies on key officers. The
company pays the premium and is the beneficiary
of the policy. If the officer dies, the company
receives the proceeds from the policy. Some types
of policies build a portion of each premium as cash
surrender value. The cash surrender value of such
a policy is classified as an investment on the
balance sheet of the company.

Appendix 12B Impairment of

Investments
If the fair value of an investment declines to a level below
cost, and that decline is not viewed as temporary, companies
typically have to recognize an other-than-temporary (OTT)
impairment loss in earnings.
We use a three-step process to determine whether an OTT
impairment loss must be recognized: (1) determine if the
investment is impaired, (2) determine whether any
impairment is OTT, and (3) determine where to report the
OTT impairment.

1244

Appendix 12B Impairment of

Investments

1245

Appendix 12B Impairment of

Investments

1246

1247

Appendix 12B Impairment of

Investments
United Intergroup, Inc., buys and sells both debt and equity securities of
other companies as investments. Uniteds fiscal year-end is December
31. The following events during 2013 and 2014 pertain to the
investment portfolio.
Purchase Investment: July 1, 2013, $1,000,000 of Bendac common
stock. Adjust Investment to Fair Value:
December 31, 2013: Valued the Bendac stock at $990,000 and
determined that the decline in FV should not be treated as an
OTT impairment.
December 31, 2014 : Valued the Bendac stock at $985,000 and
determined that the decline in FV should be treated as an OTT
impairment
The journal entries to record the adjustments of the Bendac stock
investment to fair value are:

December 31, 2013

Net unrealized holding gains and losses OCI
Fair value adjustment

10,000
10,000

1248

Appendix 12B Impairment of

Investments
December 31, 2014
Other-than-temporary impairment loss I/S
Investment in Bendac

15,000
15,000

Fair value adjustment

10,000
Net unrealized holding gains and losses OCI 10,000

Appendix 12B Impairment of

Investments

1249

United Intergroup, Inc., buys and sells both debt and equity
securities of other companies as investments, and classifies these
investments as AFS. Uniteds fiscal year-end is December 31.
The following events occurred during 2014:
Purchase Investment: July 1, 2014, $1,000,000 of Bendac
bonds, maturing on December 31, 2019.
Adjust Investment to Fair Value: December 31, 2014, valued
the Bendac bonds at $950,000. Of the $50,000, impairment,
$30,000 is credit loss and $20,000 is noncredit loss.
Case 1: United either plans to sell the investment or believes it
is more likely than not that it will have to sell the investment
before fair value recovers.
Case 2: United does not intend to sell the investment and does
not believe it is more likely than not that it will have to sell the
Bendac investment before fair value recovers, but estimates that
Lets look
at the losses
necessary
entries in these two cases.
$30,000
of credit
have journal
occurred.

1250

Appendix 12B Impairment of

Investments
Case 1
December 31, 2014
OTT impairment loss I/S
Discount on bond investment

50,000
50,000

Case 2
December 31, 2014
OTT impairment loss I/S
Discount on bond investment

30,000
30,000

OTT impairment loss - OCI

20,000
Fair value adjustment Noncredit loss
20,000

1251

U. S. GAAP vs. IFRS

Under IAS No. 39, companies recognize OTT impairments if there exists
objective evidence of impairment. Objective evidence must relate to one or
more events occurring after initial recognition of the asset that affect the
future cash flows that are going to be generated by the asset.

U.S. GAAP recognizes in

OCI any non-credit losses
on debt investments.

Calculation of the amount of

impairment differs depending on
the classification of an
investment.

Under IFRS, an OTT impairment

for a debt investment is likely to
be larger if it is classified as AFS
than if it is classified as HTM,
because it includes the entire
decline in fair value if classified
as AFS but only the credit loss if
classified as HTM.

1252

Investments:
A Chapter Supplement
Supplement to Chapter 12

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright2013byTheMcGrawHillCompanies,Inc.Allrightsreserved.

GAAP vs. Proposed

Accounting Standard Update

1253

1254

Accounting for Equity Investments

Determining how to account for equity investments in stock
under the proposed ASU is easy. If the investor does not
have significant influence over the investee, the equity
investment is accounted for as FV-NI. If the investor has
significant influence over the investee, but lacks control, the
equity method is used. If the investor has control, the
investment
is consolidated.
Under
GAAP,
Under
Under current
current
GAAP,
Under the
the ASU
ASU an
an equity
equity
the
the investor
investor accounts
accounts
for
for the
the equity
equity
investment
investment as
as aa
trading
trading or
or as
as an
an AFS
AFS
security.
security.

investment
investment always
always is
is
treated
treated as
as FV-NI
FV-NI
(equivalent
(equivalent to
to being
being
accounted
accounted for
for as
as aa
trading
trading security).
security).

1255

Accounting for Debt Investments

Determining
Determining how
how to
to account
account for
for debt
debt investments
investments under
under the
the
proposed
proposed ASU
ASU is
is more
more complicated
complicated than
than accounting
accounting for
for
equity
equity investments.
investments. Under
Under the
the proposed
proposed ASU
ASU we
we base
base
classification
classification of
of debt
debt investments
investments on
on two
two criteria:
criteria:
1.The
1.The characteristics
characteristics of
of the
the debt
debt instrument.
instrument.
2.The
2.The business
business activity
activity in
in which
which the
the instrument
instrument is
is used.
used.
We
We discuss
discuss each
each of
of the
the criteria
criteria in
in turn.
turn.

Characteristics of a Simple Debt Instrument

1.An amount is transferred to the borrower (debtor) when the debt
instrument is issued that will be returned to the lender (creditor)
when the debt matures or is settled. The amount is the principal or
face amount of the debt adjusted for any discount or premium.
2.The debt cannot be prepaid or settled in such a way that the
lender does not recover substantially all of its original investment,
unless the lender chooses to allow it.
3.The debt instrument is not a derivative.

1256

Accounting for Debt Investments

Characteristics of a Complex Debt
Instrument
Debt that lacks one or more of the characteristics of
simple debt is considered complex. Under the
proposed ASU, debt that is complex always is
classified as fair value in net income.

1257

Business Purpose of a Debt Instrument

For simple debt, we next must consider the
business activity that motivates the investor to hold
the debt. The proposed ASU identifies three
primary business activities as
1.lending,
2.long-term investing, or
3.held for sale.
The debt holders purpose is
lending or customer financing
with a focus on collecting cash
flows (interest and principal). The
debt holder must have the ability
to renegotiate, sell, or settle the
debt to minimize losses due to a
borrower's deteriorating credit.
The appropriate accounting
approach is amortized cost.

1258

Business Purpose of a Debt Instrument

For simple debt, we next must consider the
business activity that motivates the investor to hold
the debt. The ASU identifies three primary business
activities as
1.lending,
2.long-term investing, or
3.held for sale.
The debt holder may choose to
hold on to the debt investment or
sell it as a way of either (a)
maximizing its return on
investment or (b) managing risk.
The appropriate accounting
approach is Fair Value Other
Comprehensive Income (FV-OCI)

1259

Business Purpose of a Debt Instrument

For simple debt, we next must consider the
business activity that motivates the investor to hold
the debt. The ASU identifies three primary business
activities as
1.lending,
2.long-term investing, or
3.held for sale.
For the business purpose to be
classified as held for sale, the
debt instrument is either (a) held
for the purpose of being sold or
(b) actively managed internally on
a fair value basis. The appropriate
accounting approach is Fair Value
Net Income.

1260

Summary of Classification Criteria

The proposed ASU does not allow transfers of

debt from one category to another. After the
debt is initially classified, reclassifications are not
permitted.

Impairments When the Investor Does

Not Exercise Significant Influence
Because equity investments are reported at FV-NI, no
impairment guidance is necessary. The same is true
for debt investments recorded at FV-NI. Declines in
fair value always are reported in net income.
However, for debt investments reported at amortized
cost or at FV-OCI, impairment losses are possible.
Lets look at the three-bucket approach currently
under consideration.
1
Investments not affected
by observed events.

2
Investments affected by
observed events (but
individual defaults have
not been identified).

3
Individual debt
investments suffering
credit losses.

1261

1262

Debt Impairment (continued)

Objective: Use expected value (probability-weighted
average) of losses of principal and interest on a discounted
basis.
Time horizon of estimated losses:
Bucket 1: over near term (say, 1-2 years).
Buckets 2 and 3: over remaining life of investment.
No impairment upon acquisition of distressed debt (interest
based on expected cash flows rather than contractual cash
flows).

1263

Equity Method
The criteria for applying the equity method are the
same in the ASU as in current GAAP. If a company is
holding an investment for sale that normally would
qualify for the equity method, the investment is
accounted for as FV-NI.
If
If facts
facts indicate
indicate an
an impairment
impairment in
in value
value
of
of an
an equity
equity method
method investment,
investment, the
the
investor
investor recognizes
recognizes an
an amount
amount equal
equal to
to
the
the difference
difference between
between the
the investments
investments
carrying
carrying value
value and
and its
its fair
fair value.
value. If
If fair
fair
value
value increases
increases in
in the
the future,
future, the
the
impairment
impairment cannot
cannot be
be reversed.
reversed.

1264

End of Chapter 12