Investments are assets which a Company has purchased with the intention of generating gains in future either through holding such asset or through its sale.
- Shares of other companies, stock market, mutual funds etc.
- Government bonds
- Investments in other’s business through partnerships and joint ventures
- Investments in real estate
Investments may be long term or short term based on their maturity period.
Investments are categorized into following categories for the purpose of financial reporting disclosures:
|1.||Held to maturity||Investments with fixed maturity that the management has the intent and ability to hold to maturity are classified as held to maturity. The most common example of these investments are government securities and bonds which have a defined maturity period.|
|2.||Available for sale||Investments that are intended to be held for an indefinite period of time or may be sold in response to the need for liquidity are classifiedas available for sale.|
|3.||Held for trading||Investments that have been purchased with intension of re-selling for short term gains.|
If management feels at any reporting date that due to certain circumstances, the realizable value of investments is less than the carrying value then it needs to recognize a provision for diminution in value of investments.
A company invested in ordinary shares of another company ABC through the stock market by purchasing70,000 shares at $ 2.5/- each. During the year company received a cash dividend at the rate $ 0.5/ share.
The purchase of investment will be recorded as follows:
At the end of the reporting period there can be two scenarios. There may be an increase in market value of such shares or there may be a decrease. Let’s discuss both scenarios:
Value of ABC Company’s share increases to $ 3.2 / share
Increase in value of an investment will be recorded
However, it should be noted that recognition of the increase in the value of the investment is an advanced topic, and the treatment of an increase in value may vary in every region. For example, the increase in the value of the investment has different accounting treatment based on management’s classification of investment as “held to maturity”, “available for sale” or “held for trading”. Moreover, certain industry sectors are not allowed to recognize the increase in the value of investment rather the increase is only given in the notes as “Unrealized gain”.
Value of ABC Company’s share drops to $ 2.2 / share
If there is any indication at reporting date that the value of the investment has decreased, then management needs to recognize the expected loss whether.
Consequently, the investment will be presented in the balance sheet net of any provision for diminution in value of the investment: