COST METHOD AND EQUITY METHOD

     Generally, for recording investment in securities, Cost method and Equity method are used.

EQUITY METHOD

Equity Method is used to record Long term investment in securities ( Available for sale securities) where the holding company has significant influence over the target company or if the stake in the target company is more than 50%.

The method is elaborated in the blog on recording temporary investments.

COST METHOD

Under this method, whether the investment is in debt or equity securities, the securities are divided into different categories.

Held-to-maturity securities



Held-to-maturity securities are securities which a holding company intends to and has the ability to hold till their maturity. Equity securities do not fall into this criteria, as they do not mature.  Held-to-maturity debt securities are reported on the balance sheet at amortized cost (acquisition cost adjusted for premium and discount amortization). They are not revalued according to their FMV.

Trading securities

Trading securities are held to be sold in a short term period.  Discounts and premiums in debt securities are not amortized, and the securities are revalued according to their FMV. The gain/loss is reported in the net income.

For eg if it is a gain

Valuation Allowance                             xxx
Unrealised Holding income-net income            xxx

Available-for-sale securities

Available-for-sale securities (both debt and equity are securities being held for an indefinite time. These are not intended to be sold in short term or held to maturyty. These, like trading securities, are revalued according to their fair market value but is different from trading securities.  All gains and losses are reported  in the other comprehensive income.

For eg if it is a loss

Unrealised Holding Loss-OCI              xxx
Valuation Allowance                                        xxx

TRANSFER FROM ONE CATEGORY TO ANOTHER

If the securities are transferred to or from trading security  category, then they are re valued and the gain/ loss goes to the net income. If the securities are transferred to or from held to maturity category to the available for sale category, then they are re valued and the gain/ loss goes to the other comprehensive income.

To and from trading securities

If it is a loss after valuation


Unrealised Holding Loss-Net income            xxx
Valuation Allowance                                                xxx

From held to maturity to available for sale

If it is a gain after valuation



Valuation Allowance                                  xxx
Unrealised Holding income-OCI                            xxx