 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at an introduction to accounting for investments. This topic gives students a lot of issues, so I'm going to go ahead and try to demystify, to simplify this process. And this is an introduction to the whole concept. This topic is usually covered in an intermediate accounting course, and surely on the CPA far section exam very heavily. As always, I would like to remind you to connect with me online then, if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance, and tax lectures. If you are an intermediate accounting student, if you're studying for your CPA, I have plenty of resources. On my website, you'll have access to additional resources through false multiple choice, exercises, PowerPoint slides. And if you are studying for your CPA exam, 2,000 plus CPA questions, I strongly suggest you check out my website. So let's start by introducing the idea. What is investments? And what's the big idea? And why do companies invest? Because that's important. Why do companies invest? Well, simply put, why do you invest? Well, you invest because you want to earn additional money. That's as simple as that. But company invests for other reasons. Company might invest in startup, or they may want to enter a new industry. But they don't have the expertise, or they don't have enough experience in that industry. Therefore, they will buy, they invest in another company, or they will buy another company. A case in point is Microsoft. Microsoft buys many companies. One of them is LinkedIn. Because Microsoft, they don't have a good experience with social media or quasi-social media sites. Therefore, they bought, they invested in LinkedIn. Other reasons is to diversify your risk. If you have cash and you don't know what to do with your cash, diversify your risk. Invest in other companies, invest in bonds, invest in stocks to earn a high rate of return. And this is usually the ultimate motive, is to earn a rate of return on your money. Because cash don't give you anything. And if you don't have internal projects, if you don't have new product, if you cannot expand your line of business, you invest in other companies to diversify and earn a higher return. Sometime you invest to secure operating arrangement. For example, you might invest in your suppliers because they are critical to your supply chain. For example, Apple might invest in their suppliers to make sure they are doing a good job. Sometime you might do so to secure financing arrangement. And many other reasons. It doesn't matter. From an accounting perspective, we need to know how to account for investments. And how to account for investments depends on two basically criteria. The type of the investment that you are dealing with, the type could be debt or it could be equity. Now, when we discuss debt, when I discuss debt in this series of lecture, I'm gonna be referring to bonds. And specifically you're gonna see shortly, I'm gonna be referring to corporate bonds. But corporate bonds is not the only form of debt. Many companies and the majority of companies, the large amount of their money is invested in US bonds, US treasury bonds. We don't or treasury bills for that matter, but we don't account for those, but the concept is the same. So it's either you could, we can have debt, which has bonds or we can have equity. Again, when we say equity, we're gonna be assuming stocks, although we have other, other than stocks. So the first thing you have to determine the type of the investment. Am I investing in debt or am I investing in equity? Then we have to know the intent of the company or the intent of the management. What is the management plan? What is your plan? Well, what does that mean? That means are you planning to hold this investment? Are you planning to sell it in the near future? Are you planning to hold it forever? If that's available, what's your plan? So here are your options. If you invest in debt, which is again, I said that say bonds, when I say that, you can say bonds, but it's not technically not the same just for, just to explain the concept. You might have no plan to sell it. You might buy a bond and you wanna hold it to maturity. How do you account for it? What's the valuation approach? How do you account for it? You will account for it using the amortization cost. And we're gonna have a lecture about this topic. Okay? Or you have a bond and you plan to sell it. When you plan to sell it, you're gonna account for it using the fair value. We're gonna have another lecture about this topic. Or you might buy an equity security, which is stock. Again, what is your intent for stock? Well, you plan to sell it. We're gonna have fair value. We're gonna have a lecture about that. If you exercise some control and we're gonna define what control is, we're gonna have the equity method. We're gonna have a lecture about that. So notice, this is an introduction. As I said, this is an introduction to how to account for investments. But this is the big picture. I wanna make sure you understand that when investment is thrown at you, the concept of investments, the first thing is what am I dealing with? That or equity and what is the intent? What is the intent of management? And for equity, actually, we're gonna see for equity, I should have mentioned this. What matters also for equity is the degree of investment. What does that mean? It means how much do you own? Do you own 5%? Do you own 15%? Do you own 55%? Do you own 40% of the company? And we're gonna see why that matters. So that also matters. In addition to your intent, also how much do you own? Sometime it mandate a certain method. And we're gonna see this in a moment, okay? So let's talk about debt securities. When we say that, again, I want you to think of corporate bonds that represent a creditors relationship. So when you invest, you are lending your money. That's basically what it is. And as I said, we have more than corporate bonds. We could have US government securities. And believe it or not, the majority of investments like Apple, Durkash and US government securities, municipal securities, corporate bonds, this is what we discussed. The reason why we discussed corporate bonds is straightforward because in intermediate accounting, we learn about bonds. So it's very easy if you learn about bonds, how to account for bonds. And if you know how to account for bonds, the other ones are pretty straightforward. They're easier to account for. Convertible debt, which is convertible bond. Commercial paper, just money basically, short term debt. And what are the accounting category? Now we're gonna be a little bit more technical. When we have a debt security, we can classify it as health or maturity, trading or available for sale. And we're gonna have one lecture and one lecture and one lecture about this. So I might combine those two, we'll see, okay? But I'm gonna break these down. So don't worry, this is just an introduction, an overall picture. If you invest in equity securities, that means you are investing in companies and stocks of companies like Facebook, Google, Alibaba, Nestle, Apple, this is Crossout Bitcoin, Unilever, so on and so forth, okay? So here what you have is an ownership of the capital stock. Here you are an owner, you are not a lender, you have an ownership relationship. Again here, let me emphasize this point, the degree to which one corporation acquires an interest in the common stock of another one. The investor generally determines the accounting treatment of the investment subsequent to acquisition. What does that mean? It means when you buy Amazon, how much did you buy in Amazon? Did you buy 1% of Amazon, 0.05% on Amazon or 80% of Amazon? Yeah, right, right? So those are the categories. Then to be more specific, let me give you the numbers. Let me give you the numbers. So if you own between zero and 20%, if you own between zero and 20% of the company stocks, if you own that percentage, what's gonna happen is you are considered a passive investor, you are considered a passive. What does it mean passive? It means you have no saying. Oftentimes in the real world, you might have a saying between zero and 20%, if you own some time 5%, you might have a saying in the company, but from an accounting perspective, we assume you are passive. Since you are passive, you have no saying, okay? We're gonna be using the fair value method. Now, what is the fair value method? Again, we're gonna have a whole lecture about the fair value method. We're gonna be using the fair value method. And hopefully you know what the fair value, it means you have to report your investments at fair value. It means they might go up in value, they might go down in value, you have to account for them using the fair value. Now, if you own between 20 to 50, now you are a serious investor, you are considered to have significant influence in the absence of any other evidence. If you have to happen to have significant influence, we're gonna be using the equity method. What is the equity method? Don't worry about it, we're gonna have a whole lecture about the equity method. Now, what happened if you own more than 50% for FASB, not for tax purposes, for FASB, more than 50%, you assume to have control, which is true. If you own more than 50%, you have voting more than 50%, it means you control the company because you can vote the board of directors that you want and you can control the company. Under those circumstances, investment valued on the parent's book using either the cost method or the equity method. And what we do here, the investment account is eliminated in consolidation and consolidation, it's all its own accounting course which is advanced accounting. If you want to learn about consolidation or if you're taking a consolidation course or advanced accounting, please don't forget to check my website. I do have a full course about advanced accounting. And this is all what I'm gonna go over in this session. In the next session, I would look at investment in debt securities, starting with, remember I told you we're gonna be having a lecture for each category, starting with debt securities. And specifically, I'm gonna look at when you hold them to maturity, how do we account for that? As always, I would like to remind you to visit my website. 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