Accounting for Marketable Securities

Abstract

This note provides an overview of intercorporate investments, including passive investments (marketable securities), investments that result in significant influence, and investments that result in control. Then, the accounting for marketable equity and debt securities is described in detail.

Excerpt

UVA-C-2280

Rev. June 30, 2009

ACCOUNTING FOR MARKETABLE SECURITIES

Managers invest in securities of other companies for a variety of reasons. First, a company may have cash it would like to invest in the stocks or bonds of another company simply to generate a return. Second, a company may invest in another company so that it can influence that company's policies and performance. Third, a company may invest in another company to obtain control of that company. From a financial reporting perspective, these diverse reasons result in three broad investment categories: (1) passive investments, (2) investments that result in significant influence, and (3) investments that result in control.

Passive Investments

Passive investments are investments in securities of another company simply for the purpose of earning a rate of return. They can include investments in debt and equity securities. All debt securities (e.g., bonds) are considered passive investments—they generally do not result in the investing company having any significant influence or control of the company whose securities it has purchased. Although there are exceptions, investments in equity securities (e.g., stocks) are considered passive investments if the investing company owns less than 20% of the outstanding voting shares of the investee. Note that since preferred stock is typically nonvoting stock, it is usually considered a passive investment.

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Keywords: intercorporate investments, marketable securities