Investments: in company accounts

3 key takeaways

• Companies invest in various financial instruments such as stocks, bonds, and real estate to manage excess cash and generate additional income.
• Investments are classified into different categories in financial statements, such as short-term (current) and long-term (non-current) investments.
• Proper accounting and reporting of investments ensure transparency and help stakeholders understand the company’s financial health and investment strategies.

What are investments in company accounts?

Investments in company accounts are financial assets that a company holds to achieve specific financial goals. These investments can include securities such as stocks, bonds, mutual funds, real estate, and other financial instruments. Companies invest their excess cash to earn returns, manage liquidity, hedge risks, or achieve strategic business objectives.

Investments are an important part of a company’s financial strategy and are recorded in the company’s financial statements. They are classified based on the purpose of the investment and the time horizon for holding the investment.

Types of investments in company accounts

Short-term (current) investments

• Definition: These are investments that a company intends to hold for a short period, typically less than one year.
• Examples: Treasury bills, money market funds, short-term bonds, and marketable securities.
• Characteristics: Highly liquid and easily convertible to cash, aimed at managing short-term liquidity needs.

Long-term (non-current) investments

• Definition: Investments that a company plans to hold for more than one year to achieve long-term financial goals.
• Examples: Stocks, bonds, real estate, joint ventures, and subsidiaries.
• Characteristics: Less liquid than short-term investments, often used for strategic purposes such as business expansion or earning higher returns over time.

Accounting for investments

Initial recognition

• Cost method: Investments are initially recorded at their acquisition cost, which includes the purchase price and any directly attributable transaction costs.
• Fair value: In some cases, investments may be initially recognized at their fair value, especially if they are acquired for trading purposes.

Subsequent measurement

• Fair value through profit or loss (FVTPL): Investments held for trading are measured at fair value, with changes in value recognized in the income statement.
• Fair value through other comprehensive income (FVOCI): Investments not held for trading may be measured at fair value, with changes recognized in other comprehensive income.
• Amortized cost: Debt securities that the company intends to hold to maturity are measured at amortized cost, reflecting the gradual recognition of interest income.

Impairment

• Impairment losses: If the value of an investment declines significantly and the decline is considered permanent, an impairment loss is recognized in the income statement.
• Reversal of impairment: If the value of a previously impaired investment recovers, the impairment loss may be reversed under certain conditions.

Reporting investments in financial statements

Balance sheet

• Current assets: Short-term investments are reported under current assets.
• Non-current assets: Long-term investments are reported under non-current assets.

Income statement

• Investment income: Income generated from investments, such as interest, dividends, and capital gains, is reported as part of the income statement.
• Unrealized gains/losses: Changes in the fair value of investments measured at FVTPL are recognized as unrealized gains or losses in the income statement.

Cash flow statement

• Investing activities: Cash flows related to the purchase and sale of investments are reported under investing activities.

Importance of investment accounting

Financial transparency

Proper accounting and reporting of investments provide transparency and help stakeholders understand the company’s financial position, investment strategies, and risk management practices.

Performance measurement

Accurate investment accounting allows for the measurement of the performance of investments, helping management make informed decisions about future investments and resource allocation.

Regulatory compliance

Adhering to accounting standards and regulations ensures that the company’s financial statements are compliant with legal requirements, reducing the risk of penalties and improving investor confidence.

Examples of investment accounting

• Apple Inc.: Apple’s financial statements reflect its investments in marketable securities, including short-term and long-term investments in bonds and equities.
• Berkshire Hathaway: Berkshire Hathaway’s financial statements showcase its extensive portfolio of investments in publicly traded companies, private businesses, and other financial instruments.

Related topics

• Financial statements: Learn about the different components of financial statements and their significance in financial reporting.
• Asset management: Understand how companies manage their assets to maximize returns and minimize risks.
• Corporate finance: Explore the strategies and practices involved in managing a company’s finances, including investment decisions and capital structure.

Consider exploring these related topics to gain a deeper understanding of how companies manage and report their investments, and how these practices impact their overall financial health and strategy.