Accounting for Investments
by Tom McGivney
The people that develop accounting standards
have decided that the market value of investments is more important information to provide
the reader of a financial statement than the historical cost of those investments. Accordingly, accounting standards have been changed
to reflect this idea.
Simply put there are three choices when
accounting for investments:
1. held-to-maturity
2. held-for-trading
3. available-for-sale
Held to maturity is only an option when an
organization has the ability and intention to hold an investment until it matures. In this scenario the investment is valued at cost
plus accrued interest (or amortized cost). This
is largely status quo and ignores the market value fluctuations of the investment. This makes sense since the market value changes are
irrelevant if the investment is held until it matures.
This is not an option for mutual funds and equities as they do not have
maturity dates.
The other two options require that
investments be recorded at fair value, usually approximated by market value. This is not
status quo and requires that the unrealized increase (or decrease) in market value be
reflected in the financial statements. If the investment is designated as
held-for-trading, the fair value changes flow through the statement of operations. If the
investment is designated as available-for-sale, the fair value changes are recorded in the
statement of changes in net assets and avoid the statement of operations until realized.
For guaranteed investment certificates, term
deposits and Treasury Bills there is no impact because fair values and carrying values are
essentially the same.
When the standard is first implemented the impact
on prior years is reflected as a change in opening net assets with no restatement of the
prior year comparative figures.
The choice must be made when adopting the standard
or when an investment is initially purchased to discourage any manipulating financial
results.
It is important to note that over the entire
holding period of an investment there is no cumulative difference between the investment
income recorded under the old and new standards, just differences in how much income is
attributed to each period along the way. |
