Accounting for Investments in Equity Securities
- Graziano Stefanelli
- Jun 26
- 2 min read
Equity securities represent ownership interests in other entities, such as shares of common or preferred stock. Corporations, investment funds, and individuals invest in equity securities to achieve capital appreciation, receive dividend income, or exert influence over other companies. The accounting for such investments depends on the percentage of ownership, the investor’s intent, and the level of control or influence.
Categories of Equity Investments
Equity investments are categorized based on the investor’s level of influence:
Passive Investments (typically less than 20% ownership): The investor does not have significant influence or control.
Significant Influence (generally 20% to 50% ownership): The investor can influence, but not control, operating and financial policies.
Control (greater than 50% ownership): The investor controls the investee, usually requiring consolidation.
Initial Recognition and Measurement
Equity securities are initially recorded at cost, including the purchase price and any directly attributable transaction costs (such as brokerage fees).
Example:
A company buys 2,000 shares of Company X at $20 per share, plus $200 commission:
Dr. Equity Investments .......... $40,200
Cr. Cash ............................. $40,200
Subsequent Measurement under US GAAP
Fair Value Through Net Income (FV-NI):Most equity investments (without significant influence) are measured at fair value, with unrealized gains and losses recognized in net income each reporting period.
Practicability Exception:If fair value is not readily determinable, the investment is measured at cost, minus impairment, plus or minus observable price changes.
Dividends and Income Recognition
Dividend income is recognized in the income statement when the right to receive payment is established. This is separate from unrealized gains or losses on the security’s fair value.
Example Journal Entry for Dividends:
Dr. Cash
Cr. Dividend Income
Sale of Equity Securities
Upon sale, the difference between the sale proceeds and the carrying value is recognized as a gain or loss in net income.
Example:
Shares purchased at $20 and sold at $28:
Dr. Cash
Cr. Equity Investments
Cr. Gain on Sale of Investments
Impairment and Revaluation
Under the FV-NI model, all changes in fair value are recognized immediately in income, so traditional impairment assessments are not required as in prior accounting frameworks. For investments measured at cost, impairment is recognized if the fair value falls below cost and the decline is not temporary.
IFRS Differences (IFRS 9)
Fair Value Through Profit or Loss (FVPL):Most equity investments are measured at fair value, with changes recognized in profit or loss.
Fair Value Through Other Comprehensive Income (FVOCI):At initial recognition, companies may irrevocably elect to present subsequent changes in fair value in OCI, with no recycling to profit or loss on disposal.
Presentation and Disclosure
Balance Sheet: Equity investments are classified as current or noncurrent assets, depending on intent and liquidity.
Income Statement: Includes realized and unrealized gains or losses, and dividend income.
Notes to Financial Statements: Disclose policies, fair value measurements, and any election of the FVOCI model (under IFRS).
US GAAP and IFRS References
US GAAP: ASC 321 – Investments—Equity Securities
IFRS: IFRS 9 – Financial Instruments
Summary Table: Equity Securities Accounting
Category | Measurement | Gains/Losses Recognized | Where Reported |
Passive (US GAAP, <20%) | Fair Value | In Net Income | Income Statement |
Passive (IFRS) | FVPL/FVOCI | Profit or Loss / OCI | Income/OCI |
Significant Influence | Equity Method | Share of investee’s NI | Income Statement |
Control | Consolidation | All investee’s results | Consolidated FS |
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DATA STUDIOS
