Companies invest in the securities of other business entities for a variety of reasons, such as obtaining additional income, creating desirable relationships with suppliers, obtaining partial or full control over related companies, or adding new products. The decision to classify these investments as long-term rather than as current assets is based on the concept of managerial intent. When management intends to use the securities for long-term purposes, they are separately classified on the balance sheet as long-term investments rather than as temporary investments.
As discussed in Chapter 6, the balance sheet category of investments includes investments in equity and debt securities of other business entities, assets not currently in use, and special funds. This chapter discusses investments in equity and debt securities. Detailed discussion of equity investments is to those that do not result in consolidated financial statements. The topic of intangible assets is also addressed.
The term equity security is defined in SFAS No. 115 (see FASB ASC 320-10-20) as
Any security representing an ownership interest in an enterprise (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, and call options) or dispose of (for example, put options) an ownership interest in an enterprise at fixed or determinable ...