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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Perspective and Issues

The appropriate accounting for noncurrent (or long‐term) investments in equity and debt securities is normally dependent upon the degree of marketability, management's intentions regarding the holding period, and (in the case of equity investments, only) the investor's ownership percentage.

For “passive” investments in marketable equity securities, generally defined as those circumstances where the investor holds less than a 20% interest in the investee, FAS 115, Accounting for Certain Investments in Debt and Equity Securities, requires that the investment be reported at fair value. Such equity investments must be classified at the acquisition date as being held for trading purposes or as being “available‐for‐sale.” While fair value (what was historically referred to as “mark‐to‐market” or “fair market value”) accounting is prescribed in either case, only for trading securities will the change in fair value be reflected on the income statement in the current period. For investments in equity securities that are classified as “available‐for‐sale,” unrealized gains and losses are classified in an equity account referred to as accumulated other comprehensive income, after being reported as a component of other comprehensive income per FAS 130, Reporting Comprehensive Income. If however, there is a decline in fair value of the “available‐for‐sale” securities that is considered “other‐than‐temporary,” this adjustment is charged to earnings in the current period. ...

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