Equity securities can be defined as investment in stock or securities issued by another business establishment (Kenton & Scott, 2020). They represent ownership interests including common interest, preferred interest among others. Accounting for such an investment is determined by the quantity of control and influence over the decisions an individual purchasing the stock has over the issuing company. The most challenging concept for me to understand under-investment in Equity Securities is the classification of such investments which depends on the percentage of the individual voting stock that is held by the individual. This classification includes;
Holdings of less than 20%- where the individual has a passive interest (fair value method).
Holdings of stock between 20 - 50% - where the investor has a substantial influence over the company (equity method).
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Holdings of more than 50% of the stock of a company - where the investor has controlling interest over a company (consolidated statements).
The Holding of Less Than 20%
This is where an individual holding stock of a company has a passive interest. I find calculation and computation using the fair value method and fair value adjustment most challenging. The computation has various steps and levels that need to be computed to establish the fair value adjustment. To better my understanding of the concept of Holding less than 20% I used the website ( Accountinginfo, 2020). The website illustrates how to compute the fair value adjustment in the simplest way making it easily understandable.
Holdings Between 20% and 50%
This where the investor has a significant influence over the company. Computation and determination of the level of influence to me are challenging. To better my understanding of this concept I participated in a follow-up discussion with my classmates. This strategy was instrumental as it enables me to understand different things that I did not initially understand but my classmates did understand.
References
AccountingInfo, (2020) Investments in Debt and Equity Securities [Online] Available at https://accountinginfo.com/study/investment/investment-01.htm [Accessed 3rd October 2020]
Kenton, W, and Scott, G. (2020) Security [Online] Available from https://www.investopedia.com/terms/s/security.asp [Accessed 3rd October 2020]
