1. Chapter 12
INVESTMENTS
Chapter 12: Investments

2. Common and preferred stock
Nature of Investments
Bonds and notes
(Debt securities)
Common and preferred stock
(Equity securities)
To finance its operations, and often the expansion of those operations, a corporation raises funds by selling equity securities (common and preferred stock) and debt securities (bonds and notes). These securities are purchased as investments by individual investors, mutual funds, and also by other corporations. Our focus in this chapter is on the corporations that invest in securities issued by other corporations as well as those issued by governmental units (bonds, Treasury bills, and Treasury bonds).
Investments can be accounted for in a variety of ways, depending on the nature of the investment relationship.

3. Reporting Categories for Investments
Investments in securities that do not represent a significant ownership interest are placed in one of three categories. Debt securities may be classified as held to maturity, available for sale or trading securities. Equity securities may only be classified as available for sale or trading securities. Debt securities that are classified as held to maturity are reported on the balance sheet at amortized cost. The asterisk is there to remind us that investors can elect the fair value option for HTM, AFS and equity method investments, whereby those investments are accounted for in a manner similar to trading securities. We’ll discuss that more later in the chapter. Debt or equity securities classified as available for sale are shown on the balance sheet at fair value, and any unrealized gain or loss associated with the securities is reported in Other Comprehensive Income. Debt or equity securities classified as trading securities are shown on the balance sheet at fair value, and any unrealized holding gains or losses are reported in current period income.

4. Securities to Be Held to Maturity
On January 1, 2009, Matrix, Inc. purchased as an investment $1,000,000, of 10%, 10-year bonds, interest paid semi-annually. The market rate for similar bonds is 12%. Let’s look at calculation of the present value of the bond issue.
Present
Amount
PV Factor
Value
Interest
$ ,000 × =
$573,496
Principal
1,000,000
311,805
Present value of bonds
$885,301
On January 1, 2009, Matrix, Inc. purchased as an investment $1,000,000, of 10%, 10-year bonds, interest paid semi-annually. The market rate for similar bonds is 12%. Let’s look at calculation of the present value of the bond issue. The interest annuity is $50,000 ($1,000,000 times 10% = $100,000 ÷ 2 equals $50,000). Look at the present value of an ordinary annuity of $1 table. Find the 20 periods row and move across to the 6% column to find the factor of Go to the present value of $1 table and follow the same procedures to arrive at the present value factor of The present value of the bonds at 12% return is $885,301.
PV of ordinary annuity of $1, n = 20, i = 6%
PV of $1, n = 20, i = 6%

5. Securities to Be Held to Maturity
Partial Bond Amortization Table
Period
Interest Payment
Interest Revenue
Discount Amortization
Unamortized Discount
Carrying Value
114,699
885,301 1
50,000
53,118
(3,118)
111,581
888,419 2
53,305
(3,305)
108,276
891,724 3
53,503
(3,503)
104,773
895,227 4
53,714
(3,714)
101,059
898,941
Part I
Here is a partial amortization table for the bonds purchased on January 1, 2009 with the intent of holding them to maturity. The bonds were priced as $885,301, to yield Matrix, a 12% return. Interest semi-annually on June 30th and December 31st. Let’s look at the journal entry to record the initial purchase of the bonds and the subsequent receipt of the first interest amount.
Part II
On January 1, Matrix will debit investment in bonds for the face amount of $1 million, credit discount on bond investment for $114,699, and credit cash for $885,301. On June 30, the first at payment is due to Matrix. The journal entry is to debit cash for $50,000, debit discount on bonds payable for $3,118 and credit interest revenue for $53,118. The interest revenue is determined by taking 6% of the carrying value of the bonds, which is $885,301. The $50,000 cash received is determined by multiplying the face amount of the bonds, $1 million, by 5%, the stated rate. The difference between the calculated interest revenue and the cash interest received represents the amortization of the bond discount.

6. Securities to Be Held to Maturity
How would this investment appear on the balance sheet after one period of discount amortization?
$114,699 - $3,118 = $111,581 unamortized discount
As of June 30, discount on the bond investment account has been reduced to $111,581. The amortized amount of the investment is $888,419. If a balance sheet were prepared as of June 30, the investment in bonds would be shown at $888,419.

7. Securities to Be Held to Maturity
On December 31, 2009 after interest is received by Matrix, all the bonds are sold for $900,000 cash.
Period
Interest Payment
Interest Revenue
Discount Amortization
Unamortized Discount
Carrying Value
114,699
885,301 1
50,000
53,118
(3,118)
111,581
888,419 2
53,305
(3,305)
108,276
891,724 3
53,503
(3,503)
104,773
895,227 4
53,714
(3,714)
101,059
898,941
On December 31, 2009, Matrix receives $50,000 cash interest. The journal entry to record the receipt is to debit cash for $50,000, debit discount on bonds payable of $3,305, and credit investment revenue for the total of $53,305. Immediately after the receipt of interest, Matrix sell its investment in bonds for $900,000 cash. The entry to record the sale is to debit cash for the proceeds of $900,000, eliminate the unamortized discount with a debit to discount on bonds payable for $108,276, credit the investment in bonds for $1,000,000, and credit the realized gain on sale of investment for $8,276.

8. Adjustments to fair value are recorded:
Trading Securities
Adjustments to fair value are recorded:
in a valuation account called Fair Value Adjustment, or as a direct adjustment to the investment account.
as a net unrealized holding gain/loss on the Income Statement.
Unrealized Gain
Unrealized Loss
Trading securities initially are recorded at cost including any brokerage fees. Adjustments to fair value for trading securities are made when the balance sheet is prepared. These adjustments are typically made to a fair value adjustment account, but could also be made directly to the investment account.
Income Statement

9. Trading Securities
Matrix, Inc. purchased additional securities classified as Trading Securities (TS) at the end of The fair value amounts for these securities on December 31, 2009, are shown below. Prepare the journal entries for Matrix, Inc. to adjust the securities to fair value at 12/31/09.
Toward the end of 2009, Matrix purchases 1,000 shares of Mining, inc. and 1,500 shares of Ford Motor to be held as trading securities. The cost of these securities are shown on the table at the bottom of your screen. On December 31, 2009, the fair value of the Mining, Inc. shares is $41,000, and the fair value of Ford Motor shares is $20,000. Let’s see how we record the unrealized holding loss on the securities.

10. Trading Securities
At December 31, 2009, the journal entry required is to debit net unrealized holding gains and losses - IS for $3,500, and credit the fair value adjustment account for the same amount. The net unrealized holding loss will be reported in the current period income statement. Also, any interest revenue is handled the same as with HTM investments, and any dividend revenue is handled similarly, with a debit to cash and a credit to dividend income.
The Net Unrealized Holding Loss is reported on the Income Statement.

11. Trading Securities
Unrealized holding gains and losses from trading securities are reported on the income statement.
In our example fair value is below cost, so Matrix will report an unrealized holding loss in current period income. The unrealized holding loss could be included as part of operations for a financial institution like a bank of insurance company, but as part of other income or loss for non-financial companies.

12. Trading Securities
On January 3, 2010, Matrix sold all trading securities for $65,000 cash.
On January 3, 2010, Matrix sold all it trading securities for $65,000 cash. The entry to record the sale is to debit cash for $65,000, credit each trading security for its cost, and credit gain on sale of investments for $500.
In the period of sale, the fair value adjustment associated with the sold investment is eliminated, typically as part of the normal valuation process at the end of the period. This also has the effect of backing out of income any unrealized gains and losses that were recognized in prior periods, which avoids the double accounting that would result from including gains and losses both when unrealized (because fair value changes) and when realized (because the investment is sold). So, in our example, we eliminate the fair value adjustment with a debit of $3,500, and credit net unrealized gain or loss for the same amount.

13. Securities Available-for-Sale
Adjustments to fair value are recorded:
in a valuation account called Fair Value Adjustment, or as a direct adjustment to the investment account.
as a net unrealized holding gain/loss in Other Comprehensive Income (OCI), which accumulates in Accumulated Other Comprehensive Income (ACOI).
Unrealized Gain
Unrealized Loss
When an investment is not classified as an HTM or trading security, it is classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair value subsequent to acquisition. Adjustments to fair value are recorded in a valuation account called Fair Value Adjustment, or as a direct adjustment to the investment account. The net unrealized holding gain/loss is shown in the account Other Comprehensive Income (OCI), which accumulates in Accumulated Other Comprehensive Income (ACOI).
Other Comprehensive Income

14. Other Comprehensive Income (OCI)
When we add other comprehensive income to net income we refer to the result as “comprehensive income.”
Other comprehensive income consists of the four elements shown and is reported net of aggregate income tax expense or benefit.

15. Accumulated Other Comprehensive Income
Unrealized holding gains and losses on available-for-sale securities are accumulated in the shareholders’ equity section of the balance sheet. Specifically, the account is included in Accumulated Other Comprehensive Income.
Shareholders’ Equity
Common Stock
Paid-in Capital in Excess of par Accumulated other comprehensive income Retained earnings
Total Shareholders’ Equity
Net unrealized holding gains and losses.
Unrealized holding gains and losses on available-for-sale securities are reported in the shareholders’ equity section of the balance sheet. Specifically, the account is included in Accumulated Other Comprehensive Income. The reason for this placement is that many in the business world believe that including unrealized holding gains and losses on available-for-sale securities would cause greater volatility in net income than was appropriate.

16. Securities Available for Sale Example
Now assume the same facts for our Matrix, Inc. example, except that the investment is for available-for-sale securities rather than trading securities.
Now assume the same facts for our Matrix, Inc. example, except that the investment is for available-for-sale securities rather than trading securities. There’s a net unrealized holding loss of $3,500. Let’s see how we account for this net unrealized holding loss.

17. Securities Available for Sale Example
This net unrealized holding gain is reported in other comprehensive income.
On December , the journal entry required is to debit net unrealized holding gains and losses – OCI for $3,500, and credit the fair value adjustment account for the same amount. The net unrealized holding loss will be reported in OCI, which gets closed to AOCI in shareholders’ equity. Also, any interest revenue is handled the same as with HTM investments, and any dividend revenue is handled similarly, with a debit to cash and a credit to dividend income.

18. Reclassification Adjustment When AFS Investments are Sold
Event
Effect on Comprehensive Income
Effect on Shareholders' Equity
Period 1: hold AFS investment and experience net unrealized loss.
òOCI for unrealized holding loss.
ò AOCI
Period 2: sell AFS investment and realize loss on sale
ñ OCI to back out previously recognized unrealized
ñ AOCI (so net effect on AOCI over time is zero)
holding loss (so effect on OCI over time is zero)
ò Net income for realized loss
ò Retained earnings
This table illustrates reclassification of unrealized losses when an available-for-sale security is sold. Notice that, in periods where we experience unrealized holding gains or losses, they are shown in OCI and accumulated in AOCI. Then, in the period in which the AFS investment is sold we back out or OCI and AOCI the accumulated amount of unrealized holding gains or losses as part of the fair value adjustment process, so that the net impact of the unrealized holding gains or losses on OCI and AOCI is zero. In that same period we include the realized gain or loss in net income, which then gets closed to retained earnings. Therefore, you can view this process as reclassifying accumulated gains and losses from OCI and AOCI to net income and retained earnings.

19. Securities Available for Sale Example
On January 3, 2010, Matrix sold all available-for-sale for $65,000 cash.
On January 3, 2010, Matrix sold all available-for-sale securities for $65,000 cash. The entry to record the sale is to debit cash for $65,000, credit each trading security for its cost, and credit gain on sale of investments for $500.
In the period of sale, the fair value adjustment associated with the sold investment is eliminated, typically as part of the normal valuation process at the end of the period. This also has the effect of backing out of income any unrealized gains and losses that were recognized in prior periods, which avoids the double accounting that would result from including gains and losses both when unrealized (because fair value changes) and when realized (because the investment is sold). So, in our example, we eliminate the fair value adjustment with a debit of $3,500, and credit net unrealized gain or loss for the same amount.

20. Other Than Temporary Impairments
This is called an. . .
Occasionally, an investment’s value will decline for reasons that are “other than temporary.”
Impairment in Value
Sometimes an investment will incur a permanent decrease in value. We refer to this as an impairment in value.
When we own the security that has experienced a permanent decline in value, we write down the security to its impaired value and include the difference in the current period income statement. The new cost basis, which is the impaired value, is not changed if there’s a subsequent temporary change in value. This treatment does not only apply to AFS investments, but also HTM investments.

21. Transfers Between Reporting Categories
Transfers are accounted for at fair value on the transfer date.
Unrealized holding gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.
Transfers between categories of investment should be handled at fair value on the date of transfer, and unrealized holding gains and losses should be accounted for in a manner consistent with the new classification of the security. For example, if we transferred securities from the available-for-sale category to the trading category, accumulated unrealized holding gain or loss would be reclassified and recognized on the income statement.

22. Transfers Between Reporting Categories
Transfer from:
To:
Unrealized Gain or Loss from Transfer at FMV
Either of the other
Trading
Include in current net income
There is none (already recognized in net income)
Held-to-maturity
Available-for-sale
Report as a separate component of shareholders' in OCI.
Don't write-off existing unrealized holding gain or loss.
Amortize it to net income over the remaining life of
the security.
At each reporting date, the appropriateness of the classification is reassessed. For instance, if the investor no longer has the ability to hold certain securities to maturity and will now hold them for resale, these securities would be reclassified. The proper accounting for securities reclassified depends on the intent of the investor.

23. Disclosures Gross realized & unrealized holding gains & losses
Aggregate Fair Value
Gross realized & unrealized holding gains & losses
Maturities of debt securities
Amortized cost basis by major security type
Listed on this slide are the six disclosures required for investments in securities classified as held-to-maturity, available-for-sale, or trading.
Change in net unrealized holding gains and losses
Inputs to fair value estimates

24. Investor Has Significant Influence
Now we are going to change the accounting for investments dramatically. We are going to assume a company has acquired enough equity securities in another company to exert significant influence over the operating policies of that company. Under these circumstances, the equity method of accounting for the investment is required.

25. Investor Has Significant Influence
Extent of Investor Influence
Reporting Method
Lack of significant influence (usually < 20% equity ownership)
Varies depending on classification previously discussed
Significant influence (usually 20% - 50% equity ownership)
Equity method
Has control (usually > 50% equity ownership)
Consolidation
We use the equity method for investments in equity securities that are large enough to allow us to exert significant influence, typically assumed as occurring when we own between 20% and 50% of the voting common stock. If we own more than 50% of the voting common stock, we use consolidation.

26. What Is Significant Influence?
If an investor owns 20% of the voting stock of an investee, it is presumed that the investor has significant influence over the financial and operating policies of the investee. The presumption can be overcome if :
the investee challenges the investor’s ability to exercise significant influence through litigation or other methods.
the investor surrenders significant shareholder rights in a signed agreement.
the investor is unable to acquire sufficient information about the investee to apply the equity method.
the investor tries and fails to obtain representation on the board of directors of the investee.
If an investor owns 20% of the voting stock of an investee, it is presumed that the investor has significant influence over the financial and operating policies of the investee. The presumption can be overcome if :
The investee challenges the investor’s ability to exercise significant influence through litigation or other methods.
The investor surrenders significant shareholder rights in a signed agreement.
The investor is unable to acquire sufficient information about the investee to apply the equity method.
The investor tries and fails to obtain representation on the board of directors of the investee.

27. Equity Method and Consolidation
If a company acquires more than 50% of the voting stock of another company:
it controls the company acquired (cannot be outvoted). The “parent” controls the “subsidiary.”
for accounting purposes, the parent and subsidiary are considered a single reporting entity. Consolidated financial statements combine the separate financial statements of the parent and subsidiary each period into a single aggregate set of financial statements.
the equity method is sometimes referred to as a “one line consolidation,” because it shows the investor’s income and investment as increasing by their portion of the investee’s income.
If a company acquires more than 50% of the voting stock of another company:
It controls the company acquired (cannot be outvoted). The “parent” controls the “subsidiary.”
For accounting purposes, the parent and subsidiary are considered a single reporting entity. Consolidated financial statements combine the separate financial statements of the parent and subsidiary each period into a single aggregate set of financial statements.
The equity method is sometimes referred to as a “one line consolidation,” because it shows the investor’s income and investment as increasing by their portion of the investee’s income.
We don’t cover consolidations in this course, but it is useful to know a bit about it to understand how it relates to the equity method.

28. Equity Method The investment account is increased by:
Original investment cost.
Proportionate share of investee's earnings.
The investment account is decreased by:
Dividends received.
Under the equity method the investment account is increased by the original investment cost, plus the company’s proportionate share of the investees reported earnings. The investment account is decreased when dividends are received.

29. Equity Method
On January 1, 2009, Matrix, Inc. acquired 45% of the equity securities of Apex, Inc. for $1,350,000. On the acquisition date, Apex’s net assets had a fair value of $3,000,000. During 2009, Apex paid cash dividends of $150,000 and reported net income of $1,750,000.
What amount will Matrix, Inc. report on the balance sheet as Investment in Apex, Inc.?
Let’s look at a rather straightforward example of the equity method. In this case, the investor acquires 45% of the voting common stock of the investee. The investor pays $1,350,000, for its proportionate share of net assets with a fair value of $3 million. During 2009, the investee reports earnings of $1,750,000 and pays cash dividends of $150,000. Let’s look at the accounting for this investment under the equity method.

30. Equity Method
We can see that the investor paid fair value for the net assets acquired. The journal entry at date of acquisition will be to debit investment in Apex, Inc. for $1,350,000, and credit cash for the same amount.

31. Equity Method
On December 31, 2009, the company received its proportionate share of the dividends paid by the investee. The journal entry to record the receipt of dividends is to debit cash for $67,500, and credit investment in Apex, Inc. The investor also recognizes its proportionate share of the reported earnings of the investee. The journal entry is to debit investment in Apex, Inc., and credit investment revenue for $787,500. Notice that the receipt of dividends is not recognized as revenue, but the reported earnings of the investee is recognized as revenue. Receipt of dividends is viewed as a partial liquidation of the investor’s investment, so that is why it reduces the investment account. Note that this approach has the added advantage of preventing the investor from managing earnings by recognizing revenue whenever they decide to use their significant influence to compel the investee to pay dividends.

32. Equity Method Investment in Apex, Inc.
Investment ,350, , % Dividends
45% Earnings ,500
Reported amount 2,070,000
Part I The Investment in Apex, Inc. account will be shown in the balance sheet of the investor at $2,070,000. Notice that the dividends received reduces the investment account, and recognition of the proportionate share of earnings increases the investment account.
Part II
If the investee company had reported a loss, the investment account would have been reduced by the investor’s proportionate share of that loss.
If the investee had a loss, the investment account would have been reduced.

33. Equity Method
On January 1, 2009, Matrix, Inc. purchase 25% of the common stock of Apex, Inc. for $180,000. At the date of acquisition, the book value of the net assets of Apex was $400,000, and the net fair value of these assets is $600,000. During 2009, Apex paid cash dividends of $40,000, and reported earnings of $100,000.
Now let’s complicate our discussion of the equity method. Please read this information carefully, noting that the price Matrix paid for 25% of Apex ($180,000) is greater than 25% of the fair value of Apex’s net assets ($150,000). That difference of price paid over fair value of net assets is viewed as a goodwill component of the purchase price. Notice also that the fair value of Apex’s net assets is greater than 25% of the book value of those net assets on Apex’s balance sheet (25% times $400,000 equals $100,000).

34. Equity Method
Assume that of the $50,000 excess of the fair value of net assets acquired ($600,000 × 25% = $150,000) over the book value of those net assets on Apex’s balance sheet ($400,000 × 25% = $100,000), 75% is attributable to depreciable assets with a remaining life of 20 years and the remainder is attributable to land. Matrix uses the straight-line method of depreciation on similar owned assets.
Of the $50,000 excess of the fair value over book value of those net assets on Apex’s balance sheet, 75% is attributable to depreciable assets with the remaining useful life of 20 years. Matrix uses the straight-line method to depreciate similar owned assets. If Apex carried those net assets at their fair value on their financial statements, they would have to record additional depreciation expense, and Matrix’s share of that additional depreciation expense would be $1,875 per year. To capture this income effect, Matrix will impute that depreciation expense and include it as a deduction of investment revenue and the investment. Note that, because neither goodwill nor land is amortized, Matrix makes no adjustment to impute expense for them.

35. Remember, goodwill is not amortized.
Equity Method
Matrix will record the following journal entries on its books during We are familiar with the first three entries: purchase of the investment, recognition of dividends received, and recording of our proportionate share of earnings reported by Apex. The only new entry is the last one. This is the entry to recognize the additional depreciation that Matrix must record. The journal entry is to debit investment revenue and credit investment in Apex for $1,875. The additional depreciation reduces the investment revenue Matrix recognized.
Remember, goodwill is not amortized.

36. Changing From the Equity Method to Another Method
When the investor’s level of influence changes, it may be necessary to change from the equity method to another method.
At the transfer date, the carrying value of the investment under the equity method is regarded as cost.
When we change from the equity method to another method (TS or AFS), the accounting is quite easy. The carrying value of the investment at the date of transfer becomes the cost basis under the new method.

37. Changing From the Equity Method to Another Method
Any difference between carrying value and fair value is recorded in a valuation account and is recognized as an unrealized holding gain or loss.
After the transfer, the investment is treated as a trading security or a security available for sale, depending on management’s intent.
At the date of transfer, any difference between cost and fair value will be recognized as an unrealized holding gain or loss. The securities must be classified as available-for-sale or trading, depending upon the intent of management.

38. Changing From Another Method to the Equity Method
When the investor’s ownership level increases to the point where they can exert significant influence, the investor should change to the equity method.
At the transfer date, the recorded value is the initial cost of the investment adjusted for the investor’s equity in the undistributed earnings of the investee since the original investment.
Part I When we change from another method to the equity method, we adjust the investment to appear as if we had always used the equity method. Thus, we adjust the cost basis of the investment for the total undistributed earnings of the investee since the date of the original acquisition.
Part II
Undistributed earnings is defined as reported earnings minus dividends paid.

39. Changing From Another Method to the Equity Method
The original cost, the unrealized holding gain or loss, and the valuation account are closed.
A retroactive change is recorded to recognize the investor’s share of the investee’s earnings since the original investment.
Any unrealized holding gains or losses included in a valuation allowance account are closed at the date of transition from cost to equity. A retroactive adjustment is required to restate the investment for the total undistributed earnings since the date of original acquisition.

40. Fair Value Option
SFAS No. 159 allows companies to use a “fair value option” for HTM, AFS and equity method investments.
The investment is carried at fair value.
Unrealized gains and losses are included in income.
For HTM and AFS investments, this just amounts to classifying the investments as trading.
For equity-method investments, the investment is still classified on the balance sheet with equity method investments, but the portion at fair value must be clearly indicated.
The fair value option is determined for each individual investment, and is irrevocable.
SFAS No. 159 allows companies to use a “fair value option” for HTM, AFS and equity method investments.
The investment is carried at fair value.
Unrealized gains and losses are included in income.
For HTM and AFS investments, this just amounts to classifying the investments as trading.
For equity-method investments, the investment is still classified on the balance sheet with equity method investments, but the portion at fair value must be clearly indicated.
The fair value option is determined for each individual investment, and is irrevocable.

41. Financial Instruments & Derivatives
Cash.
Evidence of an ownership interest in an entity.
Contracts meeting certain conditions.
Derivatives:
Value is derived from other securities.
Derivatives are often used to “hedge” (offset) risks created by other investments or transactions
Financial instruments include cash, evidence of ownership interest in an entity, and contracts meeting certain conditions. Derivatives are often used to “hedge” (offset) risks created by other financial investments or transactions. Derivatives have values that are “derived” from the value of the underlying security.

42. Other Investments – Appendix A
It is often convenient for companies to set aside money to be used for specific purposes. In the short-term, funds may be set aside for
Petty cash funds.
Payroll accounts.
In the long-run, funds are often set aside to:
Pay long-term debt when it comes due.
Acquire treasury stock.
Special purpose funds set aside for the long-term are classified as investments.
Petty cash is considered a special-purpose fund because it is monies that are set aside for the payment of small business expenditures that require cash. We might use the petty cash fund to pay for postage, cab fare for employees, or meals when employees work overtime. Most companies establish a payroll account as a special-purpose fund. The balance in the payroll account shortly after payday should be zero. The special-purpose funds serve as a control mechanism for the company.
Some companies set up special-purpose funds for long-term purposes. These funds might include a sinking fund used to reacquire long-term debt or treasury stock.

43. Appendix 12A – Other Investments
It is a common practice for companies to purchase life insurance policies on key officers. The company pays the premium and is the beneficiary of the policy. If the officer dies, the company receives the proceeds from the policy. Some types of policies build a portion of each premium as cash surrender value. The cash surrender value of such a policy is classified as an investment on the balance sheet of the company.
Appendix 12A—Other Investments
It is a common business practice for companies to purchase life insurance policies for key officers and employees. The company pays the premium and is the beneficiary of the policy. If the policy is a “whole life” policy, it develops a cash surrender value. The cash surrender value of the life insurance policy is treated as an investment on the company’s balance sheet.

44. Appendix 12B – Impairment of a Receivable Due to a Troubled Debt Restructuring
When the original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor, the new arrangement is referred to as a troubled debt restructuring.
Sometimes a troubled debt is settled in full when the debtor transfers assets or equities to the creditor. The creditor usually recognizes a loss on the settlement. Such a settlement is not considered unusual or infrequent and is not an extraordinary item.
Part I Appendix 12B—Impairment of a Receivable Due to a Troubled Debt Restructuring
The original terms of the debt agreement may be changed as a result of financial difficulties experienced by the debtor. When this process occurs, it’s referred to as a troubled debt restructuring.
Part II
A troubled debt restructuring may involve the full settlement of the debt by the transfer of assets for equities from the debtor to the creditor. The creditor usually recognizes a loss on the settlement. The loss is not considered extraordinary.

45. End of Chapter 12.
End of Chapter 12