[jstoffel]

Hey! So I’m taking FAR in a few weeks, and for some reason Ive been really second guessing my knowledge of investment classifications, and I just wanted to see if anyone could help organize my thoughts for me.

The basic structure, as I understand it, is:
No Significant Influence -> cost method
Significant Influence -> equity method
Controlling Interest -> equity method

Then, we also have the 3 marketable security categories (Trading, AFS, HTM) and the FV Option.

Everywhere I look seems to say that when there is no significant influence, you use the cost method. But, I know you can also use (and based on the practice questions, it seems like you will most likely use) the 3 marketable security classifications (Trading, AFS, HTM). But, they are not considered ‘cost method’? because they are (except for HTM) regularly adjusted to FV. The marketable security classifications are completely separate from the cost method, yes? (

This all started when a question in the Wiley test bank classified an investment as ‘Cost adjusted for Fair Value,’ and then I started getting all mixed up. Then when I tried research this, everywhere I looked would simply label investments with NO significant influence as cost method (which would almost lead me to believe that the 3 marketable security categories were a part of cost method, but that just doesn’t make sense).

Also, whats up with the FVO? can anything use the FVO? I feel like most of the investments in the practice questions are already classified in a way that adjusts them to FV. But, I see questions saying that a company has a Trading/AFS investment, and does not elect the FVO. Are they just trying to trip me up, bc these investments are adjusted to FV regardless??

Anyway, if anyone can provide some clarification on the structure/organization of the classification that would be wonderful! thanks.

[Globetrotter]

Hello jstoffel,

I am studying this right now (using Wiley). Here is what I learned. This is a pretty convoluted topic. Let's see if you agree.

Firstly, when your question is talking about ‘Cost adjusted for Fair Value”, is it possible that it is talking about possible impairment of the investment?
Then if are using the cost method and came by FV from some source, and cost > FV, write it down to FV and loss is recognized in earnings. This will be your new cost basis.

Secondly, are we are talking about Equity Securities, right? They could be classified as Trading and AFS but NOT Held-to-Maturity.

For “no significant influence” you could use both cost and Fair Value. You are more likely to use FV for publicly traded as it's readily available.If the investment is in the private company, and no FV is readily available, you can use cost method.

For “significant influence” – Equity or FV. Normally you would use equity method. There are some weird circumstances (like there is a MAJORITY shareholder or standstill with investee) where you would use FV.

For “controlling interest” – Equity or Cost.

Finally, I think fair value option is something hat you choose to value your assets and financial liabilities. You have to make this choice to eligible items. (Not to consolidated entities). There are a lot of restrictions.

What do you think?

Anyway, good luck on your FAR.

[Author]

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