How do you account for an equity security? An investor will purchase the equity securities of an entity in hopes the entity will make a profit and in turn, the investment will appreciate. The financial instrument is an investment in the entity’s net assets or equity. The most prevalent types of equity securities are common stock and preferred stock. What is an equity security?Īn equity security is a financial instrument representing ownership in another entity. This treatment is still in effect for debt securities under ASC 320, but the accounting for equity securities has changed. Prior to ASU 2016-01, both debt and equity securities were classified as held-to-maturity, available-for-sale, or trading and accounted for accordingly. Additionally, the previously existing standard, ASC 320, Investments - Debt Securities (ASC 320), was updated to provide accounting and reporting guidance only for investments in debt securities. More specifically, ASU 2016-01 established ASC 321, Investments - Equity Securities (ASC 321) to present new accounting treatment for equity securities. In 2016 the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) to address the recognition, measurement, presentation, and disclosure of certain financial instruments. This article will focus on the accounting treatment of intangible investments, specifically equity securities. The changes in value, or “income” from an investment are accounted for in a myriad of different ways, many of which depend on what type of investment it is. After the initial recognition, the accounting gets a bit more complex. When a company purchases an investment, it is recorded as a debit to the appropriate investment account (an asset), offset with a credit to the account representing the consideration (e.g., cash) given in exchange for the asset. Examples of nonphysical investment include the investment securities mentioned above but can also include derivatives or investments in companies. The property is a fixed asset acquired for the purpose of providing rental income to the owner. An example of a physical investment is a building purchased to be a rental property. Specifically, from an accounting perspective an investment is an asset acquired to generate income. While this line of thinking is correct, accountants view investments as this and much more. You have probably heard of stock investments, and the term “investment” may lead you to immediately envision stocks, bonds, and mutual funds.