Debt investment accounting is the process of valuing and recording the interest revenue and losses. These amounts are recorded on a debt instrument’s balance sheet. As the value of a debt instrument changes, its amortized cost must be adjusted. In the same manner, the fair value measurement is adjusted to reflect any gain or loss.
The FASB recognizes that debt securities may be purchased for many different reasons, including to hold until maturity or actively trade for trading gains. Generally, managers classify their debt investments into one of three classification categories: trading, holding, or non-trading. Although they rarely use the trading classification, the accounting for debt investments is based on classification.
The new standards also address concerns about the valuation of debt securities held by financial institutions. These standards address some of the accounting issues related to these types of investments, but they do not address the accounting for liabilities. They also do not affect the accounting for equity security investments. Further, this standard does not affect defined benefit pension plans, consolidated-subsidiaries, brokers, or dealers of securities.
Another way to view debt investment accounting is by looking at the way in which debt is issued by companies. It is a form of long-term investment that is represented on a balance sheet at its amortized cost. In this case, the change in fair value does not affect the company’s net income. The principal amount of debt is recorded in the asset account, along with the interest that accrues on the principal.
Fair value is another important element of debt investment accounting. In some cases, the debt investment is valued at a discount. This means that the debt investment was acquired at a lower price than its actual cost. The difference between the actual value and the amortized cost is the fair value. For example, if the debt investment is purchased on January 1, 2011, Robinson Company would purchase it at a discount. The discount price would be $92,278.
In addition to the fair value of debt investments, impairment loss can also be recorded on these investments. It is determined by comparing the carrying amount of debt to expected future cash flows and the expected amount of interest. If the debtor’s credit rating improves, then the impairment loss will decrease. If this occurs, the previously recognized loss shall be reversed with a debit to Debt Investments and a credit to Recovery of Impairment Losses.
Financial assets are another important consideration in debt investment accounting. They can be cash, equity investments, or contractual rights. While cash and equity investments are generally straightforward, the accounting treatment of debt investments is extremely complex. As such, it is important to use fair value guidelines in order to determine their value. However, debt investment accounting is often a complicated and controversial area.
Fair value accounting differs from equity method accounting. While equity method investments are considered “tradable” securities under U.S. GAAP, debt investments are classified as “available for sale.” In IFRS, the equity method of accounting is used for holding-for-collection investments.