Accounting Standards for Equity Investments

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Introduction

The accounting standards for equity investments provide the basis for fair and consistent reporting of investments in equity securities. These standards are designed to ensure the accuracy of financial reporting and the comparability of financial data between organizations. The International Accounting Standards (IAS) 39 and 40 and the Statement of Financial Accounting Standards (SFAS) No. 115 are two of the most crucial accounting standards for equity investments (Guo et al., 2019). This paper aims to compare and contrast these two accounting standards and analyze their conceptual frameworks about conservatism, comparability, relevance, neutrality, and representational faithfulness.

SFAS No. 115

SFAS No. 115 is an accounting standard issued by the Financial Accounting Standards Board (FASB), which guides how to account for investments in equity securities. The standard requires that investments in equity securities be classified as either trading securities or available-for-sale securities. Investors can benefit from rapid changes in market value by purchasing and holding tradable assets. Available deposits are appropriate for long-term investment and profit maximization (Sattarov et al., 2020). Gains and losses on the sale of securities must also be included in net income by the standard.

IAS No. 39 and 40

IAS No. 39 and 40 are international accounting standards issued by the International Accounting Standards Board (IASB). These standards guide the accounting for financial instruments, including investments in equity securities. Investments in equities securities must be categorized as either held for trading or available for sale according to the requirements. The classification of an investment in equity securities depends on the investor’s intention at the time of acquisition. The standards also require that gains and losses on the sale of securities be recognized in net income.

Comparison

Similar guidance is given on the accounting for investments in equity securities in SFAS No. 115, IAS Nos. 39 and 40, and other standards. Depending on the investor’s intent at the time of acquisition, both standards require equity investments to be classified as trading securities or available-for-sale securities (Mejri et al., 2022). Gains and losses on the sale of securities must also be included in net income per the requirements. The two standards diverge most when categorizing investments in equity securities. Investments in equity securities must be categorized as trading or available-for-sale securities under SFAS No. 115. Investments in equity securities must be classified as either held-for-trading or available for sale following IAS Nos. 39 and 40.

Conceptual Framework Analysis

SFAS No. 115 and IAS No. 39 and 40 conceptual frameworks are based on five core concepts: conservatism, comparability, relevance, neutrality, and representational faithfulness. These ideas are meant to serve as a reference for recording investments in equity securities (Abhayawansa & Adams, 2022). Conservatism calls for caution when recognizing gains or losses on investments. Comparability promotes consistency in accounting principles and practices. Relevance requires that financial statements provide useful information to investors. Neutrality means that accounting information should not be biased toward any particular outcome. Finally, representational faithfulness ensures that financial statements accurately reflect the underlying economic reality. Together, these core concepts help ensure that financial statements provide transparency and accuracy in reporting investments in equity securities.

Conservatism

The conceptual framework established by SFAS No. 115 and IAS Nos. 39 and 40 include the idea of conservatism in its entirety. These rules require that investments in equity securities be classified as trading securities or available-for-sale securities depending on the investor’s intention at the acquisition time (Vasquez et al., 2019). This ensures that the security’s quoted value accurately reflects its current market value. Additionally, according to the conservative principle, profits are only recognized once they are realized, and security losses must be acknowledged immediately. This contributes to maintaining the integrity of the financial reporting process and the accuracy of financial statements.

Comparability

Comparability is a fundamental principle of SFAS No. 115 and IAS No. 39 and 40. When purchasing equity investments, their classification as trading securities or securities that are available for sale must be made based on the investor’s intent at the time of purchase (Azar et al., 2019). This ensures that the reported value of the securities is consistent with the market value of similar securities. This standardization of financial reporting assists with comparing results between different companies, allowing investors and other interested parties to make informed decisions. Comparability also ensures that investors can reach the performance of their investments with their peers.

Relevance

Relevance is a critical concept in SFAS No. 115 and IAS No. 39 and 40. These standards ensure that companies’ financial statements accurately reflect their current financial position and performance. To this end, they require that any gains or losses on the sale of securities be recognized in net income. This ensures that the reported value of the protection is in line with its current market value. This makes it possible for creditors, investors, and other stakeholders to correctly analyze the firm’s financial situation and make wise investment choices (Abhayawansa & Adams, 2022). In this way, relevance ensures that the financial statements are a reliable and accurate source of information.

Neutrality

The concept of neutrality is an essential part of the conceptual framework of SFAS No. 115 and IAS No. 39 and 40. At the time of acquisition, investments in equity securities must be classified either as trading securities or available-for-sale securities, as required by both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) (Orthaus & Rugilo, 2022). This ensures that the reported value of the protection is not biased in favor of any particular investor or group of investors.

Representational Faithfulness

The principle of representational faithfulness dictates that a company’s financial statements accurately reflect its assets, liabilities, and equity value. This helps to ensure that investors are aware of the actual value of the company’s securities and can make informed decisions when investing, as required by SFAS No. 115, IAS No. 39, and IAS No. 40 (Orthaus & Rugilo, 2022). This is to ensure that profits or losses from the sale of securities are reported in net income, and the declared value of the protection is in line with their current market value.

Conclusion

In conclusion, SFAS No. 115 and IAS No. 39 and 40 are two of the most crucial accounting standards for equity investments. These standards provide similar guidance on the accounting for investments in equity securities, and the categorization of investments in equity securities is the primary source of difference between the laws. Investments in equity securities must be categorized as trading or available-for-sale securities by SFAS No. 115. IAS No. 39 and 40 require that investments in equity securities be classified as either held-for-trading or available for sale. The conceptual frameworks of both standards include the concepts of conservatism, comparability, relevance, neutrality, and representational faithfulness. These concepts ensure that the reported value of the securities is accurate, consistent, relevant, and faithful to the current market value.

References

Abhayawansa, S., & Adams, C. (2022). Towards a conceptual framework for non-financial reporting inclusive of pandemic and climate risk reporting. Meditari Accountancy Research, 30(3), 710-738. Web.

Azar, N., Zakaria, Z., & Sulaiman, N. A. (2019). The Quality of Accounting Information: Relevance or Value-Relevance?. Asian Journal of Accounting Perspectives, 12(1), 1-21. Web.

Guo, Y., Lu, S., Ronen, J., & Ye, J. (2019). Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation. Abacus, 55(1), 180-204. Web.

Mejri, M., Ben Othman, H., Abdou, H. A., & Hussainey, K. (2022). Comparing the value-relevance of AAOIFI versus IFRS accounting numbers in the Takaful industry. Journal of Islamic Accounting and Business Research. Web.

Orthaus, S., & Rugilo, D. (2022). Revisiting Constituents’ Reflections on the Incorporation of Day-one Losses into IFRS 9. Accounting in Europe, 1-27. Web.

Sattarov, O., Muminov, A., Lee, C. W., Kang, H. K., Oh, R., Ahn, J.,… & Jeon, H. S. (2020). Recommending cryptocurrency trading points with a deep reinforcement learning approach. Applied Sciences, 10(4), 1506. Web.

Vásquez, J., Aguirre, S., Fuquene-Retamoso, C. E., Bruno, G., Priarone, P. C., & Settineri, L. (2019). A conceptual framework for the eco-efficiency assessment of small-and medium-sized enterprises. Journal of Cleaner Production, 237, 117660. Web.

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