God help me on this FSA question!

Do we only use Trading / Avail for Sale / Hold till Maturity rules if we have a non-controlling position in the firm? So if I own 10% of Pepsi and I am holding it for a short period of time I would use the Trading rules while if I held 25% and had a controling position I would use the equity method? Am I confusing something?

Post the q…

Trading/Avail for Sale/HTM are used only for passive investments. If you have any influence, you must use either equity or, in the case of control, consolidation.

10% you use cost method (Just take dividends in Income statement) but if 25% you use equity method and take 25% of pepsi’s net income in your I/S. In equity method you also adjust your investment account in Balance sheet by adding 25% profit or loss and subtracting dividends. Correct me if I am wrong.

That’s what I thought… Anything under 20% you use SFAS 115 rules which is going to be either available for sale or tradingt securities rule…

Wording of non-controlling is a little loosely used. Controlling usually means greater than 50%, and influential being 20-50% (equity method). If you have less than 20% and no influence you would Availb 4 sale, trading and held to maturity…

They touched on this in Mock1 and it threw me for a loop. Thanks all…I am having some serious mental constipation

well if its not a controlling stake/ or one that can influence… then its up to the management whether they want to classify it as HTM, trading or available for sale… this is why its subject to manipulation at times depending how much the security has appreciated… so managers also have the tendency to reclassify if it is deemed profitable to do so during bad earnings season…

ahmadasjd7fur is spot on…

They make a point of mentioning that you can have “significant influence” (i.e. equity method) at less than 20% as well, so you might want to keep an eye out for tricky langauge that would invoke that exception. I ran across it a couple of times and it made me think I should keep an eye out …