Raising Capital Accounting Essay
Accounting 311
Raising capital through investments in bonds or borrowing directly from a lender by taking out a loan generates an increase of capital influx into a business. However, there are differences in the accounting treatment for each method that should be considered when deciding how best to increase cash assets. In this essay there will be a focus on how each approach affects the balance sheet and how each is recognized on the income statement. Along with these factors, this paper will also examine the difference between the application of GAAP and IFRS principals.
Bonds typically have a predictable stream of income and repay principal at maturity; many invest in bonds because they are a dependable source of interest income and fairly robust. To begin with the accounting process and recognition of investments in bonds, these bonds are typically classified as available-for-sale, held-to-maturity, or trading (FASB ASC 320-10-25-1) (IFRS provides for classification as trading, available-for-sale, or held-to-maturity for all types of financial assets, whereas US GAAP applies these classification only to securities.). To focus on the first two classifications, their treatment in the accounting process differs slightly. First, bonds categorized as available-for-sale are located in the final section of the balance sheet known as stockholders' equity and reported at fair market value (FASB ASC 820: Fair Value Measurement). Adjustments for market value changes in available-for-sale investments in other companies are shown as a component of owners' equity and are put into a special account called Unrealized Gain/Loss- OCI. These adjustments also are reported in comprehensive income, because they reflect a change in owners' equity that is not a part of net income. The reasoning behind this is that the FASB did not believe that short term fluctuation in the value of this category of investments should affect net income when the purpose was not to invest for
Raising capital through investments in bonds or borrowing directly from a lender by taking out a loan generates an increase of capital influx into a business. However, there are differences in the accounting treatment for each method that should be considered when deciding how best to increase cash assets. In this essay there will be a focus on how each approach affects the balance sheet and how each is recognized on the income statement. Along with these factors, this paper will also examine the difference between the application of GAAP and IFRS principals.
Bonds typically have a predictable stream of income and repay principal at maturity; many invest in bonds because they are a dependable source of interest income and fairly robust. To begin with the accounting process and recognition of investments in bonds, these bonds are typically classified as available-for-sale, held-to-maturity, or trading (FASB ASC 320-10-25-1) (IFRS provides for classification as trading, available-for-sale, or held-to-maturity for all types of financial assets, whereas US GAAP applies these classification only to securities.). To focus on the first two classifications, their treatment in the accounting process differs slightly. First, bonds categorized as available-for-sale are located in the final section of the balance sheet known as stockholders' equity and reported at fair market value (FASB ASC 820: Fair Value Measurement). Adjustments for market value changes in available-for-sale investments in other companies are shown as a component of owners' equity and are put into a special account called Unrealized Gain/Loss- OCI. These adjustments also are reported in comprehensive income, because they reflect a change in owners' equity that is not a part of net income. The reasoning behind this is that the FASB did not believe that short term fluctuation in the value of this category of investments should affect net income when the purpose was not to invest for