Financial Analysis of Investment

Memorandum

To: Conner and Martin

CC: Accountants

From: Kaixuan Zhang

Date: 11/07/2012

Re: Financial Analysis of Investment

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As you concerned, I prepared two different analyses of two scenarios. The first analyses is preparing for investment represents 10% of Infrared shares. The second analyses is preparing for holding 30% of Infrared Shares.

The following analysis is based on holding 10%of Infrared shares

Cash $2400

Dividend Revenue $2400

Fair Value Adjustment $9814

Unrealized Gain or Loss- Equity $9814

When investor has a stock investment of less than 20%, it is presumed that the investor has little or no influence over the investee. In such cases, if market prices are available subsequent to acquisition, the company values and reports the investment using the fair value method. Under the fair value method, the investor earns net income only when the investee declares cash dividend. Moreover, when we are using fair value adjustment to records the net unrealized gains and losses related to changes in the fair value of available-for-sale equity securities, we should reports this amount as a part of other comprehensive income and as a component of other accumulated comprehensive income until realized.

According to the FASB (320-10-35-1), this investment will be classified available-for-sale securities. This is what FASB states: Investments in debt securities that are classified as available for sale and equity securities that have readily determinable fair values that are classified as available for sale shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized. Under this circumstance, you actually can’t add any of unrealized holding gains and losses into income.