What Is Investment Accounting?

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Accurate accounting has always been necessary for the successful implementation of investment strategies. As the world becomes more wired and interconnected, financial markets have grown in complexity and volatility. As a result, there is no simple answer to the question, “What is investment accounting?” Put simply, the ultimate goal of investment accounting is to protect and enhance vital investment assets in an increasingly unpredictable world.

Laying the Groundwork for Tomorrow’s Financial Success

Few industries are evolving faster—from top to bottom—than financial markets. One area that has been impacted more than most is investment accounting, which focuses on the analysis of all financial accounts that involve investments, both for record keeping purposes and for strategic investment planning.

Any prudent investment strategy protects against liability by ensuring that financial records are accurate, accessible, and up to date. As important as these records are for internal purposes, they are imperative for proving compliance with tax law and other government regulations. Describing what investment accounting is in terms of responsibilities begins with governance: You must be familiar with the regulations that apply to the way investments are managed, reported, and maintained in all the localities in which the business operates.

The financial management side of investment accounting demands certain skills. These include the ability  to devise investment strategies that are tailored to achieve success for specific clients. Investment accountants may be hired as a company’s financial officer or account manager, or they may work for a brokerage while serving several different clients. Larger enterprises are likely to have on staff a cadre of financial managers with investment accounting expertise, while small businesses are most likely to contract with a third party for investment accounting services. Whether in-house or contractor, the position is also responsible for maintaining and preparing tax documents for investment accounts.

Making the Most of Debt Securities and Equity Securities

When most people think of investments, they think of equity securities. Yet debt securities represent a larger share of the total investment market. The global bond market (debt securities) is greater than $100 trillion, while the worldwide market for stocks and equities is $64 trillion. The preference for debt securities over equity securities is shown in daily trade volumes: $700 billion in bonds, compared to $200 billion in stocks.

A debt security (also called a fixed-income security) is an investment in a debt instrument, such as a government, corporate, or municipal bond, or a certificate of deposit (CD). The investor has a right to be repaid the principal and interest at a rate determined primarily by the perceived ability of the borrower to repay the debt. The debt instrument may specify the notional amount (amount borrowed), interest rate, and maturity and renewal dates, among other terms.

Debt securities impact investment accountants in the form of the 2018 update of the Financial Accounting Standards Board’s standards for debt securities. Debt securities are classified in one of three categories: Held-to-maturity (HTM), Trading securities, and Available-for-sale (AFS). HTM is basically amortized cost. Trading securities appear on balance sheets at fair value (not amortized). AFS securities record changes in bond prices as comprehensive income rather than net income because no active trading is occurring. The role of the investment accountant is to ensure debt securities are managed in a way that complies with all applicable regulations.

Debt securities are categorized by the amount of default risk, by who is offering the security, and by its income payment cycles. For example, U.S. Treasury bonds have a reputation for being safer than corporate bonds, equity securities, and other investment options, but they also have lower interest rates. Alternatively, high-risk bonds have higher interest rates or return yields in exchange for their increased risk. Corporate and government bonds are rated by agencies such as Standard and Poor’s, Moody’s Investor Service, and others. Similarly, higher-rated bonds, such as corporate AAA, offer lower interest rates than lower-rated bonds, such as corporate BBB.

By contrast, an equity security represents a claim on the earnings and assets of a corporation, such as a share of stock. If the company’s stock price goes up, the investor can profit, but if it goes down, the investor can lose. If the company goes bankrupt, bondholders are paid from its remaining assets before shareholders are paid.

The FASB has also implemented changes to accounting rules for equity securities that affect the role of investment accountants. Changes in share fair value of AFS equity investments have been classified as comprehensive income until it is realized. Now those changes will be reflected in net income at the time they occur, for the most part, no longer only when the equity is sold.

Different Investment Types Need Different Accounting Methods 

When it comes to fully explaining what investment accounting is, there is no such thing as a one-size-fits-all solution. Investment instruments range from traditional bank and credit union accounts to annuities and retirement accounts, to such complex products as options contracts and commodity and security futures. Understanding the intricacies of managing a range of investment types for various purposes is key to success in the role of investment accountant.

The most common forms of equity securities are corporate common stock and preferred stock. Both types confer to their owners the right to earnings and a dividend, voting rights, right of transfer, and limited liability (the investor can lose no more than the amount invested). Preferred stock owners receive dividend payments before holders of common stock, and in the event of a bankruptcy, they receive payment from liquidation of assets before common stockholders.

U.S. Treasury securities and savings bonds are the most popular bond types. They are regarded as some of the least-risky investments because they are supported by the “full faith and credit” of the U.S. government. Treasury bills (T-bills) have maturities of only a few days, weeks, or months, while Treasury notes (T-notes) and Treasury bonds (T-bonds) mature from two years to 30 years after they are purchased.

Municipal bonds, or “munis,” are issued by state and local governments as a means of raising funds for roads, schools, and other public projects. Munis generally pay the holder a specified amount of interest, usually semi-annually, and return the principal on the predetermined maturity date. These bonds are typically sold in increments starting at $5,000, and their maturity dates range from short-term (two to five years) to long term (30 years).

Mutual funds are among the most popular investment choices. These funds pool the money from several investors according to a specific strategy. Shares are purchased and redeemed directly from the mutual fund or through one of the fund’s brokers rather than from an exchange. Two features in particular explain the popularity of mutual funds: they provide built-in diversification, and they are professionally managed. However, they entail the same risk as other securities: You could lose your money.

The way investment accountants interact with these and other investment instruments has been affected by another new rule from the FASB that is intended to make a company’s financial reports easier for investors and creditors to decipher. “Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” or Accounting Standards Update 2016-01, is designed to improve the transparency regarding increases to an investment’s value.

Also impacting the work of investment accountants is the rise in nontraditional sources for financial information, such as social media, 24-hour stock markets, and predictive analytics driven by AI (artificial intelligence). While this reliance on technology can bring many benefits, it can also have a down side. There can be a  greater risk of financial loss due to technical disruptions, whether caused by a cyber attack, a hardware or software failure, or human error. In recognition of this digital climate, investment accountants assume a central role in protecting their organizations and clients from liability for technology-induced losses.

How a Finance MBA Can Kick-Start Your Career as an Investment Accountant

Globalization and technology have made managing investment activities a primary function for businesses and organizations of all types and sizes. Demand for financial managers with investment accounting skills continues to grow: The U.S. Bureau of Labor Statistics (BLS) forecasts that employment in the category will increase 19 percent between 2016 and 2026, which is much faster than the average growth for all other occupations.

The BLS outlook notes that candidates who hold a master’s degree in accounting and finance often have a decided edge in the competition for investment accounting and other financial management jobs. The Master of Business Administration online program from the New Jersey Institute of Technology (NJIT) is an excellent choice for students who wish to pursue these jobs. The program is designed to enhance students’ paths to success in the business environment of the future, one where advanced technologies are driving change and creating new opportunities.

NJIT’s technology-focused MBA program helps prepare business leaders for success in tomorrow’s fast-paced markets by working to instill decision-making and problem-solving skills that are designed for the 21st century business world. The MBA program enables students to choose one of three specializations: Management Information Systems, Marketing, and Finance. These targeted subject areas are structured to ensure that students learn cutting-edge business skills that help them devise a clear career strategy for the future.

 

Learn More:

Find out how the online MBA program at New Jersey Institute of Technology is designed to prepare motivated, tech-savvy management professionals with the business expertise and technical knowledge vital for

 

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Sources:

CPA Hall Talk

Financial Industry Regulatory Authority: Types of Investments

Financial Industry Regulatory Authority: Types of Bonds

Financial Industry Regulatory Authority: Types of Mutual Funds

Investopedia: Types of debt securities

Investopedia: Types of equity securities

National Center for Business Journalism

New Jersey Institute of Technology

New York Times

U.S. Bureau of Labor Statistics: Financial Managers

U.S. Securities and Exchange Commission WiseGeek