FASB standards require all investments in securities to be reported in the balance sheet at fair value. However the unrealized gains and losses on securities that are not part of an actively traded portfolio (so called "available for sale" securities) are reported as "other comprehensive income". Other comprehensive income may be shown only in a footnote and is not included in the EPS calculations that every publicly traded company must report.
What is your opinion about the exclusion of unrealized gains and losses on available for sale securities from net income.© BrainMass Inc. brainmass.com October 24, 2018, 10:59 pm ad1c9bdddf
I favor the idea of showing 'available for sale' securities at fair market value. Normally securities in this classification would be short term, or current assets. They could be classified as long-term, depending on the intent of management, but the current asset classification would undoubtedly be preferred (for the working capital ratio, if nothing else).
The other items within the category of current assets are normally valued at fair market value. It isn't that much of a problem because those assets normally turn over quickly. Even inventories are usually ...
The solution explains the current GAAP rules and presents four reasons with explanations as to why the writer agrees with the treatment of unrealized gains and losses. In the solution is a 'real world' example of what would have resulted if Google stock has been bought and classified as available for sale under other rules.
Gains and losses in investments in trading securities
#6 XYZ Company began operations in 2006. Since then, it has reported the following gains and losses for its investments in trading securities on the income statement:
2006 2007 2008
Gains (losses) from sale of trading securities $ 15,000 $(20,000) $ 14,000
Unrealized holding losses on valuation of trading securities (25,000) - (30,000)
Unrealized holding gain on valuation of trading securities - 10,000 -
At January 1, 2009, XYZ owned the following trading securities:
AGH Common (15,000 shares) $450,000
DEL Preferred (2,000 shares) 210,000
Pratt Convertible bonds (100 bonds) 115,000
During 2009, the following events occurred:
1. Sold 5,000 shares of AGH for $170,000.
2. Acquired 1,000 shares of Norton Common for $40 per share. Brokerage commissions totaled $1,000.
At 12/31/09, the fair values for XYZ's trading securities were:
AGH Common, $28 per share
DEL Preferred, $110 per share
Pratt Bonds, $1,020 per bond
Norton Common, $42 per share
(a) Prepare a schedule which shows the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2008 (after the adjusting entry for 2008 is made).
(b) Prepare a schedule which shows the aggregate cost and fair values for Vu's trading securities portfolio at 12/31/09.
(c) Prepare the necessary adjusting entry based upon your analysis in (b) above.