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Unrealized gains/losses on available for sale securities

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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.

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Solution Summary

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.

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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 ...

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