November 25, 2020 at 9:45 am #3166176LilLambLostParticipant
This question says that the unrealized gains/losses for available for sale securites go to the income statement. I feel like I'm losing it, because I thought they always to to OCI. I asked for help on their forum and their rep told me “The FV option is an item by item election made for that item at the time of purchase. When elected for that item, the unrealized amounts go on the income statement, no matter the classification.” Is this true? I'm on mobile, so sorry if there are formatting issues.
Here's the question:
Clarion had the following investments in its portfolio that were purchased during Year 2.
Investment Classification Cost Fair Value 12-31-Y2
Common stock of Company X Fair value $100,000 $121,000
Bond of Company Y Available-for-sale $ 96,000 $101,000
Bond of Company Z Held-to-maturity $ 64,000 $ 63,000
On December 31, Year 2, the amortized cost of Bond Y was $97,000, and the amortized cost of Bond Z was $63,500. Clarion uses the fair value option for all instruments in its investment portfolio. What amount should Clarion record as an unrealized gain in its Year 2 income statement?
If Clarion elects the fair value option for reporting its financial assets, unrealized gains or losses are reported in the current year's income statement. Clarion can elect the fair value option on an instrument-by-instrument basis. Because Clarion elected to value all instruments in its portfolio at fair value, the resulting net unrealized gain of $24,500 will be reported on the Year 2 income statement.
Investment Cost or amortized cost Fair Value 12-31-Y2 Unrealized gain or (loss)
Common stock of Company X Fair value $100,000 $121,000 $21,000
Bond of Company Y Available-for-sale $ 97,000 $101,000 4,000
Bond of Company Z Held-to-maturity $ 63,500 $ 63,000 (500)
$24,500November 25, 2020 at 10:32 am #3166215MickParticipant
There was an accounting standard update that unrealized gains or losses are now reflected in the income statement instead of OCI. It was done under ASU 2016-01 and was effective for entities with years ending 12/31/2018.November 25, 2020 at 11:21 am #3166260DSParticipant
AFS securities are still recognized in OCI. The key here is that they selected the fair value option. In that case, unrealized gains/losses are recognized in net income.November 26, 2020 at 4:53 pm #3167298YousefParticipant
Securities investment classified as available for sale, unrealized gain/loss will be recognized in OCI, unless the management elects fair value option at the investment acquisition date, then it will be recognized in income statement. So yeah the key word is fair value option that made it to be in income statement. Good luck with your exams.
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