1. Relate to investments which:a. Have a readily determinable “fair value”

1) Defined: sale price available on a securities exchange registered with SEC or publicly reported OTC market.

AND

2) Do NOT result in having a significant influence (usually hold < 20% ownership).

Rules: Come from SFAS 115.•Into effect in December 1993.

This “fair value” accounting REPLACES the former cost method.

New rules relate to EQUITY and DEBT.

New investments (debt and equity marketable securities) are classified into one of (3) categories:

1) Securities Available for Sale (SAS)

2) Trading Securities (TS)

3) Debt Securities held to maturity (HTM)

RULES WHICH DETERMINE WHICH CLASSIFICATION IS USED FOR AN INVESTMENT.

TRADING SECURITIES (TS).

• Debt and/or equity purchased and held principally for the purpose of selling in near future.

• Active/frequent buying/selling.

• CURRENT ASSETS

SECURITIES AVAILABLE FOR SALE (SAS)

• Debt securities not classified as held to maturity

AND

• Debt and/or equity securities not classified as trading securities

• As CURRENT or LONG-TERM ASSETS depending upon the owner’s intent.

HELD TO MATURITY (HTM)

• Debt securities ONLY.

• Have the positive intent/ability to hold this debt to maturity.

• Sales PRIOR to maturity are rare.

• As a LONG-TERM INVESTMENT.

Francisco Company acquires the following securities on July 1, 2008 as and investment in SECURITIES AVAILABLE FOR SALE (SAS).

A Co. common stock 100 shares @ $50/sh.

B Co. common stock 300 shares @ $80/sh.

C Co. preferred stock 200 shares @ $120/sh.

D Co. 10% bonds with a face value of $15,000 at par value. Interest on bonds is payable on July 1 and Jan 1each year).

RECORD INITIAL PURCHASE

•Initial Record is done at COST + related expenditures.

Purchase of Stock: 100 * $50/sh = $5,000 : A stock300 * $80/sh = $24,000 : B stock200 * $120/sh = $24,000 : C stock $53,000

SAS……………………$53,000CASH…………………..$53,000

Purchase of Bond:

SAS………………………$15,000CASH……………………..$15,000

RECORD INTEREST AND DIVIDEND REVENUE ON Dec 31.

a. Semi-annual interest earned on D Co. bonds

$15,000 * 0.10 * 6/12 = $750

Interest Receivable…$750Interest Revenue…….$750

b. Assume Francisco receives $3,000 in dividends on stock

Cash……………...…..$3,000Dividend Revenue…..$3,000

RECOGNITION OF UNREALIZED HOLDING GAINS AND LOSSES.

•Securities available for sale must be recorded at FAIR VALUE at the balance sheet date.

•This will result in UNREALIZED HOLDING GAINS AND LOSSES.

Assume at year end that securities look like this:

12/31/08 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,000 1,000300 sh B co c/s 24,000 23,500 (500)200 sh C Co. p/s 24,000 26,000 2,000$15,000 D Co bond 15,000 15,500 500 TOTALS $68,000 $71,000 $3,000

To record the $3,000 increase in value:

Market Adjustment (SAS)………...…….$3,000Unrealized holding loss/gain (EQ)………$3,000

Afterwards the balance sheet looks like this:

AssetsInvestments available for sale $68,000+ Market Adjustment 3,000Net $71,000

Stockholders Equity:Balance $ XX.XX+ Accumulated Other Comprehensive Inc. 3,000

IMPORTANT!!!!!!!!!!!!!!!

The unrealized adjustment is treated as a STOCKHOLDER’s EQUITY ACCOUNT with the SAS investment. It does NOT go into the current net income. Goes to COMPREHENSIVE INCCOMPREHENSIVE INC.

NOW ASSUME AT THE END OF 2009 THE INVESTMENTS AVAILABLE FOR SALE APPEAR AS FOLLOWS:

12/31/09 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,100 1,100300 sh B co c/s 24,000 22,700 (1,300)200 sh C Co. p/s 24,000 23,200 (800)$15,000 D Co bond 15,000 14,000 (1,000) TOTALS $68,000 $66,000 $(2,000)

The market adjustment account now requires a CREDIT balance of $2,000. The existing balance is a $3,000 DEBIT. The adjusting entry is thus:

Unrealized holding gain/loss (EQ)………$5,000Market Adjustment (SAS)……………….$5,000

Mkt Adj

3000 5000

2000

The balance sheet at 12/31/09 now looks like this:

Assets:Investments available for sale $68,000- Market Adjustment 2,000Net $66,000

Stockholders Equity:Balance $XX.XX- Accumulated Other Comprehensive Inc. 2,000

a. Investment recorded at cost (same)

b. Subsequently reported at fair value (same)

c. Unrealized holding gains/losses reported in CURRENT INCOME (stockholders equity adjustment previously)

d. Interest/dividend income reported in current income (same)

e. These kind of securities are held primarily by institutions like banks/stockbrokers.

Francisco Company acquires the following securities on July 1, 2008 as an investment in TRADINGSECURITIES.

A Co. common stock 100 shares @ $50/sh.B Co. common stock 300 shares @ $80/sh.C Co. preferred stock 200 shares @ $120/sh.D Co. 10% bonds with a face value of $15,000 at par value plus accrued interest. (Interest on bonds is payable on May 31 and Nov 30 each year).

RECORD INITIAL PURCHASE and DIVIDEND REVENUE

TS...……………………$53,000CASH…………………..$53,000

•SAME as (SAS) @ cost

STOCK

BONDS

TS...………………………$15,000CASH……………………..$15,000

RECORD INTEREST AND DIVIDEND REVENUE ON Dec 31

Int Rec……………………$750Interest Revenue…….$750

Dividend revenue

Cash……………...…..$3,000Dividend Revenue…..$3,000

Same as beforeBond interest revenue

REALIZATION OF UNREALIZED HOLDING GAINS AND LOSSES.

THIS IS DIFFERENT THAN SAS IN THE MANNER OF F/S PRESENTATION!!!!!!!

•Trading securities must also be recorded at FAIR VALUE at the balance sheet date.

•This will again result in UNREALIZED HOLDING GAINS and LOSSES.

Assume at year end that securities look like this:

12/31/08 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,000 1,000300 sh B co c/s 24,000 23,500 (500)200 sh C Co. p/s 24,000 26,000 2,000$15,000 D Co bond 15,000 15,500 500 TOTALS $68,000 $71,000 $3,000

To record the $3,000 increase in value:

Market Adjustment (TS)………...…….$3,000Unrealized holding loss/gain (IS)………$3,000

THIS IS WHAT IS DIFFERENT.

ASSETS:Trading Securities $68,000+ Market Adjustment 3,000Net $71,000

STOCKHOLDERS EQUITY:Balance $XX.XX+ Retained Earnings 3,000

IMPORTANT!!!!!!!!!!!!The unrealized adjustment is treated as a CURRENT INCOME ITEM in the INCOME STATEMENT.

STATEMENT OF INCOME

Revenue $xx.xxOther Revenue: Unrealized gain on fair value adjustment of TS security 3,000

Expense $xx.xxNet Income +$3,000

NOW ASSUME AT THE END OF 2009 THE INVESTMENTS (TRADING SECURITIES) APPEAR AS FOLLOWS:

12/31/02 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,100 1,100300 sh B co c/s 24,000 22,700 (1,300)200 sh C Co. p/s 24,000 23,200 (800)$15,000 D Co bond 15,000 14,000 (1,000) TOTALS $68,000 $66,000 $(2,000)

The market adjustment account now requires a CREDIT balance of $2,000. The existing balance is a $3,000 DEBIT. The adjusting entry is thus:

Unrealized holding gain/loss (IS)………$5,000Market Adjustment (TS)……………….$5,000

The balance sheet at 12/31/09 now looks like this:

Assets:Investments TS $68,000- Market Adjustment 2,000Net $66,000

Stockholders Equity:Balance $XX.XX

- Retained earnings 2,000

STATEMENT OF INCOME

Revenue $xx.xxExpense xx.xx

other expense: Unrealized loss on fair value adjustment of TS security 5,000

Net Income -$5,000

Summary of UGH/L changes

SAS- UHG/L---OCI-- AOCI

TS UHG/L- IS--- RE

Bond may be classified as “held to maturity” if the reporting entity has both the:

1. Positive intent

2. Ability to hold those securities to maturity

Accounted for by:

1. Record at COST

2. Subsequently reported at AMORTIZED COST. Not fair value.

3. Unrealized holding gains/losses are NOT recorded

4. Interest revenue and realized gains/losses are recorded in income.

Before Transfer

Trading Securities Available for Sale (SAS)

Sills Co. Bonds.. $80,000 $100,000Cost Fair Value Cost Fair Value

Cedar Falls CityBonds $50,000 $70,000

$130,000 $170,000

Equity $70,000 $90,000

TRANSFER CEDAR FALLS BONDS FROM TRADING TO SAS.

After Transfer

Sills Co. Bonds $80,000 $100,000 Equity $70,000 $90,000

CF bonds... $70,000 $70,000

$140,000 $160,000*Assume no fv adjustments madeyet.

Available for Sale (SAS)........ $70,000

Trading Securities................. $50,000

Unrealized Holding Gain-IS.. $20,000

Before Transfer

Security Available for Sale (SAS) Trading Securities

Sills Co. Bonds.. $80,000 $100,000Cost Fair Value Cost Fair Value

Cedar Falls CityBonds $50,000 $70,000

$130,000 $170,000

Equity $70,000 $90,000

TRANSFER CEDAR FALLS BONDS FROM SAS to TRADING

After Transfer

Sills Co. Bonds $80,000 $100,000 Equity $70,000 $90,000

CF bonds... $70,000 $70,000

$140,000 $160,000*Assume no fv adjustments madeyet.

Trading Securities..... $70,000

Available for Sale Securities.... $50,000

Unrealized Holding Gain-IS... $20,000

Before Transfer

HTM SAS

CF Bonds.. $35,000

Russell Corp. bonds.. $75,000

$110,000

Cost Fair value

$60,000 $90,000

Transfer the Russell Corp Bonds to SAS when their market is $80,000

After Transfer

CF Bonds.... $35,000$60,000 $90,000

Russell $75,000 $80,000

$135,000 $170,000

Available for Sale Securities....... $75,000

Held to Maturity........... $75,000

Unrealized holding gain-EQUITY $5,000Market Adjustment- $5,000

Before Transfer

SAS HTM

CF Bonds.. $35,000 $40,000 (fv)

Russell Corp. bonds.. $75,000 (cost) $90,000 (fv)

$110,000 (cost) $130,000 (market)

Cost

$60,000

Transfer the Russell Corp Bonds to HTM when their market is $90,000

After Transfer

CF Bonds.... $35,000 $40,000 (fv)$60,000

Russell $75,000 $90,000

$135,000 $90,000

HTM............ $75,000

Available for Sale........... $75,000

Market Adj-HTM $15,000

UHG-EQ......................... $15,000

Before Transfer

SAS HTM

CF Bonds.. $35,000

Russell Corp. bonds.. $75,000 (cost) $90,000 (fv)

$110,000

Cost

$60,000

Transfer the Russell Corp Bonds to HTM when their market is $90,000

After Transfer

CF Bonds.... $35,000$60,000

Russell $75,000 $90,000

$135,000 $90,000

HTM............ $75,000

Available for Sale........... $75,000

Market Adj-HTM $15,000

UHG-EQ......................... $15,000

FV adjustment is amortized $15,000/10 (assume) = ($1500) *its like writing off an asset.

UHG-EQ is amortized $15,000/10 = $1500 * its like claiming a partial gain

NET ADJUSTMENT.............. $0