SFAS115

Summaries

Methods reporting holdings of investment securities:

1. Cost method – change of market value upon sales. Use cost as the value.
2. Market method – changes in market value in the period
3. Lower of cost or market method – recognize decline only. Gain only recognized for recovery or sales of the security.

SFAS115 –

1). Cost method must be used if the security is illiquid

2). If the security is liquid and has fair value, use the method according to the following classifications:

a)      Debt-securities held to maturity -  amortized cost (only for debt); unrealized gains/losses are not carried in the asset.

b)      Debt and equity securities available for sale – Market method; gains and losses reported in income statement; unrealized gains and losses reported as net of deferred income tax in equity and carried in the asset

c)      Debt and equity trading securities – for short term purpose; market method; as current asset; realized/unrealized gains/losses are reported in income statement

3) Management determines the categories of the securities at purchase and transfer during the end of balance sheet period.

4) Transfer of securities:

a) or b) to c): at market value, unrealized G/L as income

a) to b): at market value, unrealized G/L recorded into equity

b) to a): at market value, unrealized G/L are then amortized throughout the life

5) Held to maturity cannot be sold. If sold, the rest has to be reported in market value.

Mark to market return = dividends + interests + G/L + unrealized G/L

Market Value Adjustment = market value – cost

Unrealized G/L = changed of MVA

*** Traps:

For available for sale:

MVA is about the market value of the asset the company holding. So if it is sold, the market value should be 0. Because now the realized G/L has taken away the unrealized G/L in embedded in the asset.

Also, remember to add the retain earning (proportionate) to the investment in balance sheet at the year end.