[Will]

please help on this question;

On p591 of Wiley FAR 2013 book, question 7

Module 16: Investments

the marketable equity securities of a company is as following:

cost 12/31/Y2(FV) 12/31/Y1(FV)

Trading 150,000 155000 100000

AFS 150,000 130000 100000

it asks what amount should the company report as unrealized holding gain in Y2 income statement, assuming it does not use the fair value option to report its investments?

my question 1 is: since, the securities are trading and AFS, how can it not use FV option to report? I think all trading and AFS need to be reported by FV options according to the table on p.579

question 2, the ansower excluded the 10k FV change of AFS becuase that belongs to OCI, so when the question mention Y2 income statement, that does not include OCI?

Thanks for any ideas

[Will]

The answer given is 55000, i thought should be 65000, including the 10k from chanage of AFS

[vlc1982]

Question 1: The entity can elect NOT to use the fair value option

Question 2: OCI is not considered part of the income statement because it is stated after Net Income (if done following the income statement). It can even be reported in an entirely different statement. Since unrealized holding gains/losses for AFS securities go to OCI for entities who do NOT elect the fair value option, it makes sense that only the 55,000 was included in the income statement. The 10,000 for AFS securities would be reported in OCI either immediately following Net Income or in a separate statement of OCI. If the entity DID elect the FV option (and was an SEC registrant), then UNGL for AFS WOULD be reported in the income statement.

I hope all this info. is correct, I'm just going by memory here. Feel free to correct me if I misstated.

FAR 66, 80
AUD 86
REG 76
BEC 74, 77 - DONE!!

Yaeger, Ninja MCQ for BEC
TX Candidate

[Anonymous]

Fair value option not elected. So,

AFS – OCI – 10,000

T/S – I/S – 55000

If FVO elected, then it's 65000

[Anonymous]

and yeah, income statement is a statement itself..

because

Comprehensive Income = I/S + OCI

it's only asking for I/S

[Will]

Thanks guys. You cleared my big confusion about IS/OCI.

Just about my question 1: even if the company does NOT select fair value option, the T/S is still always reported as fair value, right? If so, does that means when we talk about FV option for reporting, that is actually only about AFS (and HTM)? sorry my question may seems to be wierd…

[Anonymous]

Just throwing this out there…I think that OCI vs IS is one of the most confusing things in this exam. I had many MCQs that I had basically the same question about, and I'd get them wrong because I'd put it in the wrong spot. >.< But looks like you understand it now!

And, to your follow-up Question 1, I'm 99% sure you're right that Trading is always reported at FV. However, I'm not if HTM is reported at fair value, even if the fair value option is elected…maybe someone else can clarify?

[Anonymous]

Elisabeth, yes HTM investments(or any debt instruments for that matter) where the FVO is elected, it must be revalued and the lost/gains goes to the I/S.

Trading Securities – include debt and equity

AFS – includes debt and equity

HTM – only debt

notice Trading Securities include debt and equity 😀

[Anonymous]

and Will, to answer your question, it is a yes..

[Will]

Thanks derf, your guys cleared my long time confusion!!

[Author]

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