[thorsbew]

I’m having a hard time with this and my book doesn’t go into detail. From what I understood, you need to remove the securitie’s associated unrealized G/L from the books and move it up to realized G/L (along with any other unrealized you may not have recognized to this point). But the questions on cpareviewforfree.com seem to imply that this change has NO impact on OCI.

Should we be removing the full life-time unrealized gain from OCI? Should it be coming from accumulated unrealized?

Aud - 65 + 79, BEC - 82, REG - 89, FAR - 86

[Trevor]

The reason there is no affect on OCI is becuase AFS securities unrealized gain are not accumulated, but instead are taken into effect on the current year NI, thus the sale would only effect current year NI and not accumulated other comp. income… Not sue if this makes a ton of sense either, but this is what I remember… basically they go to RE not OCI…

BEC: 73,81(7/6/2010); AUD: 75(5/24/2010); FAR: 76(8/31/2010); REG: 77 (10/18/2010) - DONE!!!!

[thorsbew]

Trevor,

I believe you're thinking of trading securities. I'm positive that those roll into Net Income and subsequently into RE. AFS have a non-income effect when unrealized and are posted to other comprehensive income on the income statement. If not, then Wiley better give me some money back! 🙂

Aud - 65 + 79, BEC - 82, REG - 89, FAR - 86

[Trevor]

ah yes I could be making that mistake… been a little while lol.

BEC: 73,81(7/6/2010); AUD: 75(5/24/2010); FAR: 76(8/31/2010); REG: 77 (10/18/2010) - DONE!!!!

[Oceanman]

When an AFS security is sold, its unrealized g/l is taken out of AOCI. The difference between cost and sale price is recognized in current income.

For the accumulated g/l, dont try and “move it up” ; just take it off the books completely and recognize whatever diff there is between what you bought it for and what you sold it for. This is the easiest way to do it, and I certainly had problems getting a hold of it. There will be no impact on current year OCI bc you wouldnt be recognizing any unrealized g/l until year end (and you are selling during the year). But yes the AOCI should be changing; you remove the unrealized portion from this account. Remember the diff between AOCI and OCI; there are lots of areas that cover this in FAR including DTA/DTLs

Hope this helps and good luck

FAR-92
AUD-94
REG-87
BEC-(April)

[thorsbew]

Thanks Ocean! I'm a journal entry type of guy, so it sounds like this:

Cash (cash received)

ACC OCI (Removal of all Unrealized G/L associated with the investment)

Realized Gain (Total gains for entire ownership)

Investment (Prior Year's Market Value [We haven't booked an entry to true up to current MV])

Does this look right?

Aud - 65 + 79, BEC - 82, REG - 89, FAR - 86

[Oceanman]

Im not sure but I think i rember it as

Dr. Cash (sale price)

Cr. AFS security (cost)

Cr. Gain (total gain from owning)

and a seperate entry to close the gain in AOCI:

Dr.Unrealized gain in AOCI

Cr. Allowance to increase/decrease AFS to fmv

Im not positive but I think the entry should look something like that (or it might be backwards)

FAR-92
AUD-94
REG-87
BEC-(April)

[thorsbew]

Not so sure on that… With each unrealized G/L, we've been writing our security up to Market value. Therefore, in order to close out that single security, it seems like we should be closing out the prior period's market value as that is what is sitting in the account.

Purchase

Investment in ABC Corp XXX

Cash XXX

Year-End Change

Investment in ABC Corp XXX

OCI – Unrealized G/L XXX

Aud - 65 + 79, BEC - 82, REG - 89, FAR - 86

[Oceanman]

The AFS security is recorded on the B/S at it's fair value (its cost +/- cumulative realized holding g/l-which is kept in a valuation/allowance account). When the securtiy is sold, you take this valuation account off the books by closing it against the cumulative unrealized g/l in AOCI; this adjusts the AFS security back to its cost basis. You then record the gain when sold based on the cost basis because that is your realized gain.

You are not actually changing the amount the securiy is recorded at each period; it stays at cost. You are however presenting it on the balance sheet as a net amount, net of the valuation account which is equal to cumulative g/l for all periods. In other words, it stays on the books at cost but is presented at fmv due to the valuation adj each period. This g/l is held in AOCI and is closed out when the security is sold.

In the journal entry I showed you, just combine the entries. The allowance and cost of the AFS can be “combined” and that is effectively closing out the prior-period market value because the security fmv is made up of those 2 accounts.

For example, an AFS security was puchased in year 1 for $25. It has unrealized gains of $3 in year 2 and $2 in year 3. The security would be valued at $30 ($25 cost and $5 valuation to increase) as of the beg of year 4. If it were sold in year 4 for $32 the JE would look like

Dr.Cash $32

Dr.Unrealized g/l (AOCI) 5

Cr.Valuation allowance 5

Cr.AFS (cost) 25

Cr.Realized Gain 7

or use sep entries:

Dr.Cash $32

Cr.AFS (cost) 25

Cr.Realized Gain 7

Dr.Unrealized g/l (AOCI) 5

Cr.Valuation allowance 5

FAR-92
AUD-94
REG-87
BEC-(April)

[thorsbew]

Got ya! I had never seen the valuation broken out into a separate account. That makes sense though! Thanks for the help!

It looks like our unrealized G/L in OCI is not affected in the income statement during this sale. Simply our assets, equity, and income from continuing operations.

Aud - 65 + 79, BEC - 82, REG - 89, FAR - 86

[Author]

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