OverviewHow we account for and present debt and equity investments onthe financial statements is...OverviewHow...

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Accounting

Overview
How we account for and present debt and equity investments onthe financial statements is an important part of U.S. GAAP as wemove towards an asset/liability approach as to how certaintransactions are recorded. The application of the principles offair value accounting in regards to these assets can be extremelyimportant in how investors determine a company's financialposition. It is an area that has had some interesting ramificationsin the financial world.
Instructions
Buckingham Company holds a large portfolio of debt securities asinvestments. The total fair value of the portfolio is greater thanits total original cost, even though some of the individual debtsecurities have decreased in value. Julia, the CFO, and Sam, theController, are near year-end in the process of classifying, forthe first time, this investment portfolio in accordance with U.S.GAAP. Julia wants to classify those securities that have increasedin value during the period as trading securities in order toincrease net income this year, and wants to classify those thathave decreased in value as held-to-maturity. Sam, on the otherhand, disagrees. He wants to classify the securities that havedecreased in value as trading securities and those that haveincreased in value as held-to-maturity. He contends that thecompany is having a good earnings year and the recognizing thelosses will help to smooth the income this year, and thus thecompany will have built-in gains for future periods when thecompany may not be as profitable.
Answer the following questions:
1- Will classifying the portfolio as each proposes actually havethe effect on earnings that each says it will? Why or why not?
2- Is there anything unethical in what each of them proposes?Who are the stakeholders affected by their proposals? Be sure toinclude a solid analysis of current U.S. GAAP standards that thecompany should be following for debt investments, includingproperly cited references.
3- Assume that Julia and Sam end up properly classifying theentire portfolio into proper categories, but then each makes adifferent proposal just before year end: Julia wants to sell thosesecurities with gains and Sam wants to sell only those with lossesto accomplish their individual desired effects on net income. Isthis unethical? Why or why not?
4- Is the financial community in the U.S. in agreement with thecurrent U.S. GAAP standards as to how to present investments atfair value (often called mark-to-market accounting)? What impactdid these standards have in the 2008 financial crisis? Researchthis on the internet and summarize what you find, being sure toinclude properly cited references.

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Q1 Yes they Will As for Julias case classifying the investments that have increased in value as trading securities otherwise referred to as available for sale AFS will actually help the company gain from selling the investment since the prices of the investments have gone up Those held to maturity too will get time to gain value before they are made trading securities probably in the next period Doing this will help the company earn more profit Sams argument is also correct in that his approach will help the company retain the profit it has made in the form of investment Selling off the investments that have See Answer

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In: AccountingOverviewHow we account for and present debt and equity investments onthe financial statements is...OverviewHow we account for and present debt and equity investments onthe financial statements is an important part of U.S. GAAP as wemove towards an asset/liability approach as to how certaintransactions are recorded. The application of the principles offair value accounting in regards to these assets can be extremelyimportant in how investors determine a company's financialposition. It is an area that has had some interesting ramificationsin the financial world.InstructionsBuckingham Company holds a large portfolio of debt securities asinvestments. The total fair value of the portfolio is greater thanits total original cost, even though some of the individual debtsecurities have decreased in value. Julia, the CFO, and Sam, theController, are near year-end in the process of classifying, forthe first time, this investment portfolio in accordance with U.S.GAAP. Julia wants to classify those securities that have increasedin value during the period as trading securities in order toincrease net income this year, and wants to classify those thathave decreased in value as held-to-maturity. Sam, on the otherhand, disagrees. He wants to classify the securities that havedecreased in value as trading securities and those that haveincreased in value as held-to-maturity. He contends that thecompany is having a good earnings year and the recognizing thelosses will help to smooth the income this year, and thus thecompany will have built-in gains for future periods when thecompany may not be as profitable.Answer the following questions:1- Will classifying the portfolio as each proposes actually havethe effect on earnings that each says it will? Why or why not?2- Is there anything unethical in what each of them proposes?Who are the stakeholders affected by their proposals? Be sure toinclude a solid analysis of current U.S. GAAP standards that thecompany should be following for debt investments, includingproperly cited references.3- Assume that Julia and Sam end up properly classifying theentire portfolio into proper categories, but then each makes adifferent proposal just before year end: Julia wants to sell thosesecurities with gains and Sam wants to sell only those with lossesto accomplish their individual desired effects on net income. Isthis unethical? Why or why not?4- Is the financial community in the U.S. in agreement with thecurrent U.S. GAAP standards as to how to present investments atfair value (often called mark-to-market accounting)? What impactdid these standards have in the 2008 financial crisis? Researchthis on the internet and summarize what you find, being sure toinclude properly cited references.