Explain: Are the treatment of unrealised gains in the AASB consistent with that of required under...

Explain: Are the treatment of unrealised gains in the AASB consistent with that of required under the Conceptual Framework?

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Expert Solution

The treatment of unrealized gains or losses in the financial statements depends on whether the securities are classified as held to maturity, trading, or available for sale. Unrealized gains or Losses on securities classified as held to maturity are not recognized in the financial Statements

They have no effect on the balance sheet, income statement, and statement of Cash flows. Even so, many companies choose to disclose the market value of the securities as part of the narrative description or in the footnotes that accompany the statements.

Whether or not the market value is disclosed, held-to-maturity securities are reported on the balance sheet at amortized cost.

Investments classified as trading securities are reported in the financial statements at fair value. Unrealized gains or losses on trading securities are recognized in net income even though the securities have not been sold. The gain increases net income, which in turn increases retained earnings. Unrealized gains and losses have no effect on cash flows.

Investments classified as available-for-sale securities are also reported in the financial statements at fair value. However, an important distinction exists with respect to how the unrealized gains and losses affect the financial statements. Even though unrealized gains or losses on available-for-sale securities are included in the assets on the balance sheet, they are not recognized in determining net income. increase is reported in a separate equity account called Unrealized Gain or Loss on Available-for-Sale Securities. The statement of cash flows is not affected by recognizing unrealized gains and losses on available-for-sale securities

ekkarill92 answered 1 year ago

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