In: Accounting
Discussion Question #1 Refer to the article “Rising Interest Rates Trigger Losses on Banks Massive Bond Holdings” in Wall Street Journal (December 7, 2016) What is the difference between realized and unrealized gains and losses on security holdings? What are the three categories of investments identified in authoritative accounting literature? Cite the authoritative guidance you are referencing. What is the difference in accounting treatment of unrealized gains and losses across these three categories of investments? Cite the authoritative guidance you are referencing. Why do unrealized losses affect a bank's book value but “don't immediately diminish a banks profits”? In your answer, define the “special bucket...called 'accumulated other comprehensive income.'”
DIFFERENCE BETWEEN REALIZED AND UNREALIZED GAINS AND LOSSES OF SECURITY HOLDING:
3 CATEGORIES OF INVESTMENT:
There are 3 main types of investment, namely
Another option to invest in is tax deferred options such as IRA or annuity.
STOCKS:
COMMON STOCK : Shareholders have a percentage of ownership,have a right to vote on issues effecting the company and receive dividends.
PREFERRED STOCK: Shareholders generally receive dividends on specific intervals and in predetermined amounts but dot have voting right.
BONDS:
CASH EQUIVALENTS:
Cash equivalent investment protect our original investment and lets us to have access to our money
examples are Saving accounts
money market accounts
certificate of deposit (COD)
ACCOUNTING TREATMENT OF UNREALIZED GAINS OR LOSSES OVER THESE 3 TYPES OF INVESTMENTS:
The treatment for unrealized gains \ losses depends upon whether securities are classified as held to security, trading, available to sale.
If they are classified as held to security, they are not recognized in the financial statements.
If investments classified as trading securities then they are recognized in the financial statements. at fair value in the net income even though securities have not been sold.
if investment classified as available for sale, they were also reported in financial statements at fair value in the assets side of the balance sheet.
Unrealized losses doesn't effect the bank value as it doesn't show any impact on cash flow statement.
DEFINITION OF SPECIAL BUCKET CALLED ACCUMULATED OTHER COMPREHENSIVE INCOME:
These are the expenses, gains and losses reported in the equity section i.e shareholders equity of the balance sheet. It includes unrealized gains and losses on certain type of investments, as well as on pension funds and other foreign currency transactions.