Question

Financial Statement Display of AFS Debt Securities. A company buys debt securities at a par value of $200,000 and designates them as AFS securities. At the end of the year, the company still holds the securities, but their fair value has declined to $160,000. For each circumstance below indicate where the loss, if any, is reported, and how the investment is displayed on the company’s year-end balance sheet. a. The company intends to sell the securities before the loss in value is recovered. b. The company does not intend to sell the securities before the loss in value is recovered and 1. The loss id determined to be entirely an expected credit loss. 2. The loss is $35,000 credit-related and $5,000 market- related.

Answer 1

Followings are the treatment of loss under each circumstances:

a. If the company intends to sell the securities before the loss in the value is recovered:

Recognize the difference between fair value and amortized cost (i.e. $40,000) as a loss in the income statement and the investment is displayed on the company's year end balance sheet at its fair value.

b. If the company does not intends to sell the securities before the loss in the value is recovered:

1. If the entire loss is expected credit loss:

Recognize the entire loss of $40,000 in the income statement and the investment is displayed on the company's year end balance sheet at its fair value of $1,60,000.

2. If $ 35,000 is credit loss and $ 5,000 is a market loss:

Recognize the loss of $35,000 in the income statement. Recognize loss of $5,000 in Unrealized gain/loss Other Comprehensive Income. The investment is displayed on the company's year end balance sheet at $1,65,000 (i.e. $2,00,000-$35,000).