Question

1. Short Answer. The last 5 problems demonstrate the various accounting methods we studied in Chapter 12 to account for Investments. Note that in only 2 of these methods (Problems 2 and 4) is the unrealized gain or loss on the investment recorded and reported in the Income Statement. In the other 3 cases, the unrealized gain or loss in generally either not recorded at all Problems 1 and 5), or if it is recorded, it is reported as a component of Other Comprehensive Income (“OCI”)(Problem 3).

For the 3 cases where the unrealized gain or loss is not generally reported in Net Income (Problems 1, 3, and 5), there were at least two exceptions mentioned in the chapter when an unrealized gain or loss on these investments WOULD be reported in Net Income. Describe briefly those two exceptions?

Answer 1

Unrealized gains or losses on trading securities, available for sale securities and few equity instruments with exceptions are now eligible to be recognized in the income statement as per FASB ASC 321.

The 2 exceptions for equity instruments are-

1. Equity investments recorded under equity method-
   Where there exist significant control in the investee company's, equity method is used to record such investments. In such cases, the unrealized gains or losses are recorded in the income statement.
2. Equity investments that result in consolidation-
   The equity method followed in consolidation of all subsidiaries and associates requires the investment to be recorded at fair value and any unrealized gains or losses on such fair value adjustment shall be routed through income statement.