The Debt And Equity Securities

952 Words4 Pages
Prior to 2016, both debt and equity securities could be classified as available for sale and their gains and losses reported in other comprehensive income; however, with the passing of Accounting Standard Update No, 2016-01, all equity securities must now be classified as trading and their unrealized gains and losses reported in earnings. After examining the history of available for sale reporting standard and running pro forma scenarios of Yahoo! Inc.’s financial statements, the forthcoming evidence indicates that is better reflects the true risks taken by the company for the unrealized gains and losses on equity securities to appear in earnings rather than other comprehensive income. FASB issued Statement of Financial Accounting…show more content…
Furthermore, even if management lacks the intention to sell, there remain events and circumstances beyond the control of management that can force the need to sell. By measuring the changes in fair value in net income, it allows the investors to know the potential effects of these events and circumstances. Critics of the fair value measurement cite the increase in volatility that it causes in net income. A distinct disadvantage to reporting the gains and losses on the income statement is that these gains and losses have not actually occurred and may not ever be realized (Proposed change…, 2009). The input surrounding the current cost method indicated that the method was not developed enough nor well defined. The board agreed and discarded the method early on in the deliberations. Those in favor of the amortized cost method claim that it avoids some of the temporary fluctuations in net income. The arguments against utilizing amortized cost include: 1) It reflects an irrelevant historical transaction price that is not useful in current investment decisions. 2) Use of amortized cost depends on subjective impairment models that can be manipulated to smooth earnings. With all things considered, the board decided that reporting a change in fair value in net income was a more appropriate measurement for equity investments. The reasoning was that the realizable value of these investments could be realized by selling the equity
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