FAR 3-1: Marketable Securities

Question 1

On the balance sheet, marketable securities classified as trading or available-for-sale are valued…

Answer 1

At fair value

Question 2

On the balance sheet, marketable securities classified as held-to-maturity are valued…

Answer 2

At amortized cost

Question 3

How are unrealized losses/gains on trading securities recognized?

Answer 3

Unrealized gains & losses on trading securities are recognized on the income statement

Question 4

How are unrealized losses/gains on available-for-sale securities recognized?

Answer 4

Unrealized gains & losses on available-for-sale securities are reported in other comprehensive income

NOTE: Under IFRS, foreign exchange gains & losses on AFS debt securities are reported on the income statement

Question 5

List 3 conditions where losses on marketable securities classified as available-for-sale are recognized in income

Answer 5

• Sale of the security
• Transfer of the security to trading classification
• Permanent decline of individual security below cost

Question 6

When a marketable equity security is transferred from trading to available-for-sale or vice versa, at what cost is it transferred?

Answer 6

• Transferred at fair value, which then becomes the new basis
• For a security transferred into the trading category, the difference is treated as a realized gain or loss & is recognized on the income statement
• For a security transferred from the trading category, the unrealized holding gain or loss will already have been recognized in earnings

NOTE: Transfers to & from the trading category should be rare

Question 7

How are gains & losses on financial instruments that hedge trading securities reported?

Answer 7

Reported in earnings, consistent with reporting unrealized gains & losses on trading securities

Question 8

How are gains & losses on financial instruments that hedge available-for-sale securities reported?

Answer 8

Reported in earnings together with the offsetting losses or gains on the available-for-sale securities attributable to the hedged risk

Question 9

What disclosures should be made for available-for-sale & held-to-maturity securities?

Answer 9

• Aggregate fair value
• Gross unrealized holding gains & losses
• Amortized cost basis by type
• Information about the contractual maturity of debt securities