accounting for investments

¶ … validity of establishing Section 115 by the FASB. It has 4 sources.

The FASB (Financial Accounting Standards Board) in the recent years have revised many accounting standards and policies to effectively govern corporations for the benefit of the public. In its attempt to curtail the unaccounted for incomes and earnings, the FASB issued the FASB No.115 section in which it states that companies reporting their financials can determine their investment securities as held-to-maturity, available-for-sale or trading. In differentiating the categorization of the securities, the FASB establishes the securities either as an income statement item or a balance sheet item. The gains or loss derived from either of the categorization is considered to be different in their nature in reportage as well as in their taxation. The need for differentiation stemmed from FASB's justification that investment accounting of debt and equity are often subjected to taxation. Items of financial statements come under financing activities, involve interest income or expense whereby the company may report it as unrealized gains or losses to increase or decrease their income. Whereas the FASB, to negate this effect specifically categorizes securities as item of earnings or not earning. Since securities available-for-sale can derive interest income and thereby affect the dividends sent out they are considered to be equity. On the other hand the trading securities are those that base earnings on the face value and the realized gains or losses less the tax effects. While held to maturity securities are those securities whose income is dependent on the period of maturity and is considered to be part of the balance sheet and valued at amortized cost [Felt 2000].

In differentiating the categorization the FASB's intent is to govern disclosure policies of actual earnings and unrealized earnings. However, in the author's opinion Section 115 is not only impractical but it is also not feasible for companies who practice it.

First of all companies that have held to maturity securities are often indebted but because of their credit worthiness, the face value of their securities remains high. At the time of sale of assets and settling of liabilities, these companies can bargain with the buyers of the fair price value of the securities. This is usually the case when there is a high demand for the securities in the market or that the industry is undergoing some changes. The mandate that the securities be sold at amortized cost and the securities' unrealized gains or loss be part of the equity often result in debt for the buyers as they are still considered to be liabilities for the company unless the securities mature. Hence, companies that have a major chunk of its equity in securities because of Section 115 lose their market value and lose their market worthiness [Felt 2000].

Secondly, the mandate that the securities that are available for sale are considered to be tradable items and any kind of unrealized gains or loss is considered in the balance sheet as item of earnings due to the nature of the fair value of the securities. The reason why it is considered to be so because of the fact that available for sale securities at times may be available for sale but their instance transaction does not take place and in the event the loss or gain due to fair value cannot be attributed to the income derived from operations. This mandate although is valid however, the reverse can also happen in which the available for sale securities may be transacted in large volumes and therefore the income derived from it or loss resulting in sale cannot be used to account for the decrease or increase in the equity level. Financial analysts and FASB experts must admit the fact that the position of the company is critical for investors to make decisions. If any company whose equity changes regularly due to the liquid nature of their business, might lose their credibility and hence investments [Campbell and Kracaw 1993].