Question

Assume you are an auditor, and your client is a public company with a large portfolio of available-for-sale equity securities. The client reports these securities at fair value, with unrealized gains and losses recognized in “other comprehensive income,” an equity account, each period.

The client is preparing its quarterly financial statements and is again, for the second consecutive quarter, recording a decline in market value for several of the securities. These securities’ fair values are now below their cost. From experience, you know that losses on available-for-sale securities must be recognized in earnings if (1) the securities are considered impaired (i.e., cost basis in excess of fair value) and (2) if the impairment is considered “other than temporary.” Your client has asserted that it has the ability and intent to hold the securities, at least until their value recovers, and believes that the losses need only be recognized in OCI

What is the relevant accounting guidance?

Answer 1

It is the correct treatment that gain, if any, realised on available for sale securities will be shown under other comprehensive income until they are realised, when it will be transferred to retained earnings.

But the issue you said, client is of the opinion that the loss is not to be transferred to retained earnings, he will hold the securities till the loss is covered is not the point to be considered for the treatment but the nature of securities matters here. The securities are available for sale and such cases, you should recognise the loss as and when they are happened, as the financials are only interim it may not have an impact on final financial statements if the loss is covered within the year as claimed by the client.