What is a valuation allowance for an AFS investment?
If the AFS investment has a temporary decline in fair value, then the company would record an unrealized loss to other comprehensive income (“OCI”) on the balance sheet. The offset would be a credit to reduce the carrying value of the investment on the balance sheet. This reduction to the investment is sometimes referred to as a valuation allowance.
As you can see, the valuation allowance reduces the fair value of the investment (similar concept as the allowance for doubtful accounts balance). The valuation allowance is a contra-asset.
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How is an unrealized loss on an available-for-sale (AFS) security recorded in the financial statements?
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How are unrealized gains or losses reported if a company converts a debt security from available-for-sale to trading or held-to-maturity?
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How are changes in fair value for equity securities recorded on the income statement?
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For investments that are classified as available-for-sale (AFS), any unrealized gains or losses are recorded to other comprehensive income (OCI). When the company has an unrealized loss, the debit would be to other comprehensive income (reduces equity) and the credit is to the investment account on the asset section of the balance sheet. There is...
How are unrealized gains or losses reported if a company converts a debt security from available-for-sale to trading or held-to-maturity?
If the debt security is converted to trading, then the unrealized gain or loss is recorded on the income statement. If the debt security is converted to held-to-maturity, then the unrealized gain or loss is recorded in other comprehensive income (“OCI”), which is part of stockholders’ equity on the balance sheet.
How are changes in fair value for equity securities recorded on the income statement?
Treatment varies depending on whether its classified as “trading” or “available-for-sale”. Additionally, you must determine whether the decline in fair value is temporary or other than temporary (i.e. permanent). Remember, to determine whether or not significant influence exists. For trading securities, unrealized and realized losses are recorded in the income statement. For available-for-sale securities, assuming...
