How are trading securities and available-for-sale securities

Case – Economic Consequences

The FASB has issued SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (see FASB ASC 715) and SFAS No. 112, “Employers’ Accounting for Postemployment Benefits” (see FASB ASC 712).

These pronouncements required companies to change from accounting for benefits, such as health care, that are paid to former employees during retirement on a pay-as-you-go basis to recognizing the expected cost of benefits during employment.

As a result, companies must accrue and report expenses today, thereby reducing income and increasing liabilities. Some have argued that these pronouncements will cause employers to re- duce or eliminate postretirement and postemployment benefits. It is not neces- sary for you to know the particulars of implementing either of these standards to address the issues described below.


a. Should financial reporting requirements affect management’s decision- making process? Discuss. Should management reduce or eliminate postretirement or postemployment benefits simply because of the new pronouncement? Discuss.

b. Are there social costs associated with these pronouncements? Explain.

c. What would critical perspective proponents say about the potential and/or actual impact of these pronouncements?

d. What would mainstream accounting proponents say about the potential and/or actual impact of these pronouncements?

Case – Trading versus Available-for-Sale Securities

The FASB issued SFAS No. 115 to describe the accounting treatment that should be afforded to equity securities that have readily determinable market values that are not accounted for under the equity method or consolidation. An important part of the statement concerns the distinction between trading securities and available-for- sale securities.


a. Compare and contrast trading securities and available-for-sale securities.

b. How are the trading securities and available-for-sale securities classified in the balance sheet?

In your answer, discuss the factors that should be considered in determining whether a security is classified as trading or available for sale and as current or noncurrent. c. How do the above classifications affect the accounting treatment for unrealized losses?

d. Why does a company maintain an investment portfolio containing current and noncurrent securities?

e. If a company elects to adopt fair-value accounting for securities that are clas- sified as available for sale simultaneously with the adoption of SFAS No. 159, what effect would the election have on its financial statements?

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