FASB ED expands fair value accounting for securities.The Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). issued an exposure draft proposing expanded use of fair value accounting for investments in debt and equity securities, while retaining the use of the amortized cost accounting for debt securities being held to maturity. The ED, Accounting for Certain Investments in Debt and Equity Securities, classifies securities under three categories: * Held to maturity applies to debt securities the entity has the positive intent and ability to hold to maturity. They would be reported at amortized cost. Securities that might be sold in response to changes in interest rates, changes in prepayment risks Prepayment Risk The uncertainty related to unscheduled prepayment in excess of scheduled principal repayment. Notes: This risk is generally associated with mortgage securities. , increases in loan demand or similar factors could not be considered as "held to maturity" under the proposal. * Trading securities are debt and equity securities being held for current resale. They would be reported at fair value with unrealized gains and losses included in earnings. * Securities available for sale are debt and equity securities that are not classified as either held to maturity or trading securities. They would be reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. . The ED would supersede To obliterate, replace, make void, or useless. Supersede means to take the place of, as by reason of superior worth or right. A recently enacted statute that repeals an older law is said to supersede the prior legislation. FASB Statement FASB Statement A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting no. 12, Accounting for Certain Marketable Securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has , and related interpretations and would amend Statement no. 65, Accounting for Certain Mortgage Banking Activities, to eliminate mortgagebacked securities from its scope. If adopted as a final statement, the proposal would be effective for fiscal years beginning after December 15, 1993. Comments on the proposal are due by December 8. Public hearings are scheduled for December 18 and January 7 and 8 at the FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). offices in Norwalk, Connecticut. One free copy of the E D is available until December 8 from the FASB Order Department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. |
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