This audio will introduce you to accounting treatment, in case of impairment of held to maturity securities and available for sale securities. It also provides explanation on treatment of cash dividends, interest income, and stock dividends.
Held to maturity securities and available for sale securities may become impaired at some point of time. If decline in value is other than temporary, for held to maturity securities and available for sale securities, then such impaired security must be written down to fair value and, the realized loss is included in earnings. Any subsequent recovery is not recognized in earnings unless, such recovery is realized through sale of the security. Any other than temporary impairment cannot occur in the context of trading securities because, the holding gains and losses are recognized in current earnings without any limitation.
Cash dividends and interest income are included in current period’s income. Stock dividends are not reflected in income. Additional shares received from a stock dividend should be added to the original shares, and the per share value should be calculated upon the original share’s carrying value. At the end of the financial period, the carrying value of the stock is adjusted to the fair value, and any unrealized holding gains and losses is recorded.
For trading securities, realized and unrealized gains and losses are included in current period’s earnings. For available for sale securities and held to maturity securities, realized gains and losses are included in current period’s earnings. Unrealized gains and losses for such securities are reported in other comprehensive income.
Amortization of any unrealized holding gains and losses on securities transferred from available for sale securities to held to maturity securities, is included in income.