Complete the following chart for items a through d, describing the accounting treatment using the number by one of the following four approaches listed as follows. (Assume that the firm does not elect the fair value option): APPROACHES (1) Measured at fair value with changes recognized in net income. (2) Measured at amortized cost. (3) Measured at fair value with changes recognized initially in

Question

other comprehensive income. (4) Measurement depends on whether firm uses hedge accounting. In the third column of the chart, present your explanation regarding this approach. Marketable security/derivative Approach Explanation
a. A derivative judged to be effective used to hedge forecasted sales.
b. Derivatives appearing as liabilities. These derivatives do not hedge assets or liabilities or forecasted transactions.
c. Debt securities that the firm has purchased with the ability to hold to maturity. After the current year, the firm's intent to hold the securities until maturity is uncertain. The firm frequently buys and sells debt of this sort.
d. Marketable equity securities held for an indefinite period as available-for-sale securities.

Answer 1

Marketable security/derivative Approach Explanation
a. A derivative judged to be effective used to hedge forecasted sales. 4 The firm has option to use hedge accounting, deferring income effects until realization and reporting changes in fair value in periodic other comprehensive income, or to not use hedge accounting and reporting holding gains and losses, like trading securities gains and losses, in current period income.
b. Derivatives appearing as liabilities. These derivatives do not hedge assets or liabilities or forecasted transactions. 1 This derivative is not an accounting hedge, so gains and losses appear in current income.
c. Debt securities that the firm has purchased with the ability to hold to maturity. After the current year, the firm's intent to hold the securities until maturity is uncertain. The firm frequently buys and sells debt of this sort. 1 Because not both ability and intent to hold to maturity are present, it will appear at fair value. Because the firm trades securities such as this, the classification is as a trading security. If the firm were not a trader, then Treatment (3) would apply.
d. Marketable equity securities held for an indefinite period as available-for-sale securities. 3 Standard treatment for available-for-sale securities.