Equity Securities

To begin, read the following scenario:

You are the controller for a corporation that holds several investments in publicly traded equity securities. These investments are classified as trading securities, meaning changes in fair value are reported directly in net income. This year, the fair market value of these securities increased significantly. 

The CFO suggests reclassifying the investments as available-for-sale securities, which would result in unrealized gains reported as other comprehensive income (OCI) and removing them from net income. The CFO’s rationale for this change is to present more stable earnings to shareholders. 

Note also that your salary as the controller is based on the company’s net income.

For your main discussion post, reflect on these questions: 

1. Do you agree or disagree with the CFO’s suggestion to reclassify the securities? When answering this question, consider the criteria used to classify equity securities as trading or available-for-sale.
2. How does the classification of equity securities affect net income and your bonus? Explain your reasoning for how these investments should be classified based on intent and accounting standards and evaluate whether reclassification would affect your bonus.
3. What ethical issues arise from reclassifying investments to influence earnings or bonuses? Discuss any ethical considerations involved in your analysis.
4. How would you respond to the CFO if pressured to approve a reclassification that benefits certain bonuses but conflicts with accounting intent?