Marketable Securities - Impact on Net Income

Hi All,

Held for trading asset

Original Cost at Year End 2012 - 12,000,000

Fair market value at year end 2013 - 12,500,000

Available for sale

Original Cost at Year End 2012 - 17,000,000

Fair market value at year end 2013 - 16,000,000

If coy reports under IFRS instead of GAAP, its net income will most likely be:

A) the same

B) 500,000 lower

C) 500,000 higher

Answer is (A)

I selected © because I thought the gain in the Held for Trading asset would be reported to the income statement and increase the net income by 500,000.

Any thoughts?

Thanks very much.

For the Held for trading asset (" HTA"), there will be a gain of:

$12.5mio - $12mio= $500,000

Depending on the question, if the HTA is sold then the gain will be a realized gain; if not it will be unrealized gain. Be it realized or unrealized, this amount of 500K will hit the income statement which affect the bottom line i.e. net income.

For Available for sale asset (" AFS"), there will be a loss of:

$17mio - $16mio= $1,000,000

If the AFS in question is sold, it will be a realized loss of 1 mio and this will hit the income statement. If however, the loss of 1mio is unrealized (as the AFS is not sold), the unrealized gain will be recorded in Other Comprehensive Income (" OCI") through Shareholder’s Equity account.

The different treatment for gain/loss under both standards are the same, hence the answer is A i.e. Company following IFRS or U.S. GAAP will report the same net income figure.

Hope it helps a bit.



Hi Ernest,

Thanks for replying.

For HTA whether it is realised or unrealised, the gain will be reported in the income statement, therefore increasing net income by $500,000.

For AFS, I agree that if the loss is unrealised, it is reported to Equity via Other Comprehensive Income (so no impact on net income nor income statement). If it is a realised loss, then it is is reported to the income statement and lowers the net income by $1,000,000. I guess I’m making the assumption here that the gains are unrealised… eventhough not stated in the question…

I guess it’s the last paragraph where you say, the different treatment for gain/loss under both standards are the same that I don’t really understand.

The way I read it is - net income would be reduced by $500,000; but maybe, what the question is getting at is that both IFRS and GAAP would both report net income as reduced by $500,000??

What do you think?

I was thinking through and choosing my answer before scrolling down to see the official answer. Then I read your comments and I start to think to myself " A can mean ‘net income remains the same without any change to the figures’?".

I know what you mean and why you chose C. I think the question is really asking- _ Will the net income figures differ _ if company follow IFRS instead of U.S. GAAP. Under both standards, there will be a net change of 500K to the net income figure and hence firm will report the same net income under both standards. :slight_smile:

Ok, cool. It’s just a comprehension thing then.


Btw, I think you will def pass in June! Hopefully, so will I and then see you around at Level II :slight_smile:

Thanks for the encouragement fellow level 1 comrade! I hope so too, but i doubt i can… Nevertheless, we will still help each other and finish the race :slight_smile: Good luck and all the best!