To identify investments eligible for fair value accounting, the preparer first distinguishes debt from equity and considers any applicable election. Under United States generally accepted accounting principles (U.S. GAAP), an investment's accounting category determines where subsequent valuation changes appear.
Other comprehensive income (OCI) contains specified changes excluded from current net income, including qualifying noncredit valuation changes on available-for-sale debt. Accumulated other comprehensive income (AOCI) is the corresponding cumulative equity balance, after reclassifications and applicable taxes.
The business-entity model determines this earnings-and-OCI matrix.
To identify investments eligible or required to be reported at fair value, a not-for-profit entity (NFP) applies instrument-specific guidance. Its investment guidance covers debt securities and equity securities with readily determinable fair values within that scope. Other investments and ownership interests follow their applicable measurement, equity-method, or consolidation guidance.
An NFP reports investment return in changes in net assets, classified with or without donor restrictions as applicable; it does not create an OCI category. The business-entity trading/AFS earnings-and-OCI split therefore does not determine the NFP's presentation.
Common mistakes
- Ignoring the prior mark. Corvane's equity gain is $3,000 for Year 2; the $8,000 difference from original cost includes the earlier $5,000 gain.
- Comparing before accretion. Corvane's AFS cumulative loss is $5,000, using $199,000 amortized cost; comparing fair value with $198,000 understates that loss by $1,000.
- Counting purchased interest as revenue. Larch earns $12,500 in Year 1; including the seller's $2,500 produces an incorrect $15,000.
Bottom line
- Under the business-entity model, trading debt, ordinary equity outside the specified exceptions, and assets with valid fair value option elections recognize recurring fair-value changes in earnings.
- AFS debt is carried at fair value, with interest, realized results and credit losses in earnings and noncredit holding changes in OCI.
- NFP investment measurement depends on instrument and scope; fair-value changes and distributed income affect the applicable net-asset classes without creating OCI.
- Acquisition accounting separates purchased interest and applies the instrument's transaction-cost guidance; AFS amortized cost is updated before the fair-value comparison.
Exam shortcut
Instrument type, entity type and any valid election establish the accounting path before arithmetic begins. Three columns isolate updated basis, existing signed adjustments and required ending value. Current entries bridge the last two columns. An AFS decline requires the sale-condition assessment, then the credit cap, then the remaining OCI amount. Ending allowance and current expense are separate figures. A complete sale removes the investment, its valuation accounts and related AOCI.
The full lesson (about 7,563 words, 50 min read) adds 10 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.E1
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