Assets
The Security Bucket
Classification picks the measurement: trading through net income, AFS debt through OCI, HTM at amortized cost, and all equity through net income.
How the exam words it
- -The stem gives a security's cost and year-end fair value and asks 'where is the unrealized gain reported?'.
- -It asks for the year-end journal entry to the fair value adjustment account, sometimes with an existing balance.
- -An HTM bond's fair value moves and it asks 'how is this increase reported?', or an early sale asks about the tainting rule.
- -An AFS debt security is sold and it asks for the net income effect in the year of sale.
The playbook
- 1Bucket first: equity securities are always fair value through net income (ASU 2016-01); debt is trading (net income), AFS (OCI), or HTM (amortized cost).
- 2Compute the fair value adjustment as the change from the existing balance, not from zero.
- 3On sale of AFS debt, reclassify the AOCI balance so lifetime income equals proceeds minus original cost.
- 4HTM fair value changes are note disclosure only, and early sales taint the portfolio unless credit deterioration, near maturity, or an isolated event explains them.
The trap
Marking equity securities through OCI. That is the pre-2016-01 rule; today OCI is reserved for AFS debt, and equity securities run through net income.
How the exam varies it
The same pattern, re-skinned along these axes:
Equity versus debt, and which debt bucketInitial mark versus subsequent change versus saleIncome statement effect versus the journal entry versus disclosure
Drill this pattern
8 questions of The Security Bucket from across the AUD topics. Clear it by getting 5 right with a streak of 3.