FASB issues new acccounting rules for debt and equity securities

Healthcare Financial Management, Oct, 1994 by Alan Reinstein, Mohamed Bayou

Balance sheet disclosures. The aggregate fair value, gross unrealized holding gains and losses, and amortized cost basis as of each balance sheet date should be reported in the balance sheets or in the notes to the financial statements for each of the three categories of investments (such as held-to-maturity, trading, and available-for-sale). All individual, trading, and available-for-sale securities should be classified as current and long-term, as appropriate.

For example, the classification of held-to-maturity securities depends upon the date of maturity or the exercisable call date, whichever is more probable. The classification of available-for-sale securities hinges on such factors as the reasonableness of the intent of management to sell--based upon a review of the entity's prior classifications and the maturities of such financial instruments. However, marketable debt and equity securities classified as available-for-sale should be classified normally as current assets in the balance sheet, even though the organization currently has no plans to dispose of them. Because such assets usually represent a surplus of immediately available funds, they may be sold at the discretion of management.

Healthcare organizations should make additional disclosures for specific types of securities, including equity securities; debt securities issued by the U.S. Department of Treasury and other governmental agencies; debt securities issued by state governments and by political subdivisions of these governments; debt securities of foreign governments; corporate debt securities; and mortgage-backed securities.

In addition, organizations should disclose the maturity dates of contractual maturities as of the most recent balance sheet date presented. Healthcare organizations should disclose the fair value and amortized cost-of-debt securities for at least the following major groupings:

* Those that are expected to mature within one year,

* Those that will mature in one to five years,

* Those that will mature in five to 10 years, and

* Those with maturities exceeding 10 years.

Healthcare organizations may disclose separately a portfolio of securities that do not mature at a specific date, such as mortgage-backed securities, provided they disclose the basis for allocating these sets of securities (for example, those collateralized by trust deeds by specific locations).

Income statement disclosures. Dividend and interest income for all three types of securities continue to be included in earnings. Realized gains and losses for available-for-sale and held-to-maturity securities and both realized and unrealized gains and losses for financial instruments classified as trading securities also are included in earnings. Statement No. 115 also requires organizations to disclose for each presented income statement period the:

* Proceeds from sales of available-for-sale securities, including gross realized gains and losses from those sales;

* Cost basis (for example, average cost or specific identification) used to compute realized gains and losses;