FASB codifications about available for sale securities

The Standards Codification Changes

The Standards Codification changes have affected securities available for sale (AFS) under the fair value option. AFS securities for NVIDIA accumulated to $2.4 billion. Prior and following measurements are to be computed at a fair value. That is why the prior cost method is to be considered as an elimination and the company is about to record equity investments by singling out their fair value at cost, less impairment (Dong et al. 240). Any alterations within those securities are to be addressed in the earnings section. A subject to a single-step approach is the impairment model that makes the companies conduct a qualitative assessment for each financial period with an aim to identify impairment. The fair value of securities is measured at amortized costs.

Changes in Fair Value and Disclosure

Changes in fair value as a result of instrument-specific risk are recognized separately in the statement of comprehensive income. Accumulated gains or losses will then be reclassified from other earnings if the security is settled before maturity. In the current codification, public firms are required to make a disclosure of the fair value of securities. NVIDIA is a publicly listed firm, and therefore, disclosure is mandatory, and this is done at amortized cost. Moreover, the new approach requires companies to present separate notes regarding the securities.

Question 2

NIVDIA Corporation treats all their marketable securities and cash equivalents as available for sale securities. AFS assets are equity or debt instruments that are held for a period of time that is not definite without intending to resell for financial gain (Dong 12). Gains and losses on foreign exchange of monetary assets are usually recognized in the profit and loss statement. However, this excludes the items whose designation is a hedging instrument. Since Equity instruments are non-monetary assets, the loss or gain will be recognized in the specific equity account (Dong et al. 15). For a nonmonetary financial asset like an investment in equity instrument, it has to be translated using the historical rate if its fair value cannot be measured reliably in the balance sheet. In the case that it is carried at fair value in the currency of the foreign country, it is translated using the cosign rate.

Recognition of Impairment and Foreign Currency Changes

According to US GAAP, it is not necessary to reveal separately the loss or gain in capital loss as a result of an asset change on a market rate, or loss or gain in currency as a result of foreign exchange rate change. However, SOP shows that such evidence when separate will offer important information to financial statement users. In the statement of loss, there should be recognition of impairment of equity instruments. The recognition of cumulative net loss should be done in the equity account. Recognition of any amount that is attributed to changes in foreign currency should be done in the profit and loss statement.

Sale of AFS Equity Securities

When AFS equity securities are sold, they are moved from other comprehensive income to the profit and loss statement. When the market rate of the available-for-sale financial asset increases over and above the buying price of the security, this increase is recognized in the other comprehensive income without recognizing it as income in the current financial period (Dong et al. 9). This is recognized in the balance sheet as part of the equity of the shareholders.

Question 3

There are a number of differences between GAAP and IFRS. Under IFRS, the treatment of AFS (available for sale securities) is explained below. IFRS 7 recognizes available for sale when the company becomes a party to the contract. A firm is required to remove the liability from the balance sheet if the obligation is extinguished. Initial measurement of the security is done at fair value. Subsequent measurement will depend on the kind of financial instrument. In the case of available for sale, unrealized changes in the fair value amount are recorded in the statement of comprehensive income (Dong et al. 246). Realized changes from sale or impairment are reported in the profit and loss statements, at the time of realization. Changes in fair value are recognized through the statements of changes in equity. Cumulative profits and losses that were recognized in equity are only treated so when the AFS asset is derecognized.

Differences Between GAAP and IFRS

As aforementioned, AFS under GAAP is recognized at fair value, less impairment. The implications of the differences occur during global mergers and acquisitions. During these transactions, US companies are forced to report their financial statements in line with IFRS. The reason behind this argument is that codified GAAP standards normally refer to rules and regulations that have not been organized by the FASB. As a result, there are discrepancies between the contents of both standards. In addition, the FASB does not recognize new standards as an authoritative right (Dong et al. 240). They only provide background information about codification and the basis for the conclusion. To add on, American policies are traditionally implemented under the rule of law. Therefore, the ’going concern’ hypothesis is not well-established in the GAAP structure. On the other hand, weight and reliability of IFRS gives the standard an upper hand due to the presence of well-established and widely-accepted standards.

Work Cited

Dong, Minyue, Stephen Ryan, and Xiao-Jun Zhang. “Preserving amortized costs within a fair-value-accounting framework: Reclassification of gains and losses on available-for-sale securities upon realization.” Review of Accounting Studies 19.1 (2014): 242-280.