Fair Value Times TwoResources

• Discussion Participation Scoring Guide.

Addison Manufacturing holds a large portfolio of debt and equity securities as an investment. The fair value of the portfolio is greater than its original cost, even though some securities have decreased in value. Ted Abernathy, the financial vice president, and Donna Nottebart, the controller, are near year-end in the process of classifying, for the first time, this securities portfolio in accordance with FASB Statement No. 115. Abernathy wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as:

1. Available-for-sale (equity securities).
2. Held-to-maturity (debt securities).

Nottebart disagrees. She wants to classify those securities that have decreased in value as trading securities and those that have increased in value as available-for-sale and held-to-maturity. She contends the company is reporting a good earnings year and that recognizing the losses helps to smooth income this year. As a result, the company will have built-in gains for future periods when the company may not be as profitable.

Consider the scenario to discuss which treatment you would choose for determining the fair value of the equity investments. Use factual information to justify your treatment choice.