Interpreting Footnote Disclosures for Investments

CNA Financial Corporation provides the following footnote to its 2018 10-K report. Investments The company classifies its fixed maturity securities as either available-for-sale or trading, and as such, they are carried at fair value. Changes in fair value of trading securities are reported within Net investment income on the Consolidated Statements of Operations. Changes in fair value related to available-for-sale securities are reported as a component of Other comprehensive income.

The following table provides a summary of fixed maturity and equity securities.

	Cost or	Gross	Gross	Estimated
	Amortized	Unrealized	Unrealized	Fair
December 31, 2018 ($ millions)	Cost	Gains	Losses	Value
Fixed maturity securities available-for-sale
Corporate and other bonds	$24,393	$1,028	$514	$24,907
States, municipalities and political subdivisions	12,585	1,399	12	13,972
Asset-backed:
Residential mortgage-backed	6,260	88	74	6,274
Commercial mortgage-backed	2,860	36	42	2,854
Other asset-backed	2,568	14	31	2,551
Total asset-backed	11,688	138	147	11,679
U.S. Treasury and obligations of government sponsored enterprises	203	4	-	207
Foreign government	624	7	5	626
Redeemable preferred stock	13	-	-	13
Total fixed maturity securitiesavailable-for-sale	49,506	2,576	678	51,404
Total fixed maturity securities trading	5	-	-	5
Total fixed maturity securities	$49,511	$2,576	$678	$51,409

(a) At what amount does CNA report its investment in marketable debt securities on its balance sheet? In your answer, identify the portfolios fair value, cost, and any unrealized gains and losses.

($ millions)
Reported on balance sheet	Answer
Cost	Answer
Unrealized gains	Answer
Unrealized losses	Answer

(b) Compute the net unrealized gain or loss on CNAs investment portfolio. Use a negative sign with your answer to indicate an unrealized loss. $Answer million

How do CNAs balance sheet and income statement reflect this net unrealized gain or loss?

Securities are reported at historical cost. Gains and losses are recognized upon sale of the securities.

Securities are reported at fair value. Unrealized gains and losses are recognized currently in net income.

Securities are reported at fair value. Unrealized gains and losses on AFS securities are recorded in accumulated other comprehensive income.

Securities are reported at fair value. Only unrealized losses are recognized in net income. Unrealized gains are deferred and recognized upon sale of the securities.

(c) How do CNAs balance sheet and income statement reflect gains and losses realized from the sale of available-for-sale securities?

Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in the AOCI account to reflect the elimination of previously recorded unrealized gains and losses.

No entry is required as the securities are currently reported at fair value and all unrealized gains and losses are reflected in current income. The fair value changes bypass the income statement.

Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in cash and cash equivalents to reflect the elimination of previously recorded unrealized gains and losses.

Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in retained earnings to reflect the elimination of previously recorded unrealized gains and losses.