Question 2. Interpreting Footnote Disclosures for Investments

CNA Financial Corporation provides the following footnote to its 2012 10-K report.

Valuation of investments The company classifies its fixed maturity securities and its equity securities as either available-for-sale or trading, and as which, 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. . . . Losses may be recognized within Net realized investment gains (losses) on the Consolidated Statements of Operations when a decline in value is determined by the Company to be other-than-temporary.

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

Summary of Fixed Maturity and Equity Securities

December 31, 2012 (in millions)

Fixed maturity securities available-for- sale

Corporate and other bonds

States, municipalities and political subdivisions

Asset-backed: Residential mortgage-backed Commercial mortgage-backed

Other asset-backed

Total asset-backed

Cost or Gross Gross Amortized Unrealized Unrealized

Estimated Fair Value

Unrealized OTTI Losses (Gains)

Cost

Gains

Losses

$ 19,530

9,372

5,745 1,692 929

8,366

$ 2,698

1,455

246 147 23

416

$ 21

44

71 17 --

88

$ 22,207

10,783

5,920 1,822 952

8,694

$ --

--

(28) (3) --

(31)

U.S. Treasury and obligations of government sponsored enterprises

Foreign government

Redeemable preferred stock

Total fixed maturity securities available-for-sale

Total fixed maturity securities trading

Equity securities available-for-sale

Common stock

Preferred stock

Total equity securities available-for-sale

T otal

172

588 113

38,141

29

38 190

228

$ 38,398

11

25 13

4,618

--

14 7

21

$ 4,639

1

-- 1

155

--

-- --

--

$ 155

182 --

613 -- 125 --

42,604 (31)

29

52 197

249

$ 42,882

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

Reported on balance sheet =Answer

($ millions) ($ millions) ($ millions) ($ millions)

($ millions)

Fair value Cost Unrealized gains Unrealized losses

Answer Answer Answer Answer

In respect of questions that follow (1) give reasons for your choice (2) Give reasons why other choices are not appropriate

(b) How do CNAs balance sheet and income statement reflect any unrealized gains and/or losses on the investment portfolio?

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

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

Securities are reported at market value. Unrealized gains and losses on AFS (Trading) securities are recorded in accumulated other comprehensive income (net income).

Securities are reported at market 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 market value and all unrealized gains and losses are reflected in current income. The market 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.

Please give reasons for the multiple choises