Snowtime Investors Inc. buys and sells various debt securities. These security investments represent approximately 90% of the companys total assets. Snowtime has a policy of classifying all its investments as trading securities (TS), since it has traditionally sold any individual security when management felt it advantageous to do so. The company is reconsidering this classification policy because, most often, the securities are not sold for many accounting periods (but not held to maturity). Some members of senior management feel that the entire investment portfolio should be classified as Available for Sale (AFS) debt securities. A number of managers, however, are opposed to the change in classification policy. They are concerned about the effects of the policy change on their retirement pay. The retirement pay is based on a formula involving the three-year average earnings of the company in the year of retirement. You are a manager in the accounting team. Your direct supervisor, the chief financial officer (CFO), asked you to prepare a document that will be used by the CFO to convince all managers that the proper classification for the portfolio is TS. Your accounting research leads you to believe the portfolio should be classified as AFS securities.

What is the proper classification of the portfolio per the Financial Accounting Standard Boards official pronouncements (GAAP)?

What are the accounting effects on reported income for TS verses AFS?

Give possible reasons why the Snowtime managers are concerned about their retirement pay.

Do you see any ethical issues involved i) in the managers opposition to change the classification of the securities to AFS securities and ii) in the CFOs request for you to prepare a document you believe is incorrect per the FASB financial standards?