XYZ Manufacturing holds a large portfolio of debt and equity investments. The fair value of the portfolio is greater than its original cost, even though some investments have decreased in value. N, the financial vice president, and L, the controller, are near year-end in the process of classifying for the first time this investment portfolio in accordance with IFRS. N wants to classify those investments that have increased in value during the period as trading investments in order to increase net income this year. She wants to classify all the investments that have decreased in value as non-trading (the equity investments) and as held-for-collection (the debt investments).

L disagrees. She wants to classify those investments that have

decreased in value as trading and those that have increased in value as

non-trading (equity) and held-for-collection (debt). She contends that

the company is having a good earnings year and that recognizing the

losses will help to smooth the income this year. As a result, the

company will have built-in gains for future periods when the company

may not be as profitable.

Instructions

Answer the following questions.

a. Will classifying the portfolio as each proposes actually have the

effect on earnings that each says it will?

b. Is there anything unethical in what each of them proposes? Who

are the stakeholders affected by their proposals?

c. Assume that N & L properly classify the entire

portfolio into trading, non-trading, and held-for-collection

categories. But then each proposes to sell just before year-end the

investments with gains or with losses, as the case may be, to

accomplish their effect on earnings. Is this unethical?