Accounting for Investment Securities

1. Bonds and notes (Debt securities) Common and preferred stock (Equity securities) Accounting for Investment Securities Investments can be accounted for in a variety of ways, depending on the nature of the investment relationship.

2. Securities available- for-sale are expected to be held for an unspecified period of time. Held-to-maturity securities are those where the investor intends and has the ability to hold the security to maturity date. Trading securities are bought and held primarily to be sold in the near term.

3. Securities Available-for-Sale • All investments in debt and equity securities that don’t fit the definitions of the other reporting categories are classified as “available-for-sale.” • vSecurities available-for-sale are reported at the fair value of the investmentsecurities on the reporting date.

4. What is Fair Value?

5. Securities Available-for-Sale Purchase of Investments November 18 Purchased ABM Corporation 10% bonds for $40 million. ($ in millions) Investment in ABM bonds 40 Cash 40 Investment Revenue November 30 Received cash interest of $2 million on the investment in ABM Corporation bonds. Cash 2 Investment revenue ($40 million x 10% x 1/2 year) 2 Sale of Investments December 1 Sold the ABM Corporation bonds for $43 million. Cash 43 Investment in ABM bonds 40 Gain on sale of investments 3

6. Securities Available-for-Sale Purchase of Investments December 21 Acquired two new investments costing: Millington Industries common shares $30 million Bartlett Corporation common shares 20 million ($ in millions) Investment in Millington shares 30Investment in Bartlett shares 20 Cash 50

7. ADJUSTING INVESTMENTS TO FAIR VALUE December 31 The market prices of the investments are: Millington Industries common shares $35 million Bartlett Corporation common shares 19 million ($ in millions) Fair Value Available-for-Sale Securities Cost Fair Value Adjustment Millington Industries shares $30 Bartlett Corporation shares 20 Totals $50

8. ADJUSTING INVESTMENTS TO FAIR VALUE December 31 The market prices of the investments are: Millington Industries common shares $35 million Bartlett Corporation common shares 19 million ($ in millions) Fair Value Available-for-Sale Securities Cost Fair Value Adjustment Millington Industries shares $30 $35 $5 Bartlett Corporation shares 20 19 (1) Totals $50 $54 $4 December 31 Fair value adjustment (calculated above) 4 Unrealized holding gain–other comprehensive income 4 Securities available-for-sale $50Plus: Fair value adjustment 4 $54

9. Other Comprehensive Income Holding gains and losses from retaining securities during periods of price change are not included in the determination of income for the period. Instead, they are reported as Other Comprehensive Income on the Statement of Comprehensive Income. These amounts are accumulated over time and reported as a separate component of shareholders’ equity – Accumulated Other Comprehensive Income.

10. Deferred losses (gains) from derivatives. Pensions: Losses (gains) Prior service cost. Losses (gains) from foreign currency translations. Comprehensive Income Comprehensive income includes losses and gains that traditionally havebeen excluded from net income. Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity. When a derivative designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction. Increases (decreases) in the postretirement benefit obligation from changing assumptions as well as plan assets earning less or more than expected Cost of recalculating postretirement benefits in prioryears after amending a plan. From changes in the market value of securities available-for-sale Net holding losses (gains) on investments.

11. Statement of Comprehensive Income ($ in millions) Net income $xxx Other comprehensive income: Net unrealized holding gains (losses) on investments $ 4 Pensions: ØGains (losses) due to revising assumptions used to estimate liability or the return on plan assets differing from expected x (x) ØPrior service cost (Current GAAP) (x) Deferred gains (losses) from derivatives x Gains (losses) from foreign currency translation xxx Comprehensive income $xxx

12. As an expanded version of the income statement. Separate statement immediately following the income statement. Comprehensive Income Other comprehensive income (a) is reported periodicallyas it is created and (b) also is reported as a cumulative amount. There are 2 options for reporting comprehensive income created during the reporting period. The statement of comprehensive income can be presented: The accumulated amount of comprehensive income is reported as a separate item of SE in the balance sheet.

13. REPORTING INVESTMENTS IN SECURITIES AVAILABLE-FOR-SALE INCOME STATEMENT($ in millions) Revenues $  Expenses () Other Income (Expense): Investment revenue 2 Gain on sale of investments 3 Net Income $  STATEMENT OF COMPREHENSIVE INCOME-OCI Unrealized holding gain on investments $ 4 BALANCE SHEET Assets Securities available-for-sale $50 Plus: Fair value adjustment 4 $54 Liabilities Not affected Shareholders’ Equity Accumulated other comprehensive income Net unrealized holding gain (loss) $ 4

14. SELLING SECURITIES PREVIOUSLY ADJUSTED TO FAIR VALUE Sale of Investments June 9 Sold the Millington shares for $36 million. ($ in millions) Cash 36 Investment in Millington shares (cost) 30 Gain on sale of investments (difference) 6 Purchase of Investments October 7 Purchased shares of Eads Industries for $45 million. Investment in Eads shares 45 Cash 45

15. ADJUSTING INVESTMENTS TO FAIR VALUE December 31 The market prices of the investments are: Bartlett Corporation common shares $16 million Eads Industries common shares 46 million ($ in millions) Fair Value Securities Available-for-Sale Cost Fair Value Adjustment Bartlett Corporation shares $20 Eads Industries shares 45 Totals $65

16. ADJUSTING INVESTMENTS TO FAIR VALUE December 31 The market prices of the investments are: Bartlett Corporation common shares $16 million Eads Industries common shares 46 million ($ in millions) Fair Value Securities Available-for-Sale Cost Fair Value Adjustment Bartlett Corporation shares $20 $16 $(4) Eads Industries shares 45 46 1 Totals $65 $62 $(3) Moving from a positive $4 (last period) to a negative $3 requires a reduction of $7: --^-----------^----------^---------------------------------- -3 0 +4 <-------------------------- -7 Unrealized holding loss–OCI ($4 credit to $3 debit) 7 Fair value adjustment ($4 debit to $3 credit) 7 Balance from last period

17. Fair Value Option GAAP allows a FVO for investments that otherwise would be accounted for using the HTM or AFS approaches. Electing the FVO for those investments is simple – just reclassify as trading securities and accounted for in that manner.