Bartlet Financial Services Company
The accounting treatment for various securities that are held with the aim of trading normally have their current market values mentioned in a company’s balance sheet by way of step of adjustments at the year-end. Securities that a firm is intending to trade implies it holds them with an aim of having them sold once their value increases, which provides some profit over the short-term. This is in addition to the reported gains and losses of the initial market value and the current market value on the profit and loss account. Moreover, this is irrespective of whether such securities remains held or have been sold by the company (Costello et.al 2011). Therefore, the aforementioned accounting entry on the profit and loss account has some impacts for the profitability reporting at the end of the year. On the other hand , securities that have been held for the purpose of “available-for-sale “ are usually not include in the income statement report whatsoever. Investments in such securities are only included on the equity section of stockholders in the balance sheet in form of stockholders’ asset value.
The accounting process for “available for sales’ is quite the same as the “accounting-for-trading securities” (Costello et.al 2011). The difference in this case relates to the recognition of the various changes in the securities’ value. The opposite account to gain or loss that has not been realized in other income is the short-run fair-market adjustment in the “available for sales”. There will be no impact on the accounting statement. In case of securities “held-to-maturity” by a firm, they are normally recorded at cost (in this case any fees plus purchase price) and resulting gains or losses should only be recognized after the securities have been sold off. The investment in such securities is normally held by the investor until a specific indefinite time elapses. The changes in the stated amount should not be combined in net income. Rather it should be listed together with other comprehensive income that has been accumulated. The reporting of both comprehensive and net income is made with an aim of allowing decision makers to have a better understanding of the effect of the unrealized losses or gains.
The accounting standards are basically regulated by the Sarbanes-Oxley Act, SEC and also COSO, through which the corporation reporting of security investments and debt are reported. Even though complex consideration such as reliability, relevance, consistency and matching that usually impacts on the actual accounting scenarios, the fundamental decisions in accounting process are regulated by the existing laws (Kermis & Kermis, 2014). However, intent is the basic accounting standard for investment in debt and security. The accounting for equity securities and debt securities requires that they be categorized by management based on the intent for holding them (Svanberg, 2012). On that note, for McCabe or Faust to follow ethical standards of accounting, they should categorize the investments legitimately and in accordance to the real intent for having any investment in security or debt. Faust and McCabe want to categorize such investment on the basis of increased values or decreased values and on their possible impact on the income, both currently and in future. Their method can be viewed as unethical at the surface, where the intent of having the investment held is ignored, which does not follow the accounting standards that call for investments to be categorized as Trading or “Available-for-sale” based on the basis of holding intent. Moreover, categorization on the basis of income projections for different years may have an impact for investors who may gain or lose the value of the asset on the basis of the categorization decisions (Svanberg, 2012). The two individuals fail in the self-conception and ethical intent combination, so that they do not include truthfulness and even objective as professionals in their efforts to categorize the investments.
If the present value of aforesaid securities decreases by the following reporting period, such investments have to be recorded to indicate that there is a change in security’s fair market value (Kermis & Kermis, 2014). The changes are shown as arise in other broad income. These securities do not have to be sold out for the recognition of value change to be noted. This is why the resulting gains or losses are viewed as being unrealized until the selling of the securities. If all securities that have been reduced in value are classified as held-to-maturity, the amortized value should be used in the measurement and further reduction in fair value above the initial value (Kermis & Kermis, 2014). Any additional reduction in fair value should be categorized as part of earnings’ impairment losses. Faust approach or suggestion would have involved the classification of such debt securities whose value has declined as trading securities and those whose value has improved as “held-to-maturity (Svanberg, 2012). Consequently, such an approach would have the right impact of reducing earnings as a result of reduction in the fair value of the debt investment.
Stakeholders comprises of a group that is bigger and more comprehensive than just stockholders .Such individuals include individuals or sub-groups that may either have an impact or be affect by various financial management decisions made by the company (Drover, Franczak & Beltramini,2012). In every scenario in the aforesaid cases, the approach proposed is unethical because it does not really align with the GAAP. The financial reports would not be stated fairly or rather, would be fraudulent. The people who would be affected in such a case include almost all the stakeholders such as stockholders, the government, unions and the Board of Directors.
At the surface, the classification of security investment and debt with an aim of optimizing end of year incomes that have been selectively set can have similar ethical issues as have been discussed before. The fundamental and basic accounting standards as provided by Committee on Sponsoring Organizations SEC and Sarbanes-Oxley Act and SEC would not be met. They provide that the categorization of security investments and debt investment should be done on the basis of investment holding intent (Rockness & Rockness, 2010). Any other classification on the basis of other income that has illogically been chosen breaches the basic primary basic requirement of the accounting standard. Selling of held-to-maturity securities that have not yet matured can be considered unethical. The GAAP provides for the sale of some chosen securities as long as the inventory approach in the assignment of cost adopted by a firm is applied constantly. On the other hand, engaging in illogical and poor accounting practices and unreasonable business decision where assets are wasted or where financial reports are misstated tantamount to unethical behavior (Rockness & Rockness, 2010).
References
Kermis, G. F., & Kermis, M. D. (2014). Financial reporting regulations, ethics and accounting education. Journal of Academic and Business Ethics, 8, 1.
Costello, A. M., & WITTENBERG‐MOERMAN*, R. E. G. I. N. A. (2011). The impact of financial reporting quality on debt contracting: Evidence from internal control weakness reports. Journal of Accounting Research, 49(1), 97-136.
Drover, W., Franczak, J., & Beltramini, R. F. (2012). A 30-Year Historical Examination of Ethical Concerns Regarding Business Ethics: Who’s Concerned?. Journal of business ethics, 111(4), 431-438.
Svanberg, J. (2012). Professional Accountants' Ethical Intent-The Impact of Job Role Beliefs And Professional Identity. EJBO: Electronic Journal of Business Ethics and Organizational Studies.
Rockness, H. O., & Rockness, J. W. (2010). Navigating the complex maze of ethics CPE. Accounting and the Public Interest, 10(1), 88-104.
