09 May WILL CLASSIFYING THE PORTFOLIO AS EACH PROPOSES ACTUALLY HAVE THE EFFECT ON EARNINGS THAT EACH SAYS IT WILL?
CA17-6 ETHICS (Fair Value) Addison Manufacturing holds a large portfolio of debt securities as an investment. The fair value of the portfolio is greater than its original cost even though some debt securities have decreased in value. Sam Beresford the financial vice president and Angie Nielson the controller are near year-end in the process of classifying for the first time this securities portfolio in accordance with GAAP. Beresford wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as held-to-maturity. Nielson disagrees. She wants to classify those debt securities that have decreased in value as trading securities and those that have increased in value as held-to-maturity. 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 Beresford and Nielson properly classify the entire portfolio into trading available-for-sale and held-to-maturity categories. But then each proposes to sell just before year-end the securities with gains or with losses as the case may be to accomplish their effect on earnings. Is this unethical?
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