Why use an approach for accounting for AFS securities that differs from that used for trading securities? The big concern is that including in net income unrealized holding gains and losses on AFS investments might make income appear more volatile than it really is. For example, many companies purchase AFS investments for the purpose of having the changes in fair value of those investments offset changes in the fair value of liabilities. This hedging insulates the company from risk and ensures that earnings are stable. However, if fair value changes for investments were to be recognized in income (as is the case with trading securities), but the offsetting fair value changes for liabilities were not recognized in income as well, we could end up with income appearing very volatile when in fact the underlying assets and liabilities are hedged effectively.13 |
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More generally, because AFS securities are likely to be held for multiple reporting periods, one could argue that there is sufficient time for unrealized holding gains in some periods to balance out with unrealized holding losses in other periods, so including unrealized holding gains and losses in income would confuse investors by making income appear more volatile than it really is over the long run. Of course, one could counter-argue that these unrealized holding gains and losses still are relevant, given that each period an investor has discretion over whether or not to continue holding the security or sell that security to realize a gain or loss.
p. 631 To consider accounting for AFS investments, refer to the facts shown in Illustration 12-2. Let's assume now that United classifies its investments as AFS rather than trading securities.
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