Before Financial Accounting Standards Board Statement No. 12, reporting companies had the responsibility of determining whether declines in the market value of marketable securities were temporary and, if not, whether the “lower of cost or market” rule would be applied to individual securities, groups of securities or the company’s aggregate portfolio. Many accountants assumed that, once written down, marketable securities could not be restored to their original cost values. Statement No. 12 has attempted to standardize practice in this area.
The statement distinguishes between portfolios of current marketable equity securities and portfolios of non-current securities. Current portfolios and securities are to be written down to the lower of cost or market, with any losses—whether realized or unrealized—written off against current income. Net unrealized gains on current portfolios are recognized in income only to the extent of previous write-downs; all realized gains are included in income. For non-current portfolios, net unrealized gains and losses do not affect income but are recognized instead through direct adjustments to shareholders’ equity; realized gains and losses on their component securities are included in income.
Unfortunately, Statement No. 12 exempts, or partially exempts, from its requirements investment companies, brokers and dealers, stock life insurance companies and fire and casualty insurance companies—precisely those enterprises that have traditionally maintained large current portfolios of marketable equity securities. These exemptions permit significant inter-industry variations in accounting for marketable equity securities to continue.