Any security acquired by a company is classified at the time it is purchased depending on the amount of the security purchased or the nature of its lifetime. If we have the intent and time to hold the security until maturity, it is classified as held-to-maturity. Securities to be held for indefinite periods of time, but not necessarily to be held-to-maturity or on a long-term basis, are classified as available-for-sale and carried at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income, net of applicable income taxes. Realized gains or losses on the sale of securities are determined using the amortized cost of the specific securities sold.
In order to incorporate the changes in market price of securities, companies have to make adjustments (unrealized gain/loss) to their financial statements at the end of each accounting period. For AFS (Available-for-sale) Securities, these changes are usually done quaterly, semi-annually or annually. With changes in market value of available for sale securities, considerable changes can be noticed in the financial statement particularly Balance Sheet i.e. Shareholders’ equity section. The only time securities actually effect the cash flow statement, apart from the time they are sold are when interest income or dividends are recognized. To see the impact of market valuation on the financial statement of a company, we consider the current quarter returns announced by JP Morgan chase.
JP Morgan Chase recently announced its numbers for the first quarter, with record amount of net income of $6.5 billion. Net revenue has been recorded at $113 million compared with a $233 million loss in the previous year. Net revenue included net securities gains of $503 million from sales of available-for-sale investment securities during the current quarter. Net interest income was a loss of $472 million due to low interest rates and limited reinvestment opportunities.
More details: http://www.fiercefinance.com/press-releases/jpmorgan-chase-reports-record-first-quarter-2013-net-income-65-billion-or-r
