This article takes a look at how JPMorgan Chase & Co. managed to offset their second quarter losses using marketable securities. JPMorgan realized a $2 billion loss, mainly from it’s derivative trading securities, so far in the second of 2012. To help offset these losses, JPMorgan looked to sell some of their available-for-sale securities that have produced cumulative unrealized gains they were purchased. Thus far in the second quarter of 2012, a $1 billion gain was realized from JPMorgans sale of available-for-sale securities and many investors believe that this is not a coincidence.
Since the change in the fair value of a trading security is recorded in retained earnings on the income statement, the gain or loss from this security is seen immediately. However, the change in value of an available-for-sale security does not affect net income until the security is sold. The change in fair value is only seen on the balance sheet (accumulated other comprehensive income – stockholders’ equity) So, companies can classify any security, no matter how volatile, as available-for-sale and keep the accumulated gains/losses off the income statement.
Selling available-for-sale securities to offset losses is not unlawful under FASB, but it does complicate financial reporting and makes it difficult for investors to determine the current intrinsic value of the company. Additionally, a company that is having a poor quarter may sell their most promising long-term securities in order to offset their losses. The author is pushing for FASB to make companies earnings a little more transparent by not allowing companies to have a “holding tank” where they can offset losses by selling promising investments, and I agree with this proposition.
Source: http://www.bloomberg.com/news/2012-06-21/jpmorgan-s-profit-is-scarier-than-its-loss.html
