There are two methodologies for accounting for these equity security changes:
1. If you were accounting for these investments as trading, no adjustments are necessary. Only the classification will change from trading securities to equity securities.
2. If you were accounting for equity securities as available-for-sale, a cumulative-effect adjustment is necessary. The accumulated other comprehensive income (AOCI) related to equity investments needs to be reclassified as undivided earnings. There is no income statement effect.
To help you better understand, Doeren Mayhew has outlined a quick example below:
December 31, 2018
Unrealized gain – $100,000
Entry- January 1, 2019
Debit – AOCI – $100,000
Credit – Undivided earnings – $100,000
Wondering how to account for the changes in fair value going forward? The changes in fair value for equity securities should be recorded through the income statement.
If your financial institution is to ready begin the implementation process, rely on one of Doeren Mayhew’s qualified credit union CPAs as a resource to your accounting group. Please contact our Financial Institutions Group today and we will be glad to help.