Royal Bank of Canada is one of the largest banks in Canada. According to its 2011 annual report, it had approximately 74,000 employees serving 15 million customers throughout the world. The bank's business largely involves borrowing money and lending it to others, but at any given time it will have a large amount of money invested in securities when it is not out on loan. It also acts as an investment dealer, buying investments from one client and selling them to another. The company reported the following information in its 2011 financial statements (in millions of dollars):
_________________________________________2011 2010
Trading investments
Debt instruments......................................$106,766..........$106,396
Equity instruments.......................................38,508.............38,529
..........................................................$145,274..........$144,925
Instructions
(a) In your opinion, why does the Royal Bank have a higher percentage of its trading investments in debt instruments than in equity instruments?
(b) How will the trading investments in debt instruments be valued on the Royal Bank's balance sheet?
(c) At November 1, 2011, 34.5% of the Royal Bank's trading investments in debt instruments were Canadian government debt instruments and 18.3% were U.S. government debt instruments. In your opinion, why does the Royal Bank have a higher percentage of its trading investments in debt instruments in government instruments as opposed to other debt instruments?
(d) The Royal Bank also reported other investments for which the gains and losses on fair value adjustments are reported in other comprehensive income. What are the advantages of reporting gains and losses in other comprehensive income instead of profit? What are the disadvantages?