You are the chief financial officer of a large manufacturing company. As CFO, you are responsible for investing excess cash in marketable securities and then handling the accounting for those securities. Your firm has a policy of classifying all securities as being available for sale. At the end of the year, preliminary financial results indicate that your company will be slightly below targeted net income. The board of directors has given you the task of determining how income might be increased without (and the board emphasized this point) going outside of the rules.
You determine that one method of increasing net income would be to reclassify all available-for-sale securities that have experienced an increase in fair value as if they were purchased as trading securities.
1. Would this reclassification achieve the desired results?
2. Is this reclassification within the rules?
3. Is this reclassification consistent with the intent of FASB Statement No. 115?
4. If you were the company’s external auditor, what questions might you have regarding this reclassification?