As required by GAAP [FASB ASC 320, previously SFAS No. 115], Microsoft Corporati
ID: 2738958 • Letter: A
Question
As required by GAAP [FASB ASC 320, previously SFAS No. 115], Microsoft Corporation reports its investments available-for-sale at the fair value of the investment securities. The net unrealized holding gain is not reported in the income statement. Instead, it's reported as part of Other comprehensive income and added to Accumulated other comprehensive income in shareholders' equity.Comprehensive income is a broader view of the change in shareholders' equity than traditional net income, encompassing all changes in equity from non-owner transactions. Microsoft chose to report its Other comprehensive income as a separate statement in a disclosure note in its annual report: MSFT Annual Report 2011
What does Microsoft mean by the term “Reclassification adjustment for gains (losses) included in net income”? Can you think of an instance where reclassification adjustment could be used unethically? As required by GAAP [FASB ASC 320, previously SFAS No. 115], Microsoft Corporation reports its investments available-for-sale at the fair value of the investment securities. The net unrealized holding gain is not reported in the income statement. Instead, it's reported as part of Other comprehensive income and added to Accumulated other comprehensive income in shareholders' equity.
Comprehensive income is a broader view of the change in shareholders' equity than traditional net income, encompassing all changes in equity from non-owner transactions. Microsoft chose to report its Other comprehensive income as a separate statement in a disclosure note in its annual report: MSFT Annual Report 2011
What does Microsoft mean by the term “Reclassification adjustment for gains (losses) included in net income”? Can you think of an instance where reclassification adjustment could be used unethically?
Explanation / Answer
The term, “Reclassification adjustment for gains (losses) included in net income" refers to the adjustment made by Company M to remove from OCY any amounts associated with sold investments. When Microsoft sells the investments that have unrealized gains or losses in the past, simply recording the total realized gain without adjustment would result in double-counting the gain or loss. Through reclassification adjustment Microsoft could clear the prior unrealized changes in fair value before the sale so that the double-counting is avoided.
The reclassification adjustment can be used unethically to manipulate the stockholders' equity section of the balance sheet.
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