Summary
Depending upon management's classification of a security (i.e., either "trading" or "available for sale"), a charge may or may not appear on the income statement in the same period as the write-down on the balance sheet. If the security is classified as a trading security, the charge on the income statement will occur in the same period as the write-down. However, if the security is classified as available for sale, the charge bypasses the income statement and is taken directly to stockholders equity. If the value of the security does not recover prior to its liquidation, the charge typically is taken in the year of liquidation. The potential charge for write-downs related to available for sale securities can be quantified by looking at the statement of stockholders equity, particularly other comprehensive income.
Analysis
Citigroup and Merrill Lynch, as well as numerous other companies, have taken massive write-downs on their security holdings. Depending upon management's classification of a security (i.e., either "trading" or "available for sale"), a charge may or may not appear on the income statement in the same period as the write-down on the balance sheet. If the security is classified as a trading security, the charge on the income statement will occur in the same period as the write-down. However, if the security is classified as available for sale, the charge bypasses the income statement and is taken directly to stockholders equity. If the value of the security does not recover prior to its liquidation, the charge typically is taken in the year of liquidation.The potential charge for write-downs related to available for sale securities can be quantified by looking at the statement of stockholders equity, particularly other comprehensive income.
Thomas Klein consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
