The first financial reporting objective of a company on marketable securities is to disclose their aim of owning the bonds. Companies purchase equity shares from other corporations with the cash that remains after meeting the operating expenses. The excess cash is used to purchase shares from other institutions. Companies buy the shares with excess cash because they presume that the market prices of the shares will increase in the future. As a result, the companies will gain profits after reselling the shares to the market. Also, equity shares are bought to generate a company’s profits in the future (Haskins & Lynch, 2008). Secondly, companies make financial reports for marketable securities to address their aim of influencing other corporations. The financial reporting objectives illustrate that the shares are held by the companies to influence other institutions (Haskins & Lynch, 2008). The third goal of making financial reports for marketable securities is to disclose the fact that companies hold shares of a company to gain control (Haskins & Lynch, 2008). The financial reporting objectives assist the company to increase profits and their value in the market.
The reporting measures in the GAAP (Generally Accepted Accounting Standards) hinder managers from meeting the goals of making financial reports for marketable securities. The SFAS (Statement of Financial Accounting Standards) 115 standards indicate that the fair values for accounting and reporting the investments on marketable securities must be established. Accountants have to report the passive investments using the market value approach. The investments held for significant influence on the company are reported using the equity approach for accounting. Accountants use the consolidated method in accounting to report the investment for stock control. Managers encounter challenges that hinder them from achieving the financial reporting objectives. Firstly, the values for trading securities change temporarily. Consequently, the values for the security asset account and income statement profits reduce. The company will not meet the financial reporting objectives on generating profits from reselling the marketable securities (Sangiuolo & Seidman, 2008) . Secondly, the values for the available securities can change for a short period. The managers cannot sell the available securities during the fluctuation period because they will make losses. The management cannot meet their objectives on financial reporting for marketable securities. Thirdly, there can be permanent declines in the marketable securities. The permanent reduction in security value can be brought by changes in government policies (Haskins & Lynch, 2008). The decline in the value of market securities affects the long-term income of the issuing company. The company recognizes losses immediately because the value reduces permanently.
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The management can meet its financial objectives by reclassifying the shares. It can reclassify the securities once there is a temporary or permanent decline. For instance, the management can reclassify the available-for-sale to trading security. The market value of the security changes immediately after reclassifying it. The management will incur minimal losses after reclassifying the security. It can also resell the security to achieve their financial reporting objectives. The issuing company will not incur losses due to the changes in the market value of the shares (Haskins & Lynch, 2008). Reclassification of shares assists managers to achieve their financial reporting goals on shares. The managers also sell the shares after they decline in value. It prevents the company from incurring losses in case the value of the security declines permanently. The manager can hold the security until it regains its value. It can then resell the security to the issuing company or market (Weil, Schipper, & Francis, 2014). Selling the security will assist the company to achieve the financial reporting objectives.
Accountants use different accounting methods to compute the value of the securities concerning the management’s intention. The management achieves their financial reporting objectives through the assistance of accountants. The financial reports made by the accountants guide the management in selling the securities at the appropriate time. Managers sell shares when they can generate large profits. Accountants use the amortized costing methods to account for the investments in bonds that are held to maturity. The trading and available-for-sale securities are computed using the market value approach (Haskins & Lynch, 2008). The management can sell the shares after getting reports from the accountants where they generate more profits. The accountants use the equity approach to compute the investments for stocks. The accounting results direct the management to the appropriate time they can influence the operations of other companies (Haskins & Lynch, 2008). The company will gain control over the operating, investing, and financing activities of the other corporations. Finally, accountants use the consolidation method to compute the investment for stock control. The company gains control over the activities of the organization it has made investments. The accounting results assist the management in determining the number of shares it has in the organization (Haskins & Lynch, 2008). Accountants use the Generally Accepted Accounting Principles to assist the managers to meet the financial reporting objectives and overcome the challenges. Accountants’ advise the managers to use the historical-cost principle to overcome the effects of the temporary changes in the value of securities (Haskins & Lynch, 2008). The processes and advice were given by accountants to the managers assist them to achieve the financial reporting objectives.
Accountants need to establish a strong communication network with the management to offer advice to the management. The accountants and management can hold meetings where they can advise them on the ways of overcoming the changes in the value of marketable securities. The accountants and managers can communicate face-to-face, through emails, or phone calls. The main contents that the accountants can address are the approaches for overcoming the changes in security value (Fortes, 2010). Accountants can advise the management on the securities that are stable to avoid challenges in fluctuations.
References
Fortes, H. (2010). Accounting Simplified . Pearson Education Ltd.
Haskins, M.,& Lynch, L., J. (2008). Accounting for Marketable Securities. Darden Business Publishing. The University of Virginia.
Sangiuolo, R., & Seidman, L. F. (2008). Financial instruments: A comprehensive guide to accounting and reporting . Chicago, IL: CCH.
Weil, R. L., Schipper, K., & Francis, J. (2014). Financial accounting: An introduction to concepts, methods, and uses .
