CPA Exam Simulation:  Fair Value Adjustment Reclassification. Intermediate Accounting
Channel: Farhat Lectures. The # 1 CPA & Accounting Courses
Date: 2020-10-18

This video cover CPA exam simulation techniques about investment fair value adjustments.  This topic can test on the CPA exam in form of exam assimilation.

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Fair Value and Investments tested on the CPA exam
In the investment world, a common way to determine a security's or asset's fair value is to list it in a publicly-traded marketplace, like a stock exchange. If shares of company XYZ trade on an exchange, market makers provide a bid and ask price for those shares on a daily basis. An investor can sell the stock at the bid price to the market maker and buy the stock from the market maker at the ask price. Since investor demand for the stock largely determines the bid and ask prices, the exchange is a reliable method to determine a stock’s fair value. 

The process of reclassifying gains or losses from equity (fair value changes) to P&L (statement of profit and loss, SOPL) as an accounting adjustment. This involves recognition of gains/ losses, in a subsequent period, in the SOPL after having been recognized initially in the other comprehensive income (OCI). Reclassification is usually prompted on disposal of a foreign operation, derecognition of available-for-sale (AFS) financial assets (securities), occurrence of profits or losses that affect a hedged transaction.

As an accounting adjustment, reclassification is typically carried out to mitigate any double counting in comprehensive income items that appeared on income statement and contributed to net profit in a given period, and had also been part of OCI in that period or earlier periods.

It is also known as a recycling.