A descriptive study of statement of financial accounting standards no. 12

Abstract

The research addressed the effects on reported assets and net income of the application of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 12 which requires that marketable equity securities be reported in the balance sheet at the lower of portfolio cost or market and that any writedown of asset values be reflected as a determinant of current period net income, in the case of current assets, or as an adjustment to Stockholder's Equity, in the case of noncurrent assets. Two hundred randomly selected corporations were asked to provide details of the composition of their portfolios of marketable securities held as either current assets or as long term investments for fiscal years ending in 1974 and 1975. The responses indicated that, for the responding companies, equity securities were not the dominant vehicle for investment. Evidence indicated that investments in money market instruments were dominant in relation to current assets and that equity investments and non-equity investments were equally common in relation to noncurrent assets. However, equity investments classified as noncurrent were predominantly accounted for under the Equity Method and, consequently, did not qualify for treatment under the provisions of SFAS No. 12. The portfolios of responding companies which qualified for treatment under SFAS No. 12 were valued at Historical Cost, Lower of Cost or Market (Portfolio), Lower of Cost or Market (Individual), and Current Replacement Value and were compared for differences in effects on the Marketable Securities (current assets) and Investments (noncurrent assets) captions and on Total Assets and reported Net Income when applying the alternative valuation models in lieu of Historical Cost for those companies. The differences were found to be not significant, in most cases, at the .05 level of risk using the correlated t-test..