Historical-costorFair-valueAccounting-Columbia.docVIP

Preserving Amortized Cost within a Fair-Value-Accounting Framework: Reclassification of Gains and Losses on Available-for-Sale Securities upon Realization Minyue Dong? University of Lausanne Stephen Ryan? New York University Xiao-Jun Zhang* University of California, Berkeley First draft: December 2008 Current draft: October 2010 (Revision in Process, for Columbia Burton Conference Participants Only: Please Do Not Cite without Permission) ? Universite de Lausanne, Faculty of Business and Economics, Quartier UNIL-Dorigny, Baliment Internef Bureau 595, CH-1015 Lausanne, Switzerland, (41)216923367. ? Stern School of Business, Kaufman Management Center, 44 West 4th Street, New York, NY 10012. (01)2129980020. * 545 Student Services Building #1900, Berkeley, CA 94720, USA, (01)5106424789. Comments and suggestions from Anne Cristine dArcy, Jonathan Glover, Pierre Liang, Jack Stecher, Danqing Yang and seminar participants at Carnegie Mellon University, Chinese University of Hong Kong, and University of Lausanne are gratefully acknowledged. We thank Jialu Shan and Joseph Cadora for research and editorial assistance. Preserving Amortized Cost within a Fair-Value-Accounting Framework: Reclassification of Gains and Losses on Available-for-Sale Securities upon Realization ABSTRACT: SFAS No. 115 requires firms to record available-for-sale (“AFS”) securities on the balance sheet at fair value, with accumulated unrealized gains and losses (“AUGL”) recorded in accumulated other comprehensive income (“AOCI”), a component of owners’ equity. Firms reclassify AUGL to net income when they realize gains and losses either economically through sale of AFS securities or for accounting purposes through transfer of the securities to trading or other-than-temporary impairment write-downs. We refer to the amount of this reclassification each period as “RECLASS.” For a sample of 200 large U.S. commercial banks from 1998-2006, we examine the incremental value relevance of RECLASS bey