Debt securities classified as available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net amount in a separate component of shareholders' equity, subject to impairment. Unrealized gains and losses are reported net of the related tax effect in other comprehensive income ("OCI"). Upon sale, realized gains and losses are reported in earnings. Dividend and interest income, including amortization of the premium and discount arising at acquisition, should also be included in earnings.

ASC 323-10-35-18 requires that, when the equity section of the balance sheet of an investee accounted for by the equity method contains the net amount of unrealized gains and losses on available-for-sale securities, the investor should adjust its investment in that investee by its proportionate share of the unrealized gains and losses, and a like amount shall be included in the shareholders' equity section of its balance sheet. See FSP 10.5 for additional information.

ASC 320-10-35-36 requires that, in remeasuring a security from the transacting currency to the functional currency, the change in fair value of available-for-sale securities (resulting from both foreign exchange and interest rates) should be reported together in the separate component of equity (i.e., accumulated other comprehensive income). For example, an enterprise with the US dollar as its functional currency might invest in debt securities denominated in a foreign currency and classify those investments as available-for-sale. Changes in the value of that foreign currency denominated, available-for-sale security resulting from movements in foreign exchange rates should be reported in the separate component of stockholders' equity until realized.

Question: Should certain assets and liabilities, such as noncontrolling interests, certain life insurance policyholder liabilities, deferred acquisition costs, and the present value of future profits ("intangible assets" or "intangible liabilities"), be adjusted with a corresponding adjustment to other comprehensive income at the same time unrealized holding gains and losses from securities classified as available-for-sale are recognized in other comprehensive income? That is, should the carrying value of these assets and liabilities be adjusted to the amount that would have been reported had unrealized gains and losses been realized?

Interpretive response: As discussed in ASC 320-10-S99-2, by analogy to the requirements of ASC 740, Income Taxes, the SEC staff believes that, in addition to deferred tax assets and liabilities, registrants should adjust other assets and liabilities that would have been adjusted if the unrealized holding gains and losses from securities classified as available-for-sale actually had been realized. That is, to the extent that unrealized holding gains or losses from securities classified as available-for-sale would result in adjustments of noncontrolling interest, policyholder liabilities, deferred acquisition costs that are amortized using the gross-profits method, or amounts representing the present value of future profits that are amortized using the estimated gross-profits method had those gains or losses actually been realized, the SEC staff believes that such balance sheet amounts should be adjusted with corresponding credits or charges reported directly to other comprehensive income. As a practical matter, the staff would not extend such adjustments to other accounts such as liabilities for compensation to employees. The adjustments to asset accounts should be accomplished by way of valuation allowances that would be adjusted at subsequent balance sheet dates.

For example, registrants should adjust a noncontrolling interest for a portion of the unrealized holding gains and losses from securities classified as available-for-sale if those gains and losses relate to securities that are owned by a less-than-wholly-owned subsidiary whose financial statements are consolidated. Certain policyholder liabilities also should be adjusted to the extent that liabilities exist for insurance policies that, by contract, credit, or charge, the policyholders (for either a portion or all of the realized gains or losses of specific securities) classified as available-for-sale to the extent not already included in the measurement of the liability. Further, certain asset amounts that are amortized using the estimated gross-profits method, such as deferred acquisition costs accounted for under ASC 944-30, on long-duration contracts and the present value of future profits recognized as a result of acquisitions of life insurance enterprises accounted for as purchase business combinations, should be adjusted to reflect the effects that would have been recognized had the unrealized holding gains and losses actually been realized. However, capitalized acquisition costs associated with insurance contracts that are not amortized using the estimated gross-profits method should not be adjusted for an unrealized holding gain or loss, unless a "premium deficiency" would have resulted had the gain or loss actually been realized.

This guidance should not affect reported net income. It addresses only the adjustment of certain assets and liabilities and the reporting of unrealized holding gains and losses from securities classified as available-for-sale.

Question: In 20X1, a Company purchased a security that meets the definition of a debt security under ASC 320-10, Investments Debt Securities, for $100, and designated this investment as an available-for-sale security. In accordance with ASC 320, the Company marks all securities to fair value on a quarterly basis (i.e., at the end of each reporting period in March, June, September, and December) and records any unrealized gains or losses in other comprehensive income. The purchased security appreciated by $30 in 20X1 and, prior to being sold in February 20X2, appreciated by another $20.

The security was sold prior to quarter end for $150. Should the Company first report the unrealized appreciation of $20 as a component of other comprehensive income prior to determining the reclassification adjustment (View A), or should the Company determine the reclassification adjustment by reference to the unrealized gain reported in the previous financial statements (View B) as illustrated below (20X2 columns)?

Interpretative response: We believe that both View A and View B are acceptable alternatives under the provisions of ASC 320 and ASC 220, and the Company should make a policy decision regarding the methodology it elects to follow. We believe the support for accepting both alternatives can be found in the illustration noted in ASC 220-10-55-18 through ASC 220-10-55-27, which describes the entity's practice, thereby suggesting more than one acceptable view. The policy should be applied consistently and disclosed in the financial statements, if material.