USA Problem with 'non cash' entries

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I am closing the accounting books for an Elks Lodge, a non-profit organization, at their fiscal year end. I am working in QuickBooks. My question is: Do we have to show unrealized gains (an increase in portfolio value from an investment account) as income on the Profit and Loss or the Balance Sheet?

The reason I'm asking is because our board of directors gets utterly confused seeing such non-cash entries appear as increasing or decreasing the lodge's cash.

Thanks,

Mark
 
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This relates to the recognition principles for Unrealized Holding Gains and Losses (UHG/L). It depends on the classification of the investments, and the control available over the investment. If the Lodge has significant influence or control over the investee (e.g. owning over 20% of the voting stock of an outside business), the investments are recognized under the Equity Method or Consolidation, respectively. That doesn't sound like the case here, however. Assuming the Lodge owns less than 20% of the investee (e.g. if they are typical bonds or small amounts of stock in public companies), they are classified as Held to Maturity, Trading, or Available for Sale.

If they are classified as Trading securities (investments held in an active trading account), their balance sheet value is adjusted to the market price for each balance sheet date, and the change in value is recognized as other income. On your last reporting date the 100 shares of stock you held in a day trading account was valued at $20/share and today (new reporting date) it's valued at $21. That means you're $100 wealthier, and you recognize that gain as other income, and report a $100 increase in value on your balance sheet. That's all for GAAP purposes; you won't have to pay taxes on the gain since you haven't sold the shares yet, so you'll also recognize a Deferred Income Tax Liability of the amount of taxes you would have to pay if you had sold the shares.

DR $100 Investments
CR $60 Unrealized Gain on Trading Securities, Net of Taxes
CR $40 Deferred Income Tax Liability
(assuming a 40% tax rate)

If they're debt instruments and classified as Held to Maturity (investments the Lodge intends to keep until maturity and which they have the financial ability to hold to maturity...equity can't qualify since it has no "maturity"), you ignore changes in value, keeping the investment value at amortized cost until later, when they are actually sold/matured/closed. No gain or loss recognized, no entry required.

Finally, if they are classified as Available for Sale (all other investments), you still mark the value of the investments to market value on the balance sheet, but instead recognize the unrealized gain or loss in Other Comprehensive Income (after Net Income). The other side of the balance sheet entry would be to equity.

Note that all investments can irrevocably be classified as trading securities upon their purchase, so even securities that qualify for HTM treatment might be instead treated like trading securities except that cash effects would still appear under cash from investing activities (while typical trading security cash flows appear under operating cash flows) on the Cash Flow Statement.

Hope that helps.
 
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Excellent and thorough answer. I appreciate the time it took for you to compose the message.

The money in question is the sum of 3 mutual funds: 2 equity (Fidelity) and 1 bond (T Rowe Price). We do not control the funds--the fund managers provide the control.

From your response we're almost positive that these investments fall under the category of Trading securities and not Available for Sale but wanted to be totally certain?

Second, I don't know if it makes any difference but the Lodge does not pay income tax on these funds. The Lodge is tax exempt.

Lastly, since one of the goals is to provide cash status clarity to the board, I'm presuming that the most sensible presentation would be a spreadsheet exported from QuickBooks that I could then delete depreciation and unrealized gains and the directors would see what makes 'sense to them' which is simply the monthly cash flows for the organization?

Thanks,

Mark
 
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Mark,

I agree, they should be considered trading funds and, yes, being tax-exempt makes the entries simpler!

For the presentation, you need to make a cash flow statement, and (except for the tiny amounts of interest and dividends the accounts throw off), the mutual funds won't even appear on the statement. Yes, you start with net profits (including interest and dividends earned if any), add back depreciation (and amortization if any); that gives you gross cash flow. Subtract increase in cash on hand and receivables and add increase in payables; that gives you net cash flows from operating activities. Cash paid to buy fixed assets gives you cash flows from investing activities. Increase (decrease) in balances on long term debt gives you cash flows from financing activities. Total them and you get total cash flow.

Scramble
 

bklynboy

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Hold up - Trading vs AFS is not made solely because its an investment account. Trading is used when you intend to turn over the assets in a short period - usually less than one year. AFS is much more typical so I caustion you before you assume they are trading - how long have you held these investments and for what purpose?
 
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The lodge has had either 2 or 3 mutual funds for at least ten years--buy and hold.
 

bklynboy

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Then classify as AFS and not trading. HTM does not apply since these are considered equities. Change in MV is recorded thru equity and not P&L.
 

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