Met Life mini-case

(investment securities)

The accounting for investments held by a company in the securities (debt or equity) of another is governed by FAS 115, a summary of which follows:

For “passive” investments in marketable equity securities, generally defined as those circumstances where the investor holds less than a 20% interest in the investee, SFAS115 requires that the investment be reported at fair market value. Such equity investments must be classified at the acquisition date as being for “trading purposes” or as being “available-for-sale.” While what is often called “mark-to-market” accounting is prescribed in either case, only in the “trading purposes” case will the change in fair value be reflected on the income statement in the current period. For investments in equity securities which are considered to be “available-for-sale,” unrealized gains and losses are to be carried in an equity account referred to as accumulated other comprehensive income, after being reported as a component of other comprehensive income per SFAS 130. However, if there is a permanent decline in the “available-for-sale” securities, this adjustment will be taken to income in the current period.

This standard covers so-called “passive investments,” whether short or long-term, in which an investor is deemed not to be able to exercise “significant influence” over the investee company. Generally, a holding of 20% or less is presumed to fall within this category of investment.[1] Prior to the passage of this standard, investments were accounted for at cost and unrealized gains (losses) were not reflected in the financial statements. Only when securities were ultimately sold were gains (losses) included income.

This mini-case is designed to give you an introduction into the accounting for marketable securities. We will use the annual report for Met Life, selections from which follow. Please answer the following questions:

  1. How much does Met Life report for its investment portfolios in 2000? How are these investments accounted for? Are they reported at cost or market?
  2. Presuming that the investments are accounted for at market, what factor(s) do you think are relevant to overcome GAAP’s objection to mark-to-market accounting? That is, GAAP has strongly held to the concept of historical cost. What are the reasons for this and why don’t we have those concerns in the case of marketable investments?
  3. How much does Met Life report for unrealized gains (losses) on these investment portfolios in 1999 and 2000? How have these unrealized gains (losses) affected reported profits in 1999 and 2000?
  4. What do you think comprises the “Net Investment Income) of $11,768 billion that Met Life reports in its income statement for 2000?
  5. Since the asset side increases (decreases) with unrealized gains (losses), what else must change on the balance sheet to maintain the accounting equation? Where does this adjustment show up?
  6. What is other comprehensive income? Where does it show up on the balance sheet? What components does Met Life report in this category (hint: look at the reconciliation of stockholders’ equity)?




Copyright © 2001 by Robert F. Halsey. All rights reserved.

[1] Holdings of 20-50% are accounted for using the “equity method.” Holdings greater than 50% are consolidated.