Interpreting Footnote Disclosures for Investments
CNA Financial Corporation provides the following footnote to its 2018 10-K report.
Investments The company classifies its fixed maturity securities as either available-for-sale or trading, and as such, they are carried at fair value. Changes in fair value of trading securities are reported within Net investment income on the Consolidated Statements of Operations. Changes in fair value related to available-for-sale securities are reported as a component of Other comprehensive income.
The following table provides a summary of fixed maturity and equity securities.
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2018 ($ millions) Cost Gains Losses Value
Fixed maturity securities available-for-sale Corporate and other bonds $24,393 $1,028 $514 $24,907
States, municipalities and political subdivisions 12,585 1,399 12 13,972
Asset-backed: Residential mortgage-backed 6,260 88 74 6,274
Commercial mortgage-backed 2,860 36 42 2,854
Other asset-backed 2,568 14 31 2,551
Total asset-backed 11,688 138 147 11,679
U.S. Treasury and obligations of government sponsored enterprises 203 4 - 207
Foreign government 624 7 5 626
Redeemable preferred stock 13 - - 13
Total fixed maturity securitiesavailable-for-sale 49,506 2,576 678 51,404
Total fixed maturity securities trading 5 - - 5
Total fixed maturity securities $49,511 $2,576 $678 $51,409
(a) At what amount does CNA report its investment in marketable debt securities on its balance sheet? In your answer, identify the portfolio’s fair value, cost, and any unrealized gains and losses.
($ millions) Reported on balance sheet Answer
Cost Answer
Unrealized gains Answer
Unrealized losses Answer
(b) Compute the net unrealized gain or loss on CNA’s investment portfolio.
Use a negative sign with your answer to indicate an unrealized loss.
$Answer million
How do CNA’s balance sheet and income statement reflect this net unrealized gain or loss?
Securities are reported at historical cost. Gains and losses are recognized upon sale of the securities.
Securities are reported at fair value. Unrealized gains and losses are recognized currently in net income.
Securities are reported at fair value. Unrealized gains and losses on AFS securities are recorded in accumulated other comprehensive income.
Securities are reported at fair value. Only unrealized losses are recognized in net income. Unrealized gains are deferred and recognized upon sale of the securities.
(c) How do CNA’s balance sheet and income statement reflect gains and losses realized from the sale of available-for-sale securities?
Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in the AOCI account to reflect the elimination of previously recorded unrealized gains and losses.
No entry is required as the securities are currently reported at fair value and all unrealized gains and losses are reflected in current income. The fair value changes bypass the income statement.
Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in cash and cash equivalents to reflect the elimination of previously recorded unrealized gains and losses.
Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in retained earnings to reflect the elimination of previously recorded unrealized gains and losses.