Statement of Financial Accounting Standards No. 12

INTRODUCTION AND BACKGROUND INFORMATION
There has long been diversity in accounting for marketable securities. Paragraph 9, Chapter 3A, «Current
Assets and Current Liabilities,» of Accounting Research Bulletin (ARB) No. 43 (originally adopted as ARB No.
30 in 1947) narrowed practice somewhat by stating:
. . . practice varies with respect to the carrying basis for current assets such as marketable
securities and inventories. In the case of marketable securities where market value is less than
cost by a substantial amount and it is evident that the decline in market value is not due to a mere
temporary condition, the amount to be included as a current asset should not exceed the market
value.
Chapter 3A of ARB No. 43 did not, however, deal with the question of whether a write-up of a previous
write-down might be permissible to reflect a recovery in the market. Accounting Principles Board (APB)
Opinion No. 18, «The Equity Method of Accounting for Investments in Common Stock,» dealt with accounting
for investments by the equity method when the investor has «significant influence» over the investee, thus
establishing accounting principles for those investments. In addition, a number of Industry Audit Guides, issued
by the AICPA for certain industries, describe specialized accounting practices applied in those industries. At
present, some enterprises are carrying marketable securities at cost, some at market (or variations of market),
some at the lower of cost or market, and some are applying more than one of those methods to different classes
of securities. During 1973 and 1974, there were substantial declines in market values of many securities. As a
result, in many enterprises where securities are carried at cost, the carrying amount is in excess of current market
value. In other enterprises where carrying amounts were written down to reflect the market decline, the partial
recovery in the market in 1975 has given rise to a situation in which securities are being carried at amounts
which are below both original cost and current market value.
Concern over the lack of definitive guidance in the authoritative literature with respect to certain
accounting problems accentuated by these conditions led to requests for the FASB to consider those problems
on an urgent basis. The issues raised were submitted to the members of the Board’s Screening Committee on
Emerging Problems, and their recommendations were weighed by the Board in arriving at its decision to
proceed with a project of limited scope, based on the three questions stated in paragraph.