Union Planters is a Tennessee bank holding company (that is, a corporation that owns banks). (Union Planters is now part of Regions Bank.) Union Planters manages \(32 billion in assets, the largest of which is its loan portfolio of \)19 billion. In additionto its loan portfolio, however, like other banks it has significant debt investments. The nature of these investments varies from

short-term to long-term. As a consequence, consistent with the requirements of accounting rules, Union Planters reports its investmentsin two different categories—trading and available-for-sale. The following facts were found in a recent Union Planters’

annual report.

Gross Gross

Amortized Unrealized Unrealized Fair

(all dollars in millions) Cost Gains Losses Value

Trading account assets \( 275 — — \) 275

Securities available for sale 8,209 \(108 \)15 8,302

Net income 224

Net securities gains (losses) (9)

Instructions

(a) Why do you suppose Union Planters purchases investments, rather than simply making loans? Why does it purchaseinvestments that vary in nature both in terms of their maturities and in type (debt versus stock)?

(b) How must Union Planters account for its investments in each of the two categories?

(c) In what ways does classifying investments into two different categories assist investors in evaluating the profitabilityof a company like Union Planters?

(d) Suppose that the management of Union Planters was not happy with its net income for the year. What step could it havetaken with its investment portfolio that would have definitely increased reported profit? How much could it have increasedreported profit? Why do you suppose it chose not to do this?

Step by step solution

01

 Reason to make investment

Union Planters purchases an investment rather than making a loan because investments give a higher return than loans. They invest in various types of securities to reduce their risk.

02

Accounting of securities

Both the short-term and long-term securities are recorded at their fair value. Trading securities havethe same market value and are fair; hence, there is no loss or gain. On the other hand, available deposits have the payment of $93, which is transferred to other comprehensive income under the head of shareholder’s equity.

03

Classification of types securities

Classifying securities into two different categories is very helpful in evaluating the profitability of the companies like Union Planters. Because organising securities into trading securities and available-for-sale securities help in determining the nature of the profit. Trading securities shows the gain earned in the short term. On the other hand, available-for-sale guardsshowgrowthina long time.

04

Effect of reclassification.

To increase the net income of the current company, should reclassify available-for-sale securities to trading securities that increase the profit of the current year. But there is also a harmful effect of this on the companyas this decrease the future gains of the company.

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