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  • tchoupitoulas_st tchoupitoulas_st Oct 7, 2002 5:20 PM Flag

    Back of the envelope

    Wrong. Typically short-term assets are to large extent securities. In order to be listed as current assets the must meet two criteria:

    1. Be readily marketable
    2. Mgt. must intend to convert (sell) the investment into cash within the time period of current assets (1 year or the Co. operating cycle, whichever is longer)

    The securities must be accounted for using the mark-to-market rule.

    There are two classifications for the securities � trading securities and available-for-sale securities. The difference in classification will effect if the stock price drop is recorded in a temporary account appearing on the income statement or considered expenses effecting the stockholders� equity.

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    • You are joking right? Security is a generic name for a financial instrument including bonds, mortgage backed, asset backed, equities, etc. Few equities would be listed as short term. Their "investment" line may or may not contain an equity component.

      From Webster's, under Security:

      an evidence of debt or of ownership (as a stock certificate or bond)

      • 2 Replies to joshbensdad
      • No, no joke. If you don�t like the term securities, let me be clearer. Companies hold stock of other companies. Management is trying to get the best return on their cash they don�t need for operations, just as individuals are trying to get the best return on their savings. Some companies have investment divisions to do just that. During the 1990s it was a good move. But we�re talking about GSPN here. Did they or do they own stocks? I looked back at 1999 and under their �Quantitative and Qualitative Disclosures about market risk� and they believed their level of market risk to be immaterial.

        As for today, they clearly spell out what they are invested in:

        �The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. As of December 31, 2001, substantially all of our short-term investments were in money market funds, certificates of deposit, or high-quality commercial paper. Long term securities are primarily comprised of AA or better corporate bonds and U.S. Government backed securities.�

        I bet they were invested in stock in the boom time. Look at the 10-k � the line item �Unrealized loss (gain) on marketable securities�. They made 22k in 1999 during the boom and they lost 88k in 2001 during the bust. The amounts are pretty small, so maybe it�s immaterial, but I bet they were speculating.

      • PS:
        I did want to say that you are correct in pointing out that I should have been more specific with my terminology. My point was that this down market does affect many companies, not GSPN in particular. It�s an incestuous cycle -- stocks decline hurting companies� balance sheets that in turn makes stocks decline. Take Intel for example, from the 8/01 10-Q:
        �Equity market risk . From time to time the company may enter into designated fair value hedging transactions using equity options and collars to hedge the equity price risk of marketable securities in its portfolio of strategic equity investments. The gain or loss from the change in fair value of these equity derivatives as well as the offsetting change in hedged fair value of the related strategic equity securities are recognized currently in gains on equity investments, net. The company may or may not enter into transactions to reduce or eliminate the market risks on its investments in strategic equity derivatives, including warrants. Prior to the adoption of SFAS 133, warrants were not considered to be derivative instruments for accounting purposes. The company also uses equity derivatives not designated as hedging instruments to offset the change in fair value of certain strategic marketable equity instruments classified as trading assets.�

        Obviously they are trying to hedge, but you can�t say they aren�t exposed!