Does anyone know what happens with Accumulated Gains and Losses in OCI when AFS investments are reclassified into HFT?
There is a questions in one of the end of chapter cases (Intercorporate Investments, #16) that asks how AFS into HFT reclassification affects financials if during the prior year investment had 4M gain and in the current period 1M loss (no dividends or interest, just FV). I assumed that when investments are reclassified into HFT all accumulated OCI components get realized in the current period as now this investment is FVPL and answered 3M gain. However, the correct answer states 1M loss.
Based on this info, it looks like reclassification only affects the current period and any gains or losses in OCI recognized only when investments are sold. The section about AFS investments states that indeed OCI component is realized when investment is liquidated, however I couldn’t find any information about OCI component at the time of reclassification. Small thing, but bugs me.
Please let me know if you can confirm that for AFS investments unrealized gains and losses in OCI are only recognized when these investments are sold and reclassification doesn’t change OCI. Small thing, but bugs me. Thanks in advance!
True. Under IFRS no reclassification to or from Held FOr Trading.
The short answer to the GAAP procedure would be to ammortize the unrealized G/L that has been sitting in the OCI to IS. Not sure how exactly it is done.
I double checked and under GAAP, reclassification from AFS to HFT results in the cumulative G/L in OCI being immediately recognized in net income (without amortization). A pretty abrupt change in the net income, if you ask me.
Under US GAAP, if you reclassify an AFS security to HFT, all unrealized gains/losses are immediately recognized on the income statement.
Whether it’s an abrupt change to net income or not depends on the size of the unrealized gains/losses. If they’ve been going steadily in one direction for some time, it could be substantial. If they’ve been changing directions for a while, the net effect might be less than any single year’s effect.
Perhaps – and I realize that I’m risking being perceived as cynical here – you reclassify them because your intentions have changed: whereas before you had not intended to trade the securities actively (and in the short term), now you do.
krokodilizm, S2000magician, thank you for confirming - “Under US GAAP, if you reclassify an AFS security to HFT, all unrealized gains/losses are immediately recognized on the income statement.” This is what I thought too, because this is logical based on the nature of HFT securities. However, CFAI thinks differently: “B is correct [NI is EUR1,000 lower]. Unrealized gains and losses are included in income when securities are classified as held for trading securities. During 2009 there was an unrealized loss of EUR1,000.” However, the fact that in 2008 there was an unrealized gain of EUR4,000 is completely ignored in the explanation and the answer “C EUR3,000 higher” is considerend as incorrect. Is CFAI wrong?
I can re-re-re confirm what others have said: if you go from AFS to Trading, the Unrealized in OCI goes straight the Income Statement upon transfer. The US GAAP citation is ASC 320-10-35-10. I just looked it up.
Scep, I don’t ahve teh CFAI books handy, but can you point to what you are referring to in the books?
I am with the dude from Cyprus, the default assumption on seeing any recalssifications should be that it is to play with earnings. It isn’t always the case, but that should be the presumption.
I see now. Though it would be more straight-forward to say “… if Bugle had been initially classified …” Anyway, it was helpful to clarify re-classification from AFS to HFT.
