Can anyone give me a summary of these classications. What do they mean and how are they treated on the financial statements? I keep mixing them up, especially held for sale and held for trading.
Held to Maturity: Think of it like a Bond
Held For Sale: its sole purpose is to be sold
Held for Use: Think of it like an item used for daily operations
Personally, the more questions I did, the more I got used to the different terms.
Held to Maturity Securities : Bonds that you plan (and are able) to hold to maturity. Reported at cost with any premium or discount amortized over the remaining life. Coupon payments go through the income statement. If sold (or put option or conversion option exercised) prematurely, any gain or loss goes through the income statement; this may lead to tainting the category if a significant portion is sold prematurely.
Trading Securities : Stocks or bonds that you plan to sell in the near future. Reported at fair market value. Realized and unrealized gains/losses go through the income statement; realized gain/loss is the difference between the selling price and the last mark-to-market price (or the purchase price if never marked to market). Cash flows (coupons and dividends) go through the income statement.
Available-for-Sale Securities : Stocks or bonds you do not plan to sell in the near future. Reported at fair market value.Realized gains/losses go through the income statement; unrealized gains/losses (net of taxes) go direct to equity (OCI). When sold, any (net) unrealized gain/loss in OCI is reversed; realized gain/loss is the difference between the selling price and the purchase price. Cash flows (coupons and dividends) go through the income statement.
Designated at Fair Value Securities : Stocks or bonds that you do not plan to sell in the near future. Reporting is the same as for Trading Securities.
" Available-for-Sale Securities : Stocks or bonds you do not plan to sell in the near future."
Does this mean that they will be sold in more than a year?
I do not believe that there’s a specific time limit.
Sorry for the lame question, but what is the difference between realized and unrealized gain/loss. I may know the latter : for e.g. when stock price rises and the rise is an unrealized gain… What is realized gain/loss?
When you actually sell the stock/asset/etc. for a higher price, then you have realized (or actually received) the gain.
OK. that makes sense.
So the company just decides whether or not it wants to classify securities as held to maturity or available for sale because both of them are not for sale? As long as the disclose this information in the footnotes, this is fine?
I believe so.