Sale of available for sale securities

CFA Level I FRA
#1

I understand that gain and losses associated with available for sale securities are recorded in other comprehensive income.

Very nature of these securities means, they can be sold in the current year or can be held beyond current year.

When these available for sale securities are sold, why sale proceed from available for sale securities are considered in i nvesting cash flow and not included in operating cash flow?

Thanks,

Parry

#2

unrealized gains/lossed on OCI

#3

Thanks oktavian for pointing it out.

But my question was more about sale proceed (cash inflow)…

“_ why sale proceed from available for sale securities are considered in i __ nvesting cash flow _ _ and not included in operating cash flow _?”

#4

If the company sells burgers, then selling securities is not part of the firm’s operations.

If the company is in finacnial service or banking sector, then it makes money out of selling securities and it is part of operations.

It depends.

#5

finding CFO by the direct method gives something like this (someone correct me if I’m wrong):

= cash received from customers - cash paid to suppliers - cash paid to employees - cash paid for other operating expenses - cash paid for interest - cash paid for income taxes

for a non-financial company, the sale of financial assets is not part of normal business activities. CFI will include proceeds from the sale of long-term assets (financial or physical)

#6

Thanks MrSmart and oktavian.

@MrSmart- If the question does not specify USGAPP or IFRS, what shall we assume by default?

@oktavian. In understand what you have specified, but Cash flow from Operating activities also include (under US GAAP) proceed for sale of securities held for trading.

If CFO can include securities held for trading and why not available for sale securities are considered as part of CFO (my small brain is struggling to understand …)?

#7

I’m not clear on this but I know these are three distinct categories:

  • held-to-maturity

  • held for trading

  • available-for-sale

the names are obvious for the first two, but the third one means it’s not one of the first two.

#8

IFRS by default. Read the IAS 39, it explains the accounting treatment of financial assets.

AFSS are non-derivative securities that are not expected to be held to maturity (except in the possibility of partial and full default of loans lent), they are all financial assets that do not fall under either held for trading, or held to maturity. For US GAAP, it is considered an investing cashflow because the proceeds of sale and price of purchase do not flow through the income statement. Since it’s not part of net income, then it cannot be part of CFO through the indirect method of calculation. CFO usually only includes items from the income statament.

#9

Crystal clear and I could not have asked for any better explanation.

MrSmart - Thank you very much.

Parry

#10

McDonalds isn’t in the business of buying Burger King stock. If it buys BK stock, holds it for three months, then sells it at a profit, the cash outflow when they but the stock is a CFI outflow, and the cash inflow when they sell the stock is a CFI inflow. They invested in Burger King.

#11

Umm… That would be OCF in my books.

#12

OCF?

You think that McDonalds’ main business operation is to invest in Burger King stock?

#13

It’s not part of business, but you have to follow accounting regulations, whatever they are.