Schweser says that when AFS securities are sold, realized gains and losses are reversed out of other comprehensive income and recognized in the income statement. Shouldn’t that be the unrealized gains and losses that are reversed out?
for AFS, any realize G/L’s, dividends, and interest income will be recognized on the I/S. Urealized G/L’s don’t hit the I/S, but are reported as part of shareholders equity, and on the B/S you hold securities at fair mkt value. so you have some AFS stock at 10 beg of year. it goes up to 12 end of year, you don’t sell it. B/S you hold the asset at 12 end of year. A - L = E so holding your A at 12, your E goes up from 10 to 12 (unrealized) Now it’s the following year and say value goes back down to 9 and you sell it. You tell me- how do you account for this realized transaction on the I/S and in equity?
Realized loss of 10-9=1 on the I/S. Reverse unrealized gain from 2 to zero in OE. Conclusion is that Schweser verbiage is incorrect. By the way, are Trading, AFS current assets whereas HTM is a noncurrent asset? Or does AFS and HTM depend on maturies.
i hear what you’re saying. maybe they in some odd way mean that you “realized” the unrealized part already in other comprehensive income and that’s the thing you’re reversing… but yeah… you seem to get the idea correctly. AFS are current, HTM are noncurrent i think- the AFS being “available” would mean you think you may sell it w/in the next year potentially. HTM maybe if maturing w/in a year would be considered current? not positive on that or when they could make the switch. if anything, my guess would be something like w/in a year of maturity, maybe it could switch from non-current to current. not 100% on that but if i were going to guess a cutoff, it’d be there.
Umm, the fmv of the asset will be removed from the balance sheet if sold. Any realized gains/losses incurred upon the disposition of the asset will flow throught the IS and be reflected in retained earnings anyway.
I had marked it and sent this as a potential error to Schweser and they had responded to me as follows: =================================================== Hello, I see what you mean. It might be better to say “…the unrealized gains and losses (now realized) are reversed out of other comprehensive income…” I will mark this one for revision next year to make it more clear. It sounds like you understand the key point. Good luck in your studies. The Schweser Team ================================================== Errata Reporting (CFA Level 2 Study Notes Book 2) Submitted by: c p krishnan (cpkrish@yahoo.com) Product: Study Notes Book 2 Nature of Error: Conceptual Error Description: Pg 116 last para/117 first para Says Available-For-Sale Securities: Under US GAAP unrealized gains/losses are reported in the “other comprehensive income” section of Shareholder’s equity. When the securities are Sold, the realized gains and losses are reversed out of other comprehensive income. shouldn’t the 2nd part read as When the securities are Sold, the UNREALIZED gains and losses are reversed out of other comprehensive income. Please clarify. Thanks CP
thanks for confirming.