FSA Question carrying, charge, income, previous, equity

soverby

Fiduciary Investors held two portfolios of marketable equity securities:

$50 million in Portfolio A was accounted for as available-for-sale.

$50 million in Portfolio B was accounted for as trading securities.

Assume that Fiduciary reclassified securities ($10 million carrying value, $8 million market value) from Portfolio B into Portfolio A under U.S. GAAP. If no previous write downs were made, Fiduciary must:

A) charge $2 million to its income statement.
B) charge $2 million to the equity section of its balance sheet.
C) do nothing to its income statement or equity section of its balance sheet.
Your answer: C was incorrect. The correct answer was A) charge $2 million to its income statement.

U.S. GAAP allows investment managers some latitude in reclassifying investment assets from “trading” to “available-for-sale.” Unrealized gains and losses are recognized on the income statement. IFRS severely restricts reclassification out of the held-for-trading category.


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my question is why does any charge have to be made...unrealized losses are already recorded in the i/s for trading securities, and the stock is already at fv...so if youre moving an $8M asset off after it's fallen from 10, and taking another $2 charge, arent you double counting the loss?

OmarAdnan

anything into or out of trading securities - all gains / losses needs to be moved to the Income statement.

that is the rule...

CP

random_walker47

is funny because I would think that the loss would have taken place already since the securities were held in the trading portfolio. (I haven't done fsa so don't shoot me yet)

wilslm

"If no previous write downs were made"

Hence, no FMV adjustment yet on the HFT securities being transfered.

Agreed with CP, ANYTHING involving a move from HFT requires immediate reflection on the I/S directly.

b_sea93

i guess the hint is that the asset is held at cost and no adjustment has been made.

got... It make sense this way

thanks Muffin9, CP....

KungFuPanda

Does IFRS also severely restricts reclassification out of the Available-for-Sale category?

wxs1986

^

"IFRS generally prohibits the reclassification of securities into or out of the designated at fair value category, and reclassification out of the held for trading category is severally restricted."

Isn't Available-for-Sale a "designated at fair value category" that will be prohibited under IFRS? No?

busterbluth

This was a total slip-up on my part--I missed the "If no previous write downs were made" part. With that said, it's obvious that the $2 loss has not been recorded and thus the $2 must be charged to the I/S immediately because it's a Trading Security. Thanks for everyone's help on this.

Just an interesting note on this question: if the reclassification was made from portfolio A to B (AFS to trading), wouldn't the answer still be a $2 charge to I/S?

As for the reclassification Q in general, I believe that IFRS is very strict about Trading securities (or designated at fair value securities)--nothing can be classified to or out of Trading. However, Held to Maturity and AFS can be reclassified between each other. US GAAP pretty much permits all reclassifications. This is in Reading 21.

firat

Damil, designated at fair value category I consider a form of HFT.

llxx

from Schweser QBANK Question: same question - 2 different solution...which one is correct????

Fiduciary Investors held two portfolios for marketable equity securities:
?X $50 million in Portfolio A was accounted for as available-for-sale.
?X $50 million in Portfolio B was accounted for as trading securities.
Assume that Fiduciary transferred $10 million in trading securities from Portfolio B into Portfolio A. It was determined that subsequent to the transfer these securities had a market value of $8 million. If no previous write downs were made, Fiduciary must:
A) charge $2 million to its income statement.
B) do nothing to its income statement or equity section of its balance sheet.
C) charge $2 million to the equity section of its balance sheet.


Your answer: C was correct!
Reclassifications allow investment managers latitude in transferring investment assets from ?