Hey guys, I’ve never been able to wrap my brain around what the book is getting at when is says for debt securities classified as AFS, the portion of change in value representing amortizaton is booked in P/L with excess in OCI as it pertains to FX translation adjustments.
What? Where did you read that? or may be I what I read was wrong. 
Anyways, what I read was that AFS debt security’s unrealized gain/loss is distributed in to two parts. The first part is fx gain/loss and the other part if other gain/loss. These two make up the total gain on an AFS debt security.
Under IFRS, the gain/loss related to FX goes in the income statement while the other gain/loss (net of tax) go in the OCI. Under GAAP, all the gain/loss (net of tax) go in the OCI.
When the AFS security is sold, whether debt or equity, the unrealized gain/loss in the OCI is transferred to Income Statement.
Interest revenue/income is recognized and is adjusted for amortization of premium or discount. The interest income is same for all categories. (HTM, FV through P/L, AFS)
If you classify a debt security – a bond – as available-for-sale (AFS), then you may have two types of gains/losses while you own it: realized gains/losses, and unrealized gains/losses. If you amortize any premium/discount paid on the bond, that is considered a realized gain/loss; it normally goes through the income statement. If you have a gain/loss because of marking-to-market (AFS securities are reported at fair market value on the balance sheet), that gain/loss goes to OCI.
The one exception to all of this is that if you have AFS bonds denominated in a foreign currency, all gains/losses attributable to changes in currency exchange rates go to OCI, even those arising from amortization. So the amortization that is independent of FX translation goes through the income statement (as for domestic bonds), but the FX portion goes to OCI.
Okay, starting to become a little clearer. I think i understand the concept of carving out the portion attributable to FX translation but could you expand on “amortization that is independent of FX translation”, that’s not clicking completely yet.
Suppose that your domestic currency is USD, and you bought a GBP-denominated bond, GBP1,000 par, 4 years to maturity, for GBP1,200. The exchange rate when you bought it was USD/GBP 1.6587, and the exchange rate one year later (on the balance sheet date) is USD/GBP 1.5923. Then,
- The purchase price was USD1,990.44 (= 1,200 × 1.6587)
- The par value (at purchase) was USD1,658.70 (= 1,000 × 1.6587)
- The annual (straight-line) amortization of the premium (in GBP) is GBP50.00 (= (1,200 – 1,000) ÷ 4)
- The par value (one year later) is USD1,592,30 (= 1,000 × 1.5923)
- The annual (straight-line) amortization of the premium (in USD) is USD99.54 (= (1,990.44 – 1,592.30) ÷ 4)
- The annual (straight-line) amortization of the premium (in GBP) is GBP50.00 (= (1,200 – 1,000) ÷ 4)
- The annual (straight-line) amortization of the premium (in USD) that is independent of exchange rate changes is USD82.94 (= GBP50.00 × 1.6587)
- The first-year amortization that is caused by exchange rate changes is USD16.60 (= 99.54 – 82.94)
Thus, you would show amortization on the income statement of USD82.94, and an FX adjustment in OCI of USD16.60.
(At least, this is how I believe that it’s done. You needn’t do the calculations; you simply need to know that the part of the amortization that doesn’t depend on changes in the FX rate goes through the income statement, and the part that does depend on the FX change goes to OCI.)
Damn dude, if only the book could explain it like this- thank you so much…lol I suspected I wouldn’t need to actually do the calculation tho I tend to stress about this kind of stuff when I don’t get it.
One quick follow up tho - why when calculating the straight line amortization in USD did you use the USD purchase price minus the par value based off of exchange rate at end of year one? I would think the amount independent of amortization would be the difference in initial purchase and par, both in terns of initial USD rate which would represent the amount of USD amortization independent of exchange rate. Am i off here?
As I said, I believe that I did it correctly, but I don’t do this junk for a living; an accountant would be a better source.
So, I cannot say for sure.
Sorry.