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Holy crappy muuuu - Classifications of marketable securities

These TS, AFS, and HTM, and their impacts (recognition) on the IS and BS, are very counter- intuitive (to me)….

How did you learn those?

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Read the explanation multiple times, it is going to stick to you at some point. Personally, I did not really try to understand the logic behind it, i just learned it by heart.

TS is held with the intent to sell.  That means gains and losses should be realized as they occur.

AFS is available for sale.  That means gains and losses should be shown as unrealized, in the event they are sold.  We aren’t intending to hold to maturity, but not intending to sell either.  It’s the lets remain flexible classification.

HTM is held with no intent to sell.  There are accounting consequences for selling HTM securities, so unless we have doubts about the credit quality of the security we know we will recieve full principal back at maturity.

GAPP doesn’t like forcing TS, because it makes earnings seem violatile.  So they allow for AFS.

Hello rawiswarden. Thank you for the explanation. The classifications started to make sense to me now. Can you advise on this - regarding AFS, in the case we sell it do we report the G/L as unrealized or realized? Thank you very much!

diselsamm wrote:

Hello rawiswarden. Thank you for the explanation. The classifications started to make sense to me now. Can you advise on this - regarding AFS, in the case we sell it do we report the G/L as unrealized or realized? Thank you very much!

If we sold an AFS security, we’d cancel out the unrealized gain/loss account in Other Comprehensive Income,  and recognize a gain in earnings. 

Clear. Thank you.