Reclassification of financial assets

CFA Level II
#1

CFAI text states that when a security designated as HFT is reclassified as AFS, the unrealized gain/loss arising from the difference between the CV and current FV for the year is recognized in income.

I’m assuming that this means either operating/non-operating (depending on firm’s nature of business) income in the income statement. AFS normally recognizes unrealized gains in the OCI, so I would have expected the reclassification gain/loss to go straight to OCI. Plus, all other reclassifications follow the rules of the asset class that it is being reclassified INTO (ex. from AFS to HTM, unrealized gain/loss is amortized over remaining life). Am I reading this correctly? Any feedback is appreciated. Thanks.

#2

This is from Scheweser

Held-to-maturity securities can be reclassified as available-for-sale if the holder no longer intends or is no longer able to hold the debt to maturity. the carrying value is remeasured to the security’s fair value, with any difference recognized in other comprehensive income.

Have you just overlooked?

#3

I rechecked in Finquiz and Curriculum and they state the same

I also have a question to you guys: I just cant seem to get my head around the rules and differences between IFRS and USGAAP in reclassification of financial assets. Any way to think conceptually do you think or you just memorize by heart?

#4

Maxmeomeo, my original post was on HFT (held-for-trading) to AFS, not HTM to AFS. Thanks for trying though. Anyone else please?

#5

Hey skwak88,

Thanks for pointing this out!

According to the CFAI books, this is something for US GAAP only and only when reclassifying from HFT to AFS. It just can’t get any more confusing than this.

IFRS severely restricts reclassification out of HFT.

Could someone please clarify the reclassification from AFS to HTM for debt securities under US GAAP?

#6

IFRS generally prohibits reclassifications into or out of the trading category and designated fair value category, US GAAP allows transfers from ALL categories. transfers between any of the categories occur at fair value.

Unrealized G/L from transfer of trading to Available for Sale recognized in income stmt. Avail for Sale to Trading also recognized inc stmt. held to maturity to Avail for sale recognized in equity under OCI, avail for sale to hold to maturity amortized over remaining life.