Effect on ROA and D/E

CFA Level II
#1

Can you please indicate the effect on ROA and Debt/Equity if a security is classified from HTM to AFS and AFS to HTM

Thank you

#2

Depends if there is a revaluation gain or loss for the AFS security

Assuming there’s a revaluation gain:

HTM -> AFS: ROA same (both HTM/AFS are under Asset), Debt/Equity lower (higher equity from revaluation gain in OCI )

AFS -> HTM: ROA same, Debt/Equity higher (lower equity from losing out on amortization of revaluation gain in income statement )

Hope this helps

#3

Thanks :slight_smile:

#4

Hi Deal_Clincher,

No worries

Also, there’s a slight correction to the response provided

When switching from AFS to HTM, the revaluation gain from OCI is amortized to the income statement.

AFS -> HTM: ROA same, Debt/Equity higher (lower equity from losing out on amortization of revaluation gain in income statement)