AFS Realied Gain// Wiley review " Inv in financial Assets"

CFA Level II
#1

Hey guys,

Just wanted to make sure that when we calculate the realized gain for AFS investments (avail. for sale) we subtract the carrying value from the selling price, and not the amortised cost? as in Realized gain= S.P - CV (Fair value) not the amortized cost + unrealized adj.

The Wiley review test for lesson 44 used the amortised cost… Would appreciate any feedback from anyone who crossed this issue Good Luck!

#2

You use amortized cost.

Recall that for AFS securities, unrealized gains/losses do not go through the income statement, so, in the absense of amortization, the realized gain/loss would be the sales price minus the _ original _ cost.

However, if you’ve amortized anything, that will have gone through the income statement already, so you remove the effect of that from the original cost, leaving you with . . . amortized cost.

#3

Well…I can’t see the Wiley problem, but I don’t like the term “amortized cost” here since these are carried at fair value. Here is the logic:

Your gain is going to be the SP less the effect of taking the asset and any Unrealized Gain/Loss sitting in Equity off your books. Your gain or loss on sale is is a plug.

  • Record the Cash coming in (Debit)
  • Remove Asset held at FV (Credit)
  • Remove any Unrealixed Gain/Loss previously recorded in Equity (If loss,Credit, if gain Debit). Just get it off the books.
  • Your G/L on the sale is the amount that will make the entry balance

So clear the book of any hint of the asset. It is gone. Then your gain/loss is a plug.

#4

Nevertheless, there can be some amortization, and you have to account for that in computing the realized gain/loss.

#5

Agreed.